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Image credit: Platform Life Sciences.
In a joint invitation with the law firm Baker McKenzie, the Life Sciences platform organized a roundtable discussion with experienced founders, representatives from legal advice and venture capital companies on the subject: A roundtable with Gretchen Schweitzer (Managing Director Trophic Communications), Dr. Christine Schuberth-Wagner (founder Rigontec, currently: CSO CatalYm), Julia Braun (LL.M., partner Baker McKenzie), Ute Lassnig (former investment banker, currently: Corporate Development & Innovate BD Evotec SE) and Dr. Birgit Zech (formerly Axxima, Pieris, MAB Discovery, XRx, Gotham Therapeutics, currently: Anavo Therapeutics BV) and Dr. Karin Kleinhans (Partner, LSP)
The start of the company – science meets business meets characters
Life Sciences platform: Is a start-up like this always a jump into the deep end?
Dr. Schuberth-Wagner: Starting in the industry was exciting for me, but also a challenge. Before preparing the founding of Rigontec, I was working purely as a scientist and did not receive any preparation for entrepreneurship during my studies. In academic training, the German natural scientist hardly gets any tools at hand, which is much more interdisciplinary in Anglo-Saxon countries. A successful start-up alone is not a sure-fire success: recognizing early on that it is helpful to start with a complementary founding team is an essential point in a very early phase of the company. In addition, it is often difficult for scientists to part with the scientific idea and convert it into a product with an associated market. The difference between a scientist and an entrepreneur is that you shed your love for the product when you start up and focus on the business. In international comparison, German founders are less prepared for this important and natural process from scientist to entrepreneur and manager, both in terms of skillset and mindset.
Schweitzer: In the USA, scientific founders are prepared very early on by investors/VCs, as it is often better for entrepreneurial growth to bring in experienced biotechnology managers.
Dr. Kleinhans: That's really the big difference when it comes to the market understanding of the start-up ecosystem. You still have crazy discussions here in Germany that lack a natural understanding of the market and its dynamics. Management is characterized by operational excellence and leadership strength, founders and scientists do not always bring this with them naturally. A management change is always driven by changing business needs of the company, a natural dynamic that has the best of society in mind, "nothing personal - just business". Change is an opportunity: This is how you generate a track record and broaden your horizons. Here in Germany change is too often equated with failure and humiliation.
Dr. Schuberth-Wagner: It is extremely important to remain at peace with your reflection and to be honest with yourself: What are my strengths and how can I best use them for the company? This means not always being at the top, but also consciously bringing experienced managers on board in order to offer the company the best opportunities - a behavior that is unfortunately also often associated with weakness or failure.
Braun: We also see a special spirit of today's university graduates in the legal field: We don't just and usually get such young people who then really "burn" with great commitment and commitment. The tendency of many highly qualified graduates goes into a supposedly secure position with the right to the right work-life balance. There is also competition between the large international law firms for highly motivated and highly qualified talent.
Lassnig: On the other hand, Germany also has advantages for the investor, especially with start-ups, because you can find really good people with an attractive offer - in the USA there is competition for "talent" among each other, right now hotspots like Boston and San Francisco.
Dr. Kleinhans: We also look for new people for a long time, there is no such thing as investor training. You also have to have a biomedical background with us. In the USA, the VC topic is so present, people have also noticed it at the scientific institutions. Here you have to explain it from the ground up again and again.
Starting a company with a view to the framework conditions - Germany vs. the rest of the world
Comparison of start-up ecosystems in Germany - what are your international experiences like?
Dr. Zech: Most recently, I worked in a transatlantic US-Germany start-up - this gave me a good insight into the international differences and challenges. Some things are just unfamiliar to colleagues in the US and vice versa, but you shouldn't overestimate that either. Our new company is headquartered in the Netherlands, but the research will initially take place in Heidelberg, i.e. intra-European, and that also brings with it a certain complexity. We searched Europe-wide for the right location for the laboratory, and the new “BioLabs” infrastructure in Heidelberg turned out to be ideal for us. The BioLab offers space and "supply" in an all-round carefree package and Heidelberg has internationally renowned research institutes with the EMBL and DKFZ. We have chosen the legal form for Anavo to be “BV”, which is the standard legal form in the Netherlands. As is well known, the "BV" can easily be converted into an "NV" for a later IPO.
