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GlaxoSmithKline and Johnson & Johnson try a new investment model

In recent news GlaxoSmithKline and Johnson & Johnson are forming a $200 million fund with Index Ventures to invest in newer biotechnology companies. Sources say that hopefully, the project will lure venture capitalists back into the industry. According to reports, Glaxo and Johnson & Johnson will each contribute $50 million to the fund. Index Ventures will contribute $100 million and have authority over investment decisions.

It's not new news for Texas residents that early-stage companies have been stressed for financing; venture capital firms are gravitating toward less risky industries. However, the new fund will invest in blossoming single-asset companies in Europe, the United States and Israel. The companies believe that this model will generate usual venture capital returns.

To qualify for funding, a biotech company must agree to focus on one molecule. Furthermore, it must add at least one entrepreneur associated with Index Ventures to its executive team. If the entrepreneur were to determine that the project was not worth engaging in, the development would end with the specific company, and the executive would move on to another funded business.

Sources say that this model reduces the time it takes to reach a return. Furthermore, the system is ideal for scientists who need money to bring their inventions closer to the market, without the risk of losing an idea inside a large organization.

Last year, initial venture capital investments in new biotechnology businesses fell. In fact, a study shows that in the past few years, around 40 percent of 150 firms have decreased their investment. Furthermore, the market for initial public offerings has also been slow. There were 29 biotechnology IPOs last year, which is down from 36 five years ago.

A spokesperson explains and backs the process to the new biotechnology companies: "We are giving you cash, and an Index drug developer who is going to live with you in the company until death or fireworks. If the plug is pulled, the founder still gets the molecule, the company, and at least it got financed that much."

Ultimately, the hope is that with success, the project will encourage venture capitalists to get involved in the industry.

Source: Bloomberg, "Glaxo joins J&J in $200 million fund with Index Ventures," Kristen Hallam, March 21, 2012