OXFORD - European biotech may be about to become a victim of its own success. The phenomenal growth in the number of biotech companies in the latter half of the 1990s has created a potentially huge equity gap as companies start looking for larger sums of money to finance later stage development.

The increased interest in growth-style investing and the rise of state-sponsored entrepreneurism has enabled Europe to start a remarkable number of life sciences companies in a few short years. But the drive of venture investors to capture the value created by European science is not yet matched by the maturation of the public capital markets on the continent. Meanwhile, the U.K. has become more cautious as investors digest the industry's initial letdowns in Britain.

At the same time, it is clear that sustainable companies (and by extension, an industrial and employment base) cannot be built without the substantial support of the capital markets. This conclusion is based on the amount of money that has been necessary to reach sustainable status in the U.S., the finite amount of money available via partnering with big pharma, and the number of young European companies needing significant amounts of venture and mezzanine capital, as well as funding from public equity offerings.

Moreover, for many reasons, the excess of equity supply over demand looks like it will persist. In the immediate future, this is leading to a triage that promises to leave only a very few companies that are able to meet the threshold requirements for accessing the public markets, while a second tier will be fattened up for trade sale, and the third tier will disappear from view.

Although this filtering process will reduce the funds demanded by IPOs and follow-ons, the continued fragmentation of Europe's public equity market promises to remain a hurdle to the capital that must be amassed to build a sustainable industry. In addition, with a limited number of European institutions yet actively interested in life science investing, the route to a broader and deeper audience for biotech investing remains a puzzle that must be completed before the biotech sector can reach the next stage of maturity in Europe.

The demand for equity

There are a number of ways to illustrate the context for European biotech investing over the next decade.

For starters, more than 180 companies have been formed in the past four years. Many of these have received seed financing from a variety of government programs. As the numbers for Germany's BioRegio program illustrate, it doesn't take much to provide seed financing or early stage funding for a company. The average BioRegio grant is less than $400,000, which points to a typical start-up round of barely more than $1 million, including matching funds by private sector investors and state government contibutions (see "So Many Children", & "Little Dollops").

Yet if providing startup financing is a relatively small exercise, capital needs quickly rise by an order of magnitude to the tens of millions of dollars. And mature biotech companies are increasingly raising amounts in the hundreds of millions of dollars (see "Average Financing").

A simplistic estimate of how much money for IPOs could be required in the next couple of years can be arrived at by multiplying the 41 European companies that have done venture rounds so far this year by the $35 million average IPO to come up with $1.4 billion.

An even higher figure comes from Mark Clement of Merlin Bioscience, who calculates that the 135 European biotech companies estimated to have been founded in 1996 and 1997 will need to raise £1.3-£1.7 billion ($2.1-$2.7 billion) in the next year or so.