Venture Capital in Terms of Support for Biotechnology

Biotechnology is a subfield of biological science linked to research areas such as recombinant DNA technology and genetic engineering. As a result biotechnology is applied in a wide range of industries (Chen & Marchioni, 2008).

According to the Biotechnology Industry Organization, one fourth of the Biotechnology industry’s financing comes from venture capital and it is not just in terms of money but also managerial guidance to the biotechnology firms. This is attributable to the fact that biotechnology is a knowledge intensive industry and a large amount of capital is needed for research and development (Chen & Marchioni, 2008).

Venture capital financing is favored by the majority of business startups including the biotechnology companies. Venture capital is an equity investment until the company matures. Venture capitalists are involved in the development of a biotechnology firm by becoming board members. The venture capitalists also advice the biotechnology firms on potential strategic partnerships (Munroe & Gary & Hutton, 2002). This gives the venture capital backed firms an added advantage over the non-venture capital backed firms.

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Literature Review

Although venture capital accounts for a small fraction of the entire funding in the United States, it plays a major role in the financing of biotechnology companies. The biotechnology companies that are funded through capital venture outperform their counterparts in job creation and revenue growth. In the first quarter of 2009, the biotechnology sector received the biggest amount of funding in comparison to the other Life Science companies. This was however, a 16% decrease from the fourth quarter of 2008, constituting a downward tread in the funding of Biotechnology, Medical Devices and Pharmaceuticals (VentureDeal, 2009).

Due to the prevailing economic crisis, the funding in biotechnology has reversed from an upward tread as the amount of funding has decreased as well as the numbers of companies funded. Sangart Company which researches and commercializes technologies related to oxygen transport agents received $50 million in the sixth round, the largest venture funding during the first quarter. BioVex Company on the other hand received $40 million from a large syndicate of venture capital firms in the sixth round of funding (VentureDeal, 2009). There are success stories in biotechnology venture capital.

One example is the case of Thomas Tedder. Tedder collaborated with a venture capitalist, Intersouth and the company provided seed money that helped Tedder’s company called Cellective Therapeutics to develop a business plan and to finalize the licensing agreement. This helped Tedder to focus on the technology development. In due course, Cellective Therapeutics proved a success and the company was sold off at the one year anniversary to MedImmune (Gwynne, 2009). From the venture capitalists point of view, there are issues that are unique to a biotechnology perspective.

The venture capitalists look for unique technologies which are critical to the biotechnology field as they are also looking for a market. This means that the venture capitalists are keen on areas such as disease areas which have a large market. The attractive types of research are those that have a widespread target such as cancer, diabetes and infection areas (Rosenman, 2001). Some of the major venture capital firms in the United States are Alta Partners, BA Venture partners, Forward Ventures, Genentech, Latterell venture partners, MedImmune Ventures, Soffinnova ventures and Intersouth (Gwynne, 2009).

The geographic clustering of venture capital financed biotechnology firms is similar to the geographic pattern of the biotechnology industry. The biotechnology businesses are clustered together in a region for several benefits. Through the clustering, the companies achieve scale economy; have knowledge and technology spill over in addition to labor pooling and a decrease in transaction costs. The clustering of firms in similar locations makes it easy for workers to change jobs without the need for traveling long distances for interviews and they may not need to relocate homes after a transfer.

Labor mobility hence facilitates the exchange of technology, information and knowledge among the biotech firms. Through geographic proximity, the transaction costs are decreased in addition to personal contact being maintained (Antonelli, 2000). This allows in-depth and fast feedback among the economic agents involved and helps build trust, and incentives in economic relationships thus reducing transaction costs. This enhances socialization within the professional network and stimulates co-operation, competition and innovation (Storper & Venables, 2004).

These are important factors for life science knowledge. The clustering of biotechnology industries relies on venture capital availability, life science knowledge, large pharmaceutical firms and urban diversity. Before the first biotechnology firm, Genetech, was established in 1977, practitioners of genetic engineering were located around universities and research institutes. These universities and institutions also provide quality labor force. Consequently, the areas that are in close proximity to the science research institutions have better access to trained graduate and post graduate students.

In the biotechnology industry, much of the venture capital is concentrated in California and Massachusetts, including San Francisco, San Diego and Boston (Gompers & Lerner, 2006). Methodology This research employs several methods to investigate the importance of venture funding to the biotechnology firms. Examination on the literature review on the subject of venture funding in biotechnology firms supports the conclusions on the industry. However when conducting research, a researcher is always faced with the task of identifying the methodology to use.

This is due to the fact that the researcher has to consider the research question (Morgan & Smircich 1980, pp. 491-500). A researcher can lay more adopt either a positivist or post-positivist approach depending on whether the research focuses more on social sciences or natural sciences. The literature review in a research plays an important role in the research as the researcher needs to consider the different perspectives and possibilities before making any conclusions (Armitage & Keeble-Ramsay 2009, pp. 1-36). The review of various information sources helps the researcher in understanding the implications of the research process.

According to Knalf & Breitmayer (1991), the authenticity as well as reliability of the literature review is key in any research. The researcher first has to consider the research options in addition considering the data collection methods. This said, the accessibility and availability of numerous sources of information has necessitated the need for a systematic methodology that can be used in decision making. In this research on venture capital in the biotechnology industry, the emphasis is on the existing firms, the firm’s location and funding. This is mainly achieved through analysis of documented sources and case study reviews.

The case studies have inherent strengths that allow tailoring of data collection processes to the research question. Nowadays it has become common for researchers to combine both qualitative and quantitative data collection methods so as to increase the validity of the data collected (Denzin & Lincoln 1994). Data Analysis Data analysis helps the researcher interpret the findings of the research hence it is crucial in any research. According to the research, the majority of biotechnology firms depend on venture capital funding to a greater extent. This study investigated the funding of biotechnology firms in relation to venture funding.

All proposed hypotheses are supported using analysis, indicating that biotechnology firms favor venture funding. It also shows that the biotechnology firms are clustered in the same areas where there are life science research base, large pharmaceutical firms, many capital venture providers and a large pool of scientists. There is no surprise that biotechnology firms use venture capital as opposed to other forms of lending. The finding that the biotechnology firms are also located in urban areas with talent and a favorable environment for new ideas and breakthroughs is also in line.

On the other hand, venture capital is not only important in terms of financial support but also in providing insights, managerial skills and entrepreneurial spirit to the newly established biotechnology firms. Results Biotechnology funding however still has many huddles one of them being lower IPO valuations which has quashed early venture capital funding. The majority of the venture investment has avoided the innovative early stage research and opted for the specialty established companies (Robbins, 2005). Conclusion This study examines venture capital funding in the biotechnology industry.

The research examined the sequence of events that take place during the funding and subsequent setting up of the biotechnology firms. The research objectives require the involvement of both the biotechnology firms and the venture capital firms in order to fully understand the relationship as well as the key factors in their relations. The researcher designed and put to use several research instruments to facilitate in the research. The main aim of the research was to bring to the fore the issues involved in the funding process.