Curated by Francesca Magnani
Logo by Chiara Marabelli
Below is an interview to Pierluigi Paracchi, CEO of Genenta Science, an important biotech company of the gene therapy sector.
Currently, you are the CEO of Genenta Science, a start-up created in July 2014 by the San Raffaele Hospital (Milano) and the TIGET scientists Luigi Naldini e Bernhard Gentner. However, now I would like to look back and talk of your previous activity as Venture Capital (VC) investor. If I am not mistaking, the peak of your career as VC was in 2013 when the Italian start-up EOS (Ethical Oncology Science) was sold to US based Clovis Oncology for 470 million dollars. How much was the initial investment?
“The EOS investors were a French VC (Sofinnova Partners), our Italian fund (Ed.: Quantica SGR with the fund Principia I), and an hollandaise one (Aescap Venture). The total amount invested by the three funds was about 25 million euro.”
What is Venture Capital (VC)
It’s capital invested in a new or expanding business, such as a start-up, given in exchange for a part of the start-up ownership. The VC is managed as a fund by a financial firm and it’s considered a high-risk investment.
This is more than 15 times the initial investment, a clear success for the involved VCs, including the one managed by you in Quantica SGR. How does one become a VC investor and what has been your path toward this career?
“I have combined my Economy studies, a job in Investment Bank where I managed the assets of the bank, and entrepreneurship. In fact, soon after finishing my undergrad studies I founded a e-recruiting business by printing a career book, Jobadvisor. The VC was a natural consequence of these activities, a synthesis between entrepreneurship and finance. Therefore, in 2002 I founded “Quantica”, the first Italian Financial Service completely dedicated to investments in scientific research ventures.”
If I am not mistaking, you are a keen kite surfer: the adrenalin rush helps in your work, or it’s completely irrelevant and you could as well practice yoga?
“(laughing)… I think I could do yoga as well…the two things are not linked, I believe. All of us finds joy and inspiration following our own passions: my own extra work dimension are kite surf and free ride ski, but I don’t believe that practicing “extreme” sports is mandatory to be a good VC entrepreneur.”
Compared to the USA, in Italy there are much less VC investors, or at least this is the perception, but I could not find official stats: could you perhaps give us some data on this?
“Concerning Italy and USA, the ratio of investments is remarkable: the USA invests 240 times more than Italy. Each year in Italy we struggle to reach the 100 million euro investment in innovative enterprises compared to the over 4 billions in the States, a huge difference. And this is estimated by taking into account the ratio among the population of the two nations.”
Going back to your past activity as VC, where did the money for the Principia I fund come from?
“The Quantica investors were banks (UniCredit, Banca del Monte dei Paschi di Siena, etc.), foundations (Cassa di Risparmio di Torino, Ente Cassa di Risparmio di Firenze, etc.) and pension funds (such as the national pension fund of accountants). To bring you back to those years, the Dot.com bubble had just bursted and investors were reluctant to invest in the hi-tech. Our own message to the investors was to bring together entrepreneurship and finance to the scientific research made in Italy.”
Were there public money invested in EOS?
“Yes: the law 388/00 of the Ministry of Productive Activities (today Ministry for the Economical Development) provided us with a 1:1 public leverage; to be clear, for a total investment of, let’s say, 2 euros, 1 euro came from Quantica and 1 euro from the Ministry.”
Is this law still in place?
“It was never refinanced, so it has been unused for many years now.”
And this despite the obvious benefits for the State, because just concerning EOS…
“Exactly, despite the fact that the Ministry earned very good money with EOS! I think that EOS was a rather special example: the Ministry for the Economical Development found in its lap a little treasure.”
What role have banks to provide seed funds to young enterprises?
“In Italy, banks have a very small involvement. But this is they way it should be: banks must invest in VC funds rather than manage funds directly. And the same applies to foundations, pension funds or insurances. This means that there must be a separation between the limited partners (investors with a limited partnership) and the general partners (the managers of the invested capitals). There must be no conflict of interest. So, in my opinion, the system is healthy when there is a stone-wall between the fund investors and those who manage such fund. When I see a hybrid situation, I tend to doubt that there will be a positive performance.”
