#OI2Dublin – Innovation about execution, not just invention, says EIT’s Alexander von Gabain

20 May 2013

Alexander von Gabain, chairman of the governing board of the European Institute of Innovation and Technology (EIT)

As the innovation elite began to converge on Dublin for the Open Innovation 2.0 conference today and tomorrow, Ann O’Dea caught up with one of the visitors, Alexander Von Gabain, who believes Europe is still missing a trick when it comes to the lucrative biotech sector.

Von Gabain boasts a distinguished career in biotechnology. Equipped with a PhD in genetics, he completed a stint at Stanford University, followed by a professorship at the renowned Karolinska Institute in Stockholm, Sweden. In the 1990s, he was appointed chair of microbiology at the University of Vienna at the Campus Vienna Biocenter, where he helped build the public-private partnership of the Vienna Biocenter/IMP (institute of Molecular Pathology). In 1998, he founded biotech company Intercell AG, which was successfully floated on the Vienna Stock Exchange in 2005. One might expect him to be celebrated among his fellow academics in Vienna. Not so, said Von Gabain, who is serving as a keynote speaker at the Open Innovation 2.0 conference in Dublin Castle.

“I was busy building successful biotech companies on campus, but it took more than a decade before any of my academic colleagues thought to ask if I would teach their students how I built my companies. I was treated by my colleagues like I was a fallen woman, like I had gone to the dark side,” he said. “I think the situation has improved, but there is still that fear among many academics in Europe who think that entrepreneurship is something that should be kept separate from universities and their ivory towers.”

This mindset is in stark contrast with the US, he said, and just one of the impediments that means Europe lags well behind the US when it comes to innovation and, in particular, the lucrative and growing biotech industry (biotech is broadly defined as “technological applications that uses biological systems”). The biotech industry is estimated to have a combined value of about €300bn in the US, compared to around €30bn in Europe and, according to von Gabain, the annual investment in European biotech in the form of venture capital, public listings, private investment and business angels is about one-third that in the US, where it stands at around €13bn.

Yet biotech is viewed as one of the innovation areas with the greatest market potential of all. The OECD estimates that biotechnology could contribute up to 2.7pc of GDP in the OECD by 2030, and itself admits this is probably conservative. On the island of Ireland, the sector employs more than 4,000 people, according to recent figures from InterTrade Ireland.

European Institute of Innovation and Technology

Other impediments include outdated tax systems and lack of understanding by politicians, von Gabain said. These are the areas that the European Institute of Innovation and Technology (EIT), of which he is chair, is trying to tackle. An agency of the European Union based in Budapest, Hungary, it was established in 2008 and became operational in 2010. In 2012, the chair was handed over to the outspoken von Gabain, who, despite his varied business interests, today dedicates much of his time to the cause.

“I do this EIT job largely as a private donation. I get €20,000 a year and I spend about three days a week on this. I’m donating this back to Europe because I was lucky enough to be treated well during my career, and I want to give something back to young people,” he said. “I believe in Europe.”

According to von Gabain, the EIT is not a research institute but rather a “high impact innovation investment fund” of the EU, trying to foster greater entrepreneurship out of research universities.

Knowledge and Innovation Communities

It does this through setting up Knowledge and Innovation Communities (KICs) – ecosystems which bring together what von Gabain describes as the three corners of the knowledge triangle – research, education and business, with entrepreneurship at its centre. This dynamic, while long operating in the US, is “underutilised” in Europe, he said.

Three KICs are already in existence in the areas of green energy, health and ageing, and climate change mitigation. These are not simply physical locations, but networks of researchers and industry partners.

“We are seeding these KICs with 25pc EIT funding and they have to counter-fund themselves with 75pc, and that seems to work. The KICs have already seen 30 strong start-ups spun out from research,” he said. “So we have invested about €300m and we have a counter financing of  €1.2bn from private partners, and we have brought together people across Europe to breed ecosystems of innovation.”

Von Gabain is quick to point out that each KIC is run by a CEO and follows a business plan, and so differ significantly from other initiatives that simply support research through research grants.

Under the new Horizon 2020 research programme, which is due to be approved by the end of 2013, the EC is proposing to increase EIT funding to €2.8bn between 2014-2020, something von Gabain said will allow it to support hundreds of innovative start-ups, and encourage students into entrepreneurship programmes in parallel with their engineering or scientific studies.

EIT’s intent is probably best exemplified by its governing board, which includes not just the heads of universities and research institutes – like Ireland’s own Patrick Prendergast, provost of Trinity College Dublin – but many from the private sector, like von Gabain himself, Jeroen van der Veer, former CEO of Dutch Shell, and former Skype director Linnar Viik. This is all about bringing the technologies and inventions to market.

A distinguished biotech heritage

Europe has a distinguished heritage when it comes to biotech, von Gabain said. A relatively young sector, of the two pivotal discoveries which forged the foundations for modern biotech in the Seventies, Cohen/Boyer’s ‘recombinant DNA technology’ was invented in Stanford University in the US, while the other, Kohler/Milstein’s ‘monoclonal antibody’, emanated from Cambridge University in the UK. Much of today’s modern pharmaceutical industry is built on these two key technologies.

