Biotechnology Funding in Cambridge

Hand in date Monday 2 nd September 2002 11972 (Excluding Appendices and Bibliography) I give permission for the following people to have access to my dissertation: Tick Box PAPER COPY Confidential (unavailable for viewing, except to authorised personnel) Available to University staff and students Available only after consultation with me ELECTRONIC COPY Unavailable Available on the Judge Institute Website (Internet) Available on the Judge Institute Intranet (where it can only be viewed or downloaded within the Judge) I confirm that this piece of work is my own unaided effort and conforms to the Judge Institute's guidelines on Plagiarism. ABSTRACT Biotechnology companies present a particular challenge to the capital markets. They demand large amounts of investment and face high risks and long timeframes before achieving profitability. Analysis of the funding received by private biotechnology companies in Cambridge in the period January 2000 to June 2002 shows that funding is dependent on the business model adopted by a company and broadly follows the financial cycle described by Berger and Udell (1998). The vast majority of funding is provided as venture capital, reflecting the high information asymmetries and low collateral associated with biotechnology. Parent companies and Government schemes are an important source of finance for very young companies as are local, specialised venture capital firms. Publicly available data suggests that there is very limited funding from business angels. This was confirme d in interviews. However, Cambridge has well-developed angel networks, and this source of finance is anticipated to increase in the future. Funding for small, entrepreneurial companies is critically related to overcoming information problems (Berger and Udell 1998). Social ties have been reported to influence funding decisions and are particularly important within a close community like the Cambridge biotechnology industry. Networking organisations have evolved specifically to establish and maintain these relationships. Cambridge also has a large number of agents who intermediate in, and appropriate value from, the funding process. These include not only the classic financial intermediaries such as venture capital firms and business angel networks, but also specialised firms that have evolved to address information problems. These contribute by reducing transaction costs, in this case associated with the identification and evaluation of funding opportunities (Campbell and Kracaw 1980). There are two mechanisms by which this is achieved: providing channels of communication and increasing the transparency of the information that is communicated. Consultants exploit their knowledge of the funding network by providing direct …