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To get some idea of what the biotech revolution will mean to your life, just imagine this…

All those plastic devices on your desk made not from petrochemicals - but soya beans.
Tomatoes that help make you resistant to cancer.
Eating two grapes in the morning and knowing you have received all the vitamins you need for the day.
Crops that need no pesticides and are unaffected by herbicides.
Receiving a 'flu vaccination not by injection into your arm - but by eating a banana.

Now, to get some idea of the biotech revolution's impact on business, imagine taking the agriculture, food and health industries and combining them into one, giant endeavour.

Sound crazy? That convergence is exactly why companies such as Monsanto now describe their business as "life sciences". The old terms like "agricultural chemicals", "pharmaceuticals" and "health care" are simply too narrow to describe where new knowledge is taking their businesses.

Every time we talk about the dangers of the Y2K issue we demonstrate just how far we have accepted the impact of the information revolution into our lives. We know that if every computer in the world was turned off, our ability to get most of the basic necessities of life would be thrown into chaos.

But the impact of genetic engineering is already just as profound, and becoming even stronger at an astonishing rate. Humans have practised genetic engineering from the time the first animal was domesticated and the first plant selected for deliberate cultivation. But advancements in gene technology mean we can now accomplish in a couple of years what once would have taken us generations.

The companies and nations leading the way in this field will most probably experience a wealth explosion at least equivalent to that the US has enjoyed from the information revolution as information and biological technology converge. Already, it is being suggested that the world is on the brink of another Green Revolution comparable to the one that saw advances in seed selection, pesticides and herbicides quadruple crop yields from the 1950s.

Australia can look to the situation with both anticipation and concern. Anticipation about the opportunities to participate, and concern about the dangers that could leave it out of the loop, some of which are only just emerging. On the positive side, Australia has a stronger heritage to draw on in health and agricultural science than it has in the information industries. It can also look to examples of nations such as Germany that have recognised the opportunities and successfully integrated themselves into the global biotech boom. Australia already has put in place many policy measures similar to those used in Germany.

But the paradox of globalisation is that some barriers suddenly appear or loom larger at the same time as it opens new doors to greater participation in emerging markets. Just as in the information industries, it is management nous and the pace of evolution of investment markets where Australia has national weaknesses that are cause for concern.

The Financial Times recently described Germany's transformation "from a virtual backwater five years ago to a country that boasts at least 300 (biotech) companies". Germany had a strong history of untapped science to draw on, but had not translated this into commercial endeavour and suffered from a reactive and slow management culture. The Financial Times said there was suspicion of biotechnology, a weak entrepreneurial culture, a lack of policy direction to encourage development of employment in the high-growth, high-wage, high-tech industries, and a lack of investment in risky, technology start-up companies.

Sound familiar? Australia has provided some of the basic science that has made the biotech revolution possible, most importantly, the CSIRO's creation of gene shears to allow genetic code to be "spliced" from one strand of DNA to another. This allows researchers to implant new features from one plant or animal into another. We also have a proud history of plant and animal selection, from the merino sheep to seeds. Australia today boosted some highly successful exporters in areas such as pasture seeds.

But there are no developed venture capital markets for high-tech companies, and enthusiasm for listed technology companies has been weak until recently. Entrepreneurs have been treated as suspicious at best, fraudulent at worst. Outside of Biota with its 'flu vaccine, there have been few success stories in industries such as pharmaceuticals to show what is possible. Australia also suffers from a "branch office" management mentality and it is yet to be proven that Australian managers understand what it takes to integrate themselves fully with the global epicentres of high-tech centres in the US. (see accompanying articles Australia: On the boat or still standing on the dock?, Outsourcing and new ways of doing business and Those who can, speak)

Germany broke out of its malaise in a short time through the timely confluence of several factors. A stock exchange for smaller companies was established in 1997. This gave venture capitalists a local point of exit through taking their investee companies to public listing. The Financial Times said the partial privatisation of the German telecommunications carrier in 1997 also increased the number of Germans who own shares, and helped changed attitudes to investing in equities.

The German government also ran a competition to fund the establishment of three regional biotech clusters, modelled on the success of areas in the US such as Silicon Valley, Boston and San Diego. The government stimulated venture capital by providing funds for investment in start-up companies to venture capital firms.

Australia has made many of the same moves. The partial privatisation of Telstra has effected a similar change in Australian attitudes to investing in equities as the telecommunications privatisation in Germany did. The Investment Innovation Fund, launched last year, will provide up to $130 million in VC investment in Australia by providing $2 to match every $1 dollar of private investment funds raised by the five firms licensed to participate in the scheme. Like the German program, it is similar to the Israeli Yozma scheme, credited with stimulating that country's explosive growth in the information industries. One of the IIF licensees, Rothschild Investments, is focusing its attention on biotech.

All of these developments augur well for Australia's chances of participating in the next great revolution sweeping the business world. But in the economics of today's most exciting new industries, a year can be a lifetime. Australia is six years behind Israel and at least 18 months behind Germany, both of which were driven by a desire to emulate and integrate into revolutions being driven out of the US.

As the source of the new business models in financing, corporate organisation and technological development, small countries have no choice but to embrace and follow the rules being set in the US, at least for now. (see Australia: On the boat or still standing on the dock? and Venture Funding: Is Australia Going Forward into the Past?)