Regarding the area where VC invest in Italy, how much is invested in the medical technology area? Is it the prominent area of VC investment?
“I split the life-sciences sector into two: on one side, we have the sector that you mention, the med-tech, the medical technologies that in Italy do have dedicated VC funds. Then, we have the biotech sector, meaning therapies and pharmaceuticals. In spite of the proven successes, in Italy there are no funds specialised in the biotech.”
In your opinion why there is such a poor interest in investing in biotech?
“The Italian VC managers have no specific knowledge of biotech, it’s a field unfamiliar to them; they ignore what’s a genetic therapy or an immunotherapy. Consequently, their attention is focused on the med-tech sector, considered somehow erroneously less risky, simpler to understand because the cultural barrier is lower. Therefore, there are quite many investments funds dedicated to the med-tech, a number perhaps not fully justifiable considering that in Italy there is a limited capability to develop a good number of competitive start-up companies. We will see.”
For a certain time now the government has been asked to give tax relief to those entities that will invest in young and innovative start-ups (less than 5-year old). Do you think that it will be finally implemented?
“First, let’s point out that until the 31st December 2016 an individual that invests money in innovative start-ups can claim back from his taxes 19% of the investment, up to 500 thousand euros. This means that if tomorrow you will invest 500 thousand euros, next year the State will allow you to claim back from your taxes 95 thousand euros: a great incentive to invest! This sadly ends at the end of 2016: it would be a great mistake not to extend it (but this depends not only on the Italian government, but also on the EU). Finally, we saw money to flow from private savings into innovative enterprises, because the “passenger” policy of the European Central Bank forced individuals with savings to look for better ways to invest their money. Large amounts of money are moving from the financial economy to the real economy. And where can one look for a promising investment? For example, in innovation and biotech star-ups, and we have many of those in Italy. It’s a virtuous cycle that must be fuelled by a tax relief policy.”
Currently, a change in the fiscal system is under discussion, namely the abolition of taxation for inventions protected by intellectual property (the so-called “patent box”). Such a change is in contrast with european regulations that will be introduced from 2021, aiming to stop the emigration of enterprises to countries with a benevolent tax regime, thus avoiding the consequent tax evasion and competition among EU countries (a recent example of this is the attempted acquisition of the British AstraZeneca by the US-based Pfizer). Do you welcome this change in the Italian fiscal system?
“Actually, for a biotech company such as Genenta, that begins its activities with pre-clinical trials to move onto clinical trials, the patent box does not provide any immediate advantage. In fact, usually biotech start-ups will not be able to earn from their intellectual property within the first 3-4 years of activity; they will rather spend money in research and development. Other type of incentives are needed, like- as I said before- tax relief for the private investors.”
Let’s go back to your experience as VC: what’s the road to success? Can you draw the profile for THE idea and THE team to invest on?
“It’s obviously difficult to give a recipe, perhaps impossible…in my experience it’s possible to find investors if one succeeds to place entrepreneurship side by side to science, and this is by no means trivial in Italy. To me these two are the necessary ingredients for a success story.”
After the investment, the disinvestment must necessarily follow in order to capitalise. How do you plan the disinvestment stage and, in average, how many years pass before this happens?
“A VC fund usually has a life-span of about 8-10 years: whereas within the first 4 years the investments are made, the disinvestment occurs in the last 4-6 years. So, in average, there is a temporal horizon of 4-6 years to plan the disinvestment.”
We spoke of the success with EOS, but let’s explore the unpleasant scenario of failure. Currently the Ministry of Justice is working on a bill of law (“Failure Bill”) that aims to implements tools to monitor companies, in order to detect the first signs of difficulties, and help them to make the necessary changes to cope and exit their crisis. In the USA a failure is considered as part of the game, so to speak, and as a chance to gain useful experience, nonetheless. For us in Italy, the word failure brings almost a social stigma: should we coin another word, perhaps?…Something like “lack of success”? Did failure happen to you? How did you cope with it?
