Start-up funding sources and biotechnology firm growth

Abstract

Biotechnology is one of the world's fastest growing industries, expanding almost four times faster than the G-7 average for all sectors with global demand of US$50 billion in 2005. Biotechnology offers significant economic benefits, particularly in exports and job creation, as well as important health, safety and environmental benefits. Although it has the potential to be an important engine of economic development in the twenty-first century, its research-intensity and the associated long lead times have intensified the equity gap faced by all rapidly growing firms. As a result, there are concerns about start-up financing on growth and performance. Our results show that angel, venture and conventional capital have contributed significantly to R&D capital formation and sales growth. Conversely, the contribution of funding from government, IPO and alliance capital sources are unimportant for our sample of biotechnology firms. These are counter intuitive results for conventional capital's importance for firm growth rates. It was expected that venture capital would be most important; however, it may be that older firms with more mature products or products ready for market are chosen as bank customers. In that case, perhaps it makes sense that bank capital is correlated with higher growth rates.

Notes

¹ For the interested reader, the survey instruments are available online. For BUDS 1999 follow this link: http://www.statcan.ca/english/sdds/instrument/4226_Q1_V2_E.pdf and for BUDS 2001 follow this link: http://www.statcan.ca/english/sdds/instrument/4226_Q1_V3_E.pdf

² Firms with fewer than five employees and less than $100 000 in R&D expenditures were excluded from the sample.

³ It is assumed that the estimated useful life of R&D capital in biotechnology is only 4 years. This figure was taken from literature on R&D in the pharmaceutical industry. Although the estimated useful life of R&D capital ranges from 3 to 10 years for R&D intensive firms, in biotechnology the estimated useful life is perhaps shorter (no exact figure is available). The results would not differ significantly if the value were higher. The value of total R&D capital available in 2001 was obtained by summing the values of total R&D spending of the firms in each year after depreciation adjustment in 2001. The resulting R&D-capital variable is used in method 2.