Early investment choice key for entrepreneurial success in science-based start-ups

Science-based start-ups play a key role in our modern, knowledge-based economies. As the successful Belgian academic spin-offs Thrombogenics, Ablynx and Materialize show, technology companies have the potential to create jobs and drive state-of-the-art innovations.

A major challenge faced by capital-intensive start-ups is their ability to attract sufficient investment to develop and commercialize their ideas internationally. Many science-based ventures struggle to survive against fierce international competition, uncertain technologies and rapid change.

Raising the right type of finance from an appropriate source is crucial for future success. This Vlerick paper seeks to identify ways in which science-based entrepreneurs who lack the business experience can identify and connect with venture capital investors who are able to help them grow their businesses.

Investment ties with venture capitalists can provide both financial resources and value-adding services such as strategic advice and access to a network of potential partners. But choosing the right early investment partners can be difficult.

The Vlerick study looked at nine start-ups in the Flemish biotech industry that were launched between 1999 and 2003. The study records both the early search for investors and the subsequent financing rounds.

The biotech sector is unique because of the length of time it takes to research and trial a new drug for market. Clinical trials, patents and the licensing process can take from ten to fifteen years. Before biotech firms can raise finance from pharmaceutical firms or public equity markets they first need to raise several rounds of venture capital. The amount of capital required can easily add up to 20 to 100 million euros or more. 

The Vlerick study found that the biotech start-ups were typically headed by pure scientists with no access to experienced second-generation biotechnology managers would could help them run their businesses.  

The results of the study show that technology entrepreneurs typically look for investors close to home such as a research institution or university, rather than conducting a broader search to find the most appropriate venture capital investor.

The case studies suggest that choice of first investor strongly influences the ease with which start-ups can attract follow-on finance from additional investment partners especially if the first investor is highly respected in the finance community and has the necessary expertise.   

Results indicate that experienced, international investors with a specific biotech focus were most likely to drive the further development of their portfolio companies. They were able to bring in additional investors and provide strategic guidance through the board of directors.

Wrong decisions in the early stages of launching a new venture can limit its growth while smart partnering decisions can boost a venture’s chances of success in the long term. In particular, the results call for more comprehensive search strategies. Scientists, who plan to set up a new venture, should therefore develop relevant networks in the business and financial community at an early stage (even before formally starting their venture) so as to broaden their search for more specialized, potentially international investors.

The Vlerick study contains lessons for venture capital investors as well. First, inexperienced venture capital investors, should only act as a non-lead investor in syndicates. When large amounts of finance are needed, experienced investors may sometimes invite inexperienced investors to join investment syndicates.

Second, experienced venture capital investors should be aware that they may not always have access to the entire range of early-stage investment opportunities. Active deal origination remains important to increase the supply of high quality proposals.

Finally, the study’s findings contain important advice for corporate venture teams and for university technology transfer offices. Institutions spinning off new ventures based upon their technology should ensure that they develop strong links with experienced investors. If they set up their spin-offs without experienced co-investors, they should ensure that the entrepreneurial team is not only comprised of scientists, but also of CEOs (and potentially CFOs) with relevant experience in managing science-based startups.

Source:Path-dependent evolution versus intentional management of investment ties: Evidence from young biotechnology ventures” by professors Sophie Manigart and Miguel Meuleman (Vlerick Business School) together with Tom Vanacker (Professor at Ghent University and Research Fellow at Vlerick Business School). Journal: ‘Entrepreneurship: Theory & Practice’.

Early investment choice key for entrepreneurial success in science-based start-ups

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