Braun: The complexity of cross-border companies or structures is not only due to the legal form, but also to taxation. The legal form of the European company (Societas Europaea, SE for short) created for the purpose of harmonization is too complex and therefore less suitable for a start-up. The German GmbH is still the first choice here. In terms of tax law, when choosing the location of the company, the domicile of the managing directors and other decision-makers must also be taken into account in order to avoid that the company is taxed in a country that differs from its legal domicile (possibly even additionally).
Some regulations applicable to the GmbH have a long historical background, which is often no longer up to date. An example of this is a long-lasting and very extensive creditor protection from the share capital of the GmbH, which amounts to at least EUR 25,000 and is then gradually increased with the financing rounds. In fact, with today's business plans of a biotechnology start-up or in the event of a crisis, you don't really get anything out for the creditors, but legally the regulations are still a kind of "sacred cow".
Dr. Zech: Aside from the topic of "foundation", the scenario of insolvency or liquidation should also be considered. In an international comparison, the German administrative act is simply very time-consuming and cost-intensive. When dealing with an international company, there is a lot of incomprehension from foreign partners.
Dr. Kleinhans: Every European country has its standard company form, the Benelux countries, the German-speaking area, the UK. The questions are always: Where do you want to develop the company and does my legal form fit into this development? You should follow common patterns, especially if you are planning a US IPO in the distance. The US stock exchanges are essential for biotech at a certain stage of development and Delaware Inc. is a simple tool for all ventures. This is a nice standard thing from the USA, you take a standard US VC contract from the NVCA, that's it - it could be that simple. We're not that far in Europe because we don't have a "European standard company" valid for all EU countries and a standard contract that can do everything, including NASDAQ-IPO. Each EU country has its own laws, and as already mentioned, (transnational) tax legislation is often not even taken into account, but it is a huge topic. But business life is often about “freedom”, about flexible, simple solutions.
Braun: Would a uniform legal structure using standard contracts really help in Germany, such as the US VC standard contract from the NVCA? From my observation, the players here are simply not that far along, because founding or founding a biotechnology start-up is not a standard process for them. I also see that the idea of founding a company in another country just doesn't really make sense at first. For first-time founders, the (spin-off) foundation itself represents an initial challenge, in which founding a company in another country with a supposedly unknown legal form is out of the question. Then many different interests of the various actors involved in the (spin-off) foundation and initial financing seem to be opposed to each other, so that the use of a standard contract without in-depth negotiations is less of an option.
Foundation ecosystem, players, new initiatives - in an international comparison
Evotec is an international player. What does that do to your view of Germany when comparing countries?
Lassnig: We don't complain so much about Germany, because we also find good location conditions here, excellent science, highly qualified employees, etc. But there are also issues that limit us - the administration is often an obstacle and you sees a higher speed abroad. But we don't see it negatively, we act ourselves with new initiatives to drive innovation forward. That's why we're making a new Evotec-BRIDGE right here in Heidelberg.
Does a German Evotec have it easier with German universities?
Lassnig: That may have helped. But I think that our platform is the important driver there - because it validates scientific findings at an industrial level, and that would certainly be an advantage internationally. We bring the standardization and help with the translation on the way to commercialization. One of our scouts on site gives the scientists very specific advice. In Heidelberg, of course, the focus is on oncology, we also have Bristol-Myers Squibb as “Pharma” in BRIDGE. Speaking of "German origins": We started with the BRIDGEs in the UK and North America, so the German factor wasn't there at all. We want to promote innovation as an "enabler" and pursue this approach in the long term.
Dr. Kleinhans: That's exactly the "business sense" that Evotec is bringing closer to science. Evotec builds these collaborative bridges and the public-private partnership (PPP) is a great way to build that bridge. In this way, a common understanding of business can develop, in which different interests lead to a common added value.
Corona: new perception of biotechnology in Germany - with unexpected consequences
Corona was a game changer for German biotechnology, but also for the view of us from abroad, wasn't it? Can we now put this to good use?
Dr. Kleinhans: You no longer have to explain biotechnology – every schoolboy now knows mRNA.
Dr. Schuberth-Wagner: Absolutely – the external perception of the biotech industry has definitely changed. I wish that the pandemic and the outstanding work of the German biotech companies will lead to a "new normal" in the appreciation of biotechnology as the technology industry of today and the future, especially in Germany.
Lassnig: I also think that Corona can also be positive for the sector. In terms of financing, we don't see any disadvantages at the moment, on the contrary: there are a lot of IPOs in the USA, and all of that without personal road shows. For Germany in particular, I can already imagine an awakening in politics and society.