And in the US, there have been some dramatic changes in recent times. Specifically, venture capital for biotech companies has fallen off dramatically. "The capital markets haven't been so good for biotech in the last year or two," says Anne Randolph, managing director of San Diego life sciences industry association, Biocom. "It's getting harder and harder to raise money."

"The industry believes that the old paradigm where you took 10 or 12 years to get a product on the market and you could go out and raise $500 million is gone, or is not likely to be replicated in numbers again."

While venture capital investment overall has exploded from $US2.7 billion in 1992 to $US12.5 in 1998 (see accompanying article How Angels are Giving Flight to the High Tech Boom and An audience with Professor Jeffrey Sohl), biotech funding has gone out of fashion. This can be seen by the fall in the number and value of biotech companies that have been publicly listed in the US.

The combined value of initial public offerings of biotech companies spiked at $US3.5 billion in 1992, a leap from $US1.6 in 1991. But they have been in the doldrums ever since. Last year, they totaled in value just $386 million. In the health care industries in total, IPOs fell from a value of $4.9 billion in 1992 to $413 million last year. There were 21 biotech companies that were listed on public equity markets in the US last year - down from 60 in 1997 and 104 in 1996.

The growth in size of venture capital funds has increasingly driven them into shorter-term and larger investments (see accompanying article How Angels are Giving Flight to the High Tech Boom). And increasingly, that has meant Internet stocks, which have recorded stellar increases in value in the past two years.

But there has also been an element of disillusionment with biotech performances, caused partly by investors' naiveté, according to De Leslie Molony, president of biotech business consultancy, Biotech Business Strategies. Molony says the IPOs in the early 1990s concerned her at the time because she suspected investors did not understand the length and risk involved in both the research and then the need to get Federal Drug Administration approval that confronted these companies. She says a rash of FDA rejections that followed left the investment market badly shaken as the value of many listed companies collapsed.

Because of the way business models, innovation and research all feed off each other in the new economy of the US - and set the standards for those activities globally - this has implications way beyond their immediate impacts on biotech in the US. (see accompanying article The Beginning of Breakthoughs).

And because the US equity markets are both the richest and the most active in the world, the valuations of companies and industries there set the trends for investment internationally.

As Australian information companies like the portal Look Smart and Internet Service Provider Ozemail have shown, in order to realise their full financial potential, Australian companies in the new international industries need to either go to the US or form a partnership with US companies. US markets provide the best valuations, the best sources of later stage investment capital, the most experienced management and the necessary marketing muscle.

Australia's nascent venture capitalists cannot afford to overlook those issues when making their investments. They need to develop "exit strategies" - ways to sell out of their investments - that demonstrate the wisdom of investing in high-tech, high-risk ventures if they are to succeed in attracting investment funds.

The valuations in the listed equity market also set the valuations of start-up companies when venture capitalists are making their initial investment.

Put these factors together and it becomes clearer why early stage investment in biotech companies is in a slump. Simply, these companies are not competing with each other, but with Internet companies that are enjoying massive, rapid increases in valuation. Most Internet companies do not require long-term R&D, and many can move from their first business plan to having a marketable product in less than a year. Increasingly, this is what venture capital firms are looking for. (see accompanying article Venture Funding; Is Australia Going Forward into the Past?)

In the first two months of 1999 there were 60 IPOs in the US, and fully half of them were Internet stocks. In 1998, there were 124 deals. Eighteen per cent of those were Internet stocks. The previous year, there were 261 IPOs, of which just four per cent were Internet stocks.

Anne Randolph, managing director of Biocom in San Diego, says another potential source of investment, or potential exit strategy for investors in biotech start-ups, a trade sale of the business or its technology to a larger company, is also tightening up as the larger businesses become more demanding. "I think they're funding companies later in the R&D process than they were. They want more proof that the technology's valid," she says.

Others, such as Steve Weathers, vice-president of client services with the San Diego Regional Economic Development Corporation, are more benign about the present situation. He says this present capital drought is cyclical, and investment in biotech will recover when enthusiasm for the Internet among investors begins to slow, just as it did for biotech stocks in the mid-1980s. Early signs that falls in technology stocks on Wall St in April were being matched by renewed interest in a broader range of industrial stocks might suggest he is right. But that is still likely to take at least a couple of years.

What do these trends mean for Australia's place in the biotech world?

Australia clearly has the fundamental science base it needs to take part in the revolution, and has made important efforts to encourage the other necessary ingredients for success, such as venture capital.

But the events unfolding in the US could mean that emulating the successful policies pioneered by Israel and imitated by Germany will not be enough for Australia. Israel is now established as a source of intellectual property in the minds of US investment markets. Germany had the advantage of being central to European investment markets, and sufficient scale to support its own high-tech investment board.

Australia is only beginning to enter the consciousness of investors in places such as Silicon Valley, nor is it likely to have the investment volume to develop its own high-tech investment exchange to rival NASDAQ in the foreseeable future.

So what should be done? Randolph says not even the US biotech community has come up with an answer.

The important thing for Australia is that policy makers, entrepreneurs and investors remain aware of what is happening, and remain open to innovative policy ideas. The starting place could well be to investigate innovative pooled investment options. These could support long-term research efforts while giving investors the ability to enjoy both long-term capital gains and a liquid market to exit their investment if they wish.