This historic biotech hub faces threat from US

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Among the grand historical buildings of Vienna, you'd be forgiven for thinking that the city's best days are lost in history. But the Austrian capital is an important hub – it's the center of Europe's modern biotechnology and life sciences sector.

Austria has historically been known for innovation – from producing classical composers and great thinkers like Sigmund Freud – and over the last decade and a half the city has reinvented itself.

But as Vienna's life science companies continue to grow, the very sector that the city has worked so hard to build risks falling behind rivals across the Atlantic in the U.S.

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"When the companies get larger they fall in a hole of financing and this is where we have to get better," Josef Penninger, head of Vienna's Institute of Molecular Biotechnology (IMBA) and co-founder of Apeiron Biologics, told CNBC in an interview. The biotech company is based in Vienna and focuses on treating cancer.

"In America, investors have lots of money flowing in and those investors know they can invest in 10 companies with one or two making it. But we don't have people with deep enough pockets and it's not tradition in Europe for someone to finance 10 companies if eight of them are going down."

Vienna’s rise

Vienna's rise as a life sciences hub started in 2000, when the city's government together with the Austrian authorities went on a massive investment drive, building infrastructure for life sciences. In 2011, a major 60 million euro ($65.2 million) investment went towards research facilities in the capital. The government also offers 50 million euros a year for applied research with a third of that going to biotech in particular.

In 2012, there were around 588 life sciences companies in Vienna of which 378 were biotech or pharma and medical technology companies that were producing or developing products and processes in these fields, according to LISAvienna, a government-backed business body for the sector. The companies generated more than 9 billion euros in sales in 2012.

Two thirds of Austria's biotech or pharma companies are based in Vienna and generate 59 percent of the sector's country-wide revenue.

"We are a highly educated city with lots of academic institutions and lots of research institutions so finding well educated people to work with is easy," Georg Dorffner, founder of the Siesta Group, a Vienna-based software company that provides services to analyse brain activity, told CNBC in an interview.

‘Dire need’ of funding

And the country has had some major success stories. Last year, Swiss pharma giant Roche bought drugmaker Dutalys and Apeiron Biologics has partnered with GlaxoSmithKline (GSK) to develop a drug to cure acute lung injury.

But Vienna's life sciences scene faces major challenges which could stifle future growth of the industry in one of Europe's most historic cities.

So far this year, Austria has seen $194.2 million worth of venture capital investment in its companies, $130.2 million of which was poured into the healthcare sector, which includes biotech. Still, Austria lags far behind its European neighbours Germany and the U.K., where VCs invested nearly $3 billion in each country across all sectors.

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This figure can be explained by the tendency for Viennese companies to get smaller early-stage funding but struggle to get the big bucks in later rounds, according to one investor.

"There is a trend in the biotech start-up sphere in the U.S. to start with bigger teams and higher first round funding, but Vienna is decoupled from that trend," Burkhard Feurstein, partner at Vienna-based VC fund Gamma Capital Partners, told CNBC in an interview.

Apeiron Biologics' Penninger said that this was a trend he saw when he started his company in 2002 and the only way he was able to get some money later on in the firm's life was to strike a research deal with GSK in 2010.

But Vienna is also lacking any dedicated life science VCs of its own as the majority come from Germany. For Penninger, the future of the Austrian life sciences sector's ability to continue to thrive will rely heavily on the ability to fix this funding conundrum.

"I think we are in dire need of growing our own biotech industry because at the end of the day that is the key. We are lacking some key VCs," the founder said.