Braun: In fact, many people are more familiar with the industry in which my team and I mainly advise. But Corona also has an impact in a completely different way: the pandemic has also further promoted the protectionism of the countries. For example, international investments in biotechnology and medical technology companies may no longer be that easy. With the amendments to the foreign trade law, Germany has created supposed protective mechanisms against a "sale" of German technologies and know-how, and we now see the need for the so-called clearance certificate when advising on a large number of differently structured transactions.
Schweitzer: But you don't just have to look at Germany there either - it was already the case under Obama that the USA took steps towards protectionism.
Dr. Zech: Internationally and within Europe, this law can represent a hurdle. However, it remains to be seen to what extent it will remain in its current form and whether it is relevant at all for us as a Dutch company with a branch in Germany. I hope for positive changes until our company is ready for the issue to be relevant. We keep an eye on developments.
Braun: The content is basically understandable. However, due to the numerous legal changes this year and last year, investments in biotechnology and medical technology companies from non-EU countries or exclusive out-licensing to non-EU countries may now be subject to investment control by German authorities. The investment control procedure to be followed is complex and time-consuming and harbors the risk of location decisions against Germany. I therefore see it as a wrong signal for young technology and entrepreneurship in Germany.
Dr. Schuberth-Wagner: There was an outcry from our industry association. I think the ministries have noticed this and will hopefully develop pragmatic solutions in the near future. (A revision of the law now added new, higher participation thresholds from 20% and higher for a reporting obligation; editor's note.)
Founders - new success stories bring the turning point?
Let's now turn to the people involved. What does the founder have to bring with him, what adventure are you actually embarking on, what do you have to get yourself into, what to think about beforehand – or does “just do it” apply here in a very American way?
Dr. Kleinhans: The great effect of BioNTech as a “founding story” cannot be overstated. However, the repeat offenders, the multiple founders, are also important for our scene - this has developed very positively here in recent years, but is enormously important for our location.
Schweitzer: With regard to Boston, too, one has to consider that the city first had to develop into a Mecca for the biotechnology industry – that wasn't always the case. Inspired by success stories like Genzyme or Biogen, a network has emerged in the city that has had a lasting effect on the industry and has attracted more and more people. Often the employees who have witnessed the success of companies have been the leaders of the next generation. And yet not everything works there either and not every start-up is a success story! There is a large group of mentors in Boston who have seen both success and failure – that too is of great value for a location. Germany is only at this point after 20 years.
Dr. Zech: The error culture will definitely remain an issue. In Germany, failure is still more of a shortcoming, in the USA "failure" is part of it and is much more tolerated. I witnessed bankruptcy as an employee of my first biotech company. It wasn't pretty, but it was also an experience. The issue of networking also remains in need of improvement. In the USA, the community is very active and dynamically interlinked. Even at the German hotspots, this is far from happening at the same level. Working in a shared lab space at my last company in the US was a refreshing experience for me. If mentoring, teaching and other innovation support are also included in the package, then you can really say: "Just do it."
Dr. Kleinhans: Another aspect that is rather rare in this country: Ugur Sahin comes from a humble background, he had to take risks if he wanted to get promoted. In prosperous Germany, one often has rather saturated conditions and people shy away from risk because they have a very pleasant status to lose. Permeability is greater elsewhere, and the fear of failure is lower.
Lassnig: Perhaps this also starts with the training. Entrepreneurship, willingness to take risks and the constructive handling of setbacks are important building blocks for personality development. Training to become an entrepreneur would be a cultural asset, an educational issue, a new social perspective that does not see risk and innovation and failure and success as opposites, but as a connection and as an extension of new knowledge.
Dr. Schuberth-Wagner: In addition to courage and the ability to constantly adapt to new circumstances, a founder should also have a real hands-on mentality, a good dose of pragmatism and resilience, and the ability to convey a passion for his idea. This works best with self-confidence, which requires trust in one's own abilities, and experience. The opportunity to make economic and patent law knowledge accessible to scientists early on, whether through training or mentoring programs - I myself have chosen the path of an extra-occupational MBA - is an important building block in turning a new founder into a successful entrepreneur. This makes it possible to deal more confidently with the German error culture and the risks and setbacks inherent in founding a company.
Financing, exit, money - how does success work?
Do we have a chance at all if entrepreneurs are not trained in schools and universities, if there are not enough examples of success to imitate, if our capital-intensive innovations always missing the money?