“Already now, there is a law specific for innovative start-ups that has brought a great improvement compared to the bankruptcy law, thanks to a simplified procedure to bring a failed enterprise to closure. Going to another point that you made, the whole venture activity is balanced between risks and benefits. There can be the possibility to earn something like 15-times the initial investment, and with a reward so big one cannot be tied down too much to the flip side of the coin: the risk of failure. I can earn a lot but I can also loose all the money, this is intrinsic in the VC activity. An average VC invests in 10 different enterprises; of those, 6 usually close down and perhaps just one succeeds. The VC is used to manage failure. And this will happen regardless of an accurate selection process, where money is invested only in 0.3-0.5% of the scrutinised enterprises. Then, of its final portfolio only a 10-15% will go well, the vast majority will brutally fail.
I think that in Italy there is only a little understanding that the entrepreneur that invests in a start-up is a hero. He should be admired, regardless of the final outcome. Honour to the entrepreneur, this is the message that should finally permeate our culture.”
It’s a common opinion, actually it’s a fact, that in Italy we patent too little. In your opinion, what are the reasons behind this? Because there is no lack of ideas, after all.
“Despite the stories of success, there is no full awareness that the biotechnology is an industry. And the patent is a the very foundation of this industry. Universities patent little, they have the problem to understand what should be patented. Universities spend money maintaining existing patents, that often stay closed inside a drawer. The technology transfer is completely missing, there is no ability to transform a patent into a business with its consequent earnings. But turning patents in business it’s only the first step. And universities and research centres are ill-equipped to initiate this process. A patent without an entrepreneur will go nowhere. This is a huge cultural gap that must be filled.”
Right now almost all universities in Italy have their own start-up incubator, and yet the transition from patent to business is quite rare. Is this due to a lack of vision or an absent entrepreneurship mindset?
“Yes, this is it: universities, researchers and professors have to acknowledge with humility their own limits on this. To do research is not the same as undertaking a business, and when it’s possible to generate a significant economical value it will not come for free. Start-up incubators and tech transfer offices need a skill set that can only be shaped in the business world. Results will not arrive until our universities will be ready to hire highly qualified people, paid appropriately, someone capable of manage an incubator for innovative enterprises. Instead, people with a superficial knowledge are placed in these jobs, often taken from within the administrative offices, just because perhaps she or he had some knowledge of patenting regulations, and the result is only consequential to these choices.”
To patent or not to patent…some believe that patenting slows down scientific progress. The open science movement is gaining consensus, at least in some fields: do you have an opinion about it?
“Well, in the biotech it’s simply not going to work: the economic burden and the risks taken are so large that intellectual property must be protected. This is the only way to repay the investors. Risks and investments must be remunerated.”
Since 2014 you are co-founder and CEO of Genenta: where do the capital invested in Genenta come from?
“All from private investors: businessmen, professionals and ex-entrepreneurs. This is Italy’s wealth! The capital increase was achieved with the help of Banca Esperia, a joint venture in the private banking between Mediolanum and Mediobanca.”
Genenta Science is a start-up company based in Milan (Italy) that aims to develop genetic therapies against cancer, particularly blood cancers. By modifying a viral vector derived from the HIV virus, Genenta’s scientists can insert a gene with anti-cancer activity (interferon-𝛼) in then stem cells of the bone marrow. The modified cells will infiltrate tumours causing their reduction or disappearance.e
Why did you chose to leave behind your activity as VC?
“I have simply moved downhill…! My thought provoking consideration is this: the start-up dominates the possibility to create something valuable, the VC is merely at its service. So, when I saw the possibility to create a start-up of success, with an extremely interesting technology, a solid intellectual property and with supreme scientists, I did not even consider to employ 12-18 months to set up an investment fund. Instead, it came natural to me to bring my business and financial skills to the scientists and researchers. Then, finding the money was just a consequence: in a few weeks (between October 2014 and January 2015), we collected 10 million euros, when in Italy the average investment for a start-up is about 300-400 thousand euros, with a total yearly VC investment (for all the start-ups, from every field) ca. 100 million euros.”