However, even back then, there were signs of the problems that would continue to stifle Europe’s biotech sector. In 1973, Stanford University quickly saw the benefit of paying to patent the revolutionary technology, and has made a “very nice return”, said von Gabain. However, just two years later, when George Kohler and Cesar Milstein approached the then-dean of Cambridge University with their discovery, he refused to spend any of the university’s budget on patenting.

Things have since moved on, but it is a salutary reminder, said von Gabain, and perhaps partly explains why the US still leads the way.

Most university campuses in Europe do not have all the players of the innovation sector at the table. “If you go to Boston, San Francisco, Washington, as a student you will find lawyers that can tell you how to do a contract with a venture capital firm, you will find venture capitalists and business angels, you will find people who have previously been working in big pharma who can help you when writing a business plan. We do not have the ecosystem of all the players smartly clustered together anywhere in Europe.”

There are exceptions, he said, pointing to campuses in Oxford and Cambridge in the UK, and in Munich and Stockholm, but even these do not compare with the Boston/MIT area or the Bay area of San Francisco.

The second impediment is an academic world that is not exposing students to the opportunities to take what they are studying in their masters and PhDs and carry it forward through entrepreneurship, he said. Changing that dynamic is a key part of the EIT mission.

Modernising financial rules

An impediment that should, in principle, be easier to shift is that of the financial rules in many European countries, including Ireland, which do not make it attractive to take the risks involved in starting biotech companies. Von Gabain estimates that a new vaccine, for example, can take up to 10 years to develop, with plenty of failures along the way. “There’s never a product launched that helps people that costs less than €200m or €300m. Innovation takes time, is risky and needs investment,” he said.

Many European countries’ taxation systems compare very unfavourably to the US when it comes to encouraging this kind of risky entrepreneurship. He has been burnt by the Austrian system himself.

He set up his most successful biotech company Intercell AG in Vienna back in 1998, bringing 20 or so “brave” young people along with him, and offering them a large part of his founder shares in share options. When the company went public in 2005, and they wanted to convert their options into real shares, they were immediately met with a barrier. They were informed by the Austrian authorities that within 24 hours they had to pay the taxes on the virtual gains of the shares, which had risen in value from €1 per share to €21 per share.

“They didn’t have the funds to pay, so they all lost their shares, which for me as a founder was a disaster,” he said. “It’s stupid. If you ask me, such taxation rules come from people who have never built up a business, people who cannot see the bravery of going into a young risky biotech, which is a kind of smart lottery.”

Things are not so different here in Ireland, according to Anna Scally, tax partner with KPMG. “If as part of their employment a person purchases share options in the company priced at the market value of the share when the option is granted, he or she is subject to income tax on the increase in share value when they exercise the option to acquire the shares in future.”

“This may well mean that the individual must sell some of the shares acquired to meet their personal income tax liability triggered by exercise if they do not have other funds,” she said.

Attracting European venture capital

In Europe, the tax systems tend also to be less friendly to venture capitalists, according to von Gabain. Good business practice in the best venture capitalist firms sees the partner take a small percentage share in the investment out of their personal monies. “Those investing into VC funds like to see the VC partner take a personal risk, too. It’s just good business practice,” he said.

Yet in many European countries, that personal investment has to be taken from their income after tax. It is one of the many elements that will disincentivise venture capital firms from investing in Europe, he said. In addition, many venture capital firms have been having trouble getting investment into new funds since the financial crisis, and some are about to leave Europe, von Gabain said.

He cited the example of a major biotech fund in Europe, TVM Capital, which was unable to close its latest fund in Europe, and subsequently moved to Canada. It is crucial that European countries adapt their policies to ensure attractiveness to these investors, he said.

There has to be a change in mindset throughout the whole value chain, and one of the aims of the EIT is to help do that, he said. “Once the politicians see the success of the KICs, they will hopefully work to remove these impediments.”

Above all, he said, it is about changing the mindsets within Europe’s educational institutions, from kindergarten to fourth level. “We all talk about innovation. What is it? It’s not discovery, it’s not invention, it’s not translation. Innovation is actually bringing the concept back to the people, so that it changes societal reality.”

It is a concept that von Gabain believes has been grasped by academia in Ireland. Recent visits to the country have left him hugely impressed. “Probably because you had such a crisis, you seem to understand here that innovation is the way out of your troubles, and you are activating this more than in the past”.

“I’m optimistic that this will mean more innovative companies growing out of Ireland, not just the big international guys coming to build their headquarters here.”

Alexander von Gabain will be addressing the Open Innovation 2.0 conference, which takes place today and tomorrow at Dublin Castle.

A version of this interview first appeared in the Sunday Times on 19 May

Ann O’Dea is the CEO and co-founder of Silicon Republic and the founder of Future Human