Quick Tips For VCs Going Global
Behind the excitement about new markets in biotechnology lies one common assumption: countries like China and India offer a comparative advantage in R&D. Many assume that biotech R&D in the East provides more for less—that is to say, the labor cost advantages provide greater capital efficiency. There is some basis for the labor-cost arbitrage thesis, but lower costs do not an R&D advantage make. Despite the significant growth in wages for scientists in both nations, it still remains possible to hire four to eight professionals in those countries for every one hired in the West. Lower labor costs do not assure a comparative advantage; research productivity could vary, and requires a level and number of managers that are currently scarce. There are significant offsets to labor costs.
There are, therefore, better reasons to enter China and India.
Will markedly increasing supplies of risk capital usher in an R&D comparative advantage? That's getting warmer, but such reasoning assumes that increased capital will automatically flow to early-stage companies. And while there is more funding available for later-stage enterprises, the corresponding increase for early-stage, high-risk technology ventures is not even close to proportionate.
The real driver toward an R&D comparative advantage in these countries will be the combination of an expanding base of science and technology, attention to intellectual property, the growing sophistication of entrepreneurs, and capital in-flows as early-stage opportunities become irresistible.
A case, therefore, can be made for Western and local VCs to commence or increase their investment activity in biotech. I offer three tips:
HEDGE YOUR BETS
Buy into biotech in these countries, but do so with the long-term patience needed for the comparative R&D advantage to develop. At the very least, VC funds should be carefully scouting opportunities in areas of their competence and making investments experimentally.
DO NOT BE PASSIVE
VC-backed companies in the U.S. and Europe should be aggressively forming strategic relationships with biotech firms or research institutes in emerging markets, including China and India. More than outsourcing to these countries, companies should build collaborations that combine the abilities in the West with those of the East
HELP DEFINE THE MARKET
Rapidly developing countries and the businesses within them are still struggling with focusing on their own markets, versus creating products for the developed world, particularly in pharmaceuticals and biotechnology. Inevitably, the companies will strike a balance, but will not be as knowledgeable in formulating therapeutics best suited for populations outside their own borders.
Weighing the pros and cons of emerging markets while leveraging their strengths and needs should provide immense returns. It is better to be part of a growing advantage than to try to catch up later.