Dr. Kleinhans: We currently have a fantastic situation in Europe with enormous amounts of available venture capital and public funding. All European funds are raising record amounts to invest in biotech. In Europe, the financing cycle works more by selling companies to pharmaceutical companies, which is difficult to schedule on a specific date. In the US, the "proceeds" from a NASDAQ IPO is simply the "normal way." You don't have to think about anything else, since the public funds are already ready to push the financing further. A symbiosis of private and public equity that continues to merge. You're seeing more and more US investors in Europe now - because of the burgeoning start-up ecosystem, but mostly because of the good science. However, they then see an IPO on the NASDAQ as the natural route. Because: It has to be fast, the timeline from founding to financing to listing on the stock exchange is clearly defined. As a result, the financing cycle is terminated and at the same time it remains constantly in flux.
Schweitzer: In the USA, the stock exchange generally has a completely different status. Investments in the form of shares are already being made by younger people because they come into contact with the topic at an early age. I first stumbled across stock prices in my father's newspaper when I was just eight years old; I was interested in what that is.
Dr. Kleinhans: US consultants also make a call very quickly, they want a few shares for a consultation. For us, being a shareholder is a responsible matter. Every company has its own rules, the US shareholder is completely different. Overall, the motto "make it, sell it" applies.
Dr. Schuberth-Wagner: Participation programs are definitely an issue, because the internationality of the companies is growing very quickly, especially in management. In order to make this possible, "international customs" are expected accordingly. Instruments such as virtual option programs are a tried and tested means with a manageable legal impact on the company, also to incentivize managers and employees for the often short life cycle of a company. The possibilities of motivating the entire staff to contribute to the company's success as a unit have not yet been fully exploited, especially in small companies.
Braun: On the subject of employee incentives and participation programs, I would like to interject briefly: Every company must think carefully and seek advice as to which form of employee participation and for which employee group is suitable. A basic distinction must be made between a “real” participation under company law and virtual participation programs. Both forms have certain legal and tax advantages and disadvantages.
Dr. Zech: In my opinion, when addressing employees in Europe, the question of meaning, the team and the basic salary count more than the "bonus offers". Employees want to make a difference "for humanity". And the pandemic has shown that there are good arguments for this attitude. In the US, a bonus and options play a bigger role. This can be a challenge in international constellations. Here, too, there are theoretically many possibilities for incentives, but it quickly becomes complicated from a legal and tax perspective.
Final round - request concert
You will receive a post in the new federal government. Which one do you want to practice and what would be your focus?
Braun: Of course, I choose the post of Minister of Justice in order to then, among other things, develop and establish a German legal form that is ideal for young biotechnology companies. As far as possible, this should combine all the advantages of the GmbH, the German stock corporation and Delaware Inc.
Schweitzer: A start-up-friendly legal form for companies would also be very important to me, whether initiated by the Ministry of Justice or the Ministry of Economics.
Dr. Zech: For me, education would clearly be my focus topic. More flexible training courses that are better adapted to the realities of the workplace - significantly more activities are needed in the direction of "entrepreneurship", including from science.
Dr. Schuberth-Wagner: I too would get particularly involved in the field of education, whether from the BMBF or BMWi is of secondary importance. My particular focus here would be the promotion of cross-functional qualifications before and after starting a career, which should also include entrepreneurship. It is unacceptable that we in Germany produce excellent research that fails due to a lack of basic economic understanding and early mistakes before it is founded, or that the founders have to re-learn their entrepreneurial tools each time. The funding opportunities for translational projects during the academic phase must also be increased, because the urge to publish academically often stands in the way of successful start-up preparation due to limited financial resources. The GO-Bio and EXIST programs of the BMBF and BMWi have already achieved a lot here, but a higher funding rate in the pre-start-up area will lead to more start-ups that are well positioned from the start.
Lassnig: Since the Ministry of Education has already been assigned, I would like to take over the Ministry of Finance in order to financially support the educational initiatives of my colleagues. It's about a huge training offensive, gladly together with the new health minister, also targeted for this high-tech area.
Dr. Kleinhans: Since this position also has to be filled, why not chancellor? I would like to tidy up many of the construction sites that we touched on today. In general, it would be a matter of financing and advancing innovations so that enthusiasm for biotechnology does not ebb again soon.
Dear ladies, thank you for this interesting discussion.
The interview was conducted by Dr. Georg Kaeb.
