Funding a new biotechnology firm - Assignment Example

? BRIEFING PAPER (Funding a new biotechnology firm) 731N1 Entrepreneurial Finance Josh Siepel Candi number:95477 Submission date: 08/03/2012 INTRODUCTION: One of the most important factors for any start up business is to decide about the funding of the required finance and start up investment. There are several elements which directly influence the finance and funding decisions of the organisations. Before deciding for any specific source of finance, organisations should keep in consideration all the costs and benefits associated with it. One important consideration in this regard is of the exit strategy. The start up business should keep in consideration the fact that the source of finance should be such that it becomes easy to exit the market, if required (Barrow, Burke, Molian, & Brown, 2005). In this briefing paper an attempt has been made to identify best possible funding pathway for a start up biotechnology firm. For this purpose, different types of finance sources have been defined and evaluated. Also, the funding history of the small technology based firms has been explored and analysed to get an idea of the funding market. Along with this, recommendations have been presented in order to select the best possible source of funds. SOURCES OF FUNDS: Basically, many small firms go for internal finance in the early stage. Self-funding is the most basic way of it. Examples of firms include some famous high-tech companies such as Dell and Apple, both of the founder raised funding with personal savings. General evidence suggest that self-funding is better for founder to maintain the control of enterprise in long-term development. If the investors are not able to finance the all initial requirements of the investment, they start looking for different sources from where funds or finance can be obtained. There are different external sources of funds available to the new start up businesses. The list of potential sources of funds includes (Leach & Melicher, 2009): IPO (Initial Public Offering); loans from Banks; lease; debentures and grants from government, as well as venture capitalist and institutional investors. These are some of the famous external sources of funds in the initial phase of the business. Initial Public Offering (IPO) is the primary source of fundraising for the public limited companies only. Other sources of funds can be used by sole traders and partnerships. Debentures are special types of loans which are mostly secured. Apart from debentures, the companies can apply for normal types of loans and leases. Government grants can be another option. However, the most famous and used source of fund for the new businesses is the venture capitalists. The venture capitalists are firms which provide the new entrepreneurs with the required initial investment (Soderblom & Wiklund, 2006). According to Lebherz (2010), as middlemen in the financial industry, VC (venture capitalist) obtain funds or finance from the investors and then provide these funds to different entrepreneurs but is only available to the private organisations. The main aim of the VC is to ensure that at exit the overall return is maximised, either by selling of the firm or by IPO and it often use to facilitate the process of internal growth. To a large extent, institutional investor including PE (private equity) is another approach for external finance. However, these entities have prior knowledge for the economic market and often take many precautions before involving money in. POSSIBLE FUNDING OPTIONS FOR THE START UP BIOTECHNOLOGY FIRM: Today, although labelled with ‘fast-growing’, biotech venture is avoided by a number of investors. In order to decide for the funding options for the start up biotechnology firm, it is better to study and explore the market trend in this regard. Different Technology Based Small Firms (TBSF) have been able to achieve growth in the previous three years. Different research studies have shown that the Technology Based Small Firms are usually discouraged and disheartened for applying for the bank loans or other debt financing. Along with this it is also worth consideration that the young entrepreneurs are not able to finance the complete investment requirement at the start. Considerable amount of Technology Based Small Firms opt for selecting different external sources. The top priority is being given to the angel investors or business angels, followed by the bank loans, and then venture capitalists. Although this is relatively new concept, for this reason the data for previous years shows that around main source of the fund has been internal. This is also because of the worsening financial and economic conditions and increasing finance gap. For this reason very limited companies are able to obtain funds from different external sources of finance (Ullah, North, & Baldock, 2011). (Ullah, North, & Baldock, 2011) The group of entrepreneurs starting the biotechnology firm should also consider several internal factors before deciding for the external source of fund, which implies for Pecking order theory. For instance, venture capital has higher interest rate because of the higher risk rate. Similar manner there are several implications of the different sources of funds which should be keep in consideration while deciding for optimal source of financing for the start up business (Rogers & Makonnen, 2003). Also, the increasing number of entrepreneurs is uncertain about the availability of the funds from external sources. The recent financial crisis and economic downturn have resulted in destroying the overall financial market and as a result investors are reluctant to invest in new businesses and ventures (Ullah, North, & Baldock, 2011). In the category of technology based small firms, the biotechnology firms have been facing different issues and challenges in order to grab the funds from different sources. A normal biotechnology firm pass through three stages in order to enter into the market. Almost all biotechnology firms first get Venture Capital and later go for the Initial Public Offering. There have been different investment trends in the biotechnology firms. Several countries have come up with different rules regarding the listing of the biotechnology firms on the stock exchange. In UK the listing of such companies have been divided on the basis of business model i.e. platform model, product model, and hybrid model. However, owing to increasing risk in this sector there are limited investors who are willing to invest their money in the shares of high risk biotechnology firms (Fisken & Rutherford, 2002). Apart from these public markets and investors, another option for the biotechnology firms is to obtain funds from the private markets or sources like Venture Capitalists. In the year 2001, around $ 859 million were raised by different biotechnology firms in Europe through venture capital (Fisken & Rutherford, 2002). Also, around 70 percent of these funds were provided to the biotechnology firms with hybrid model (See table). (Fisken & Rutherford, 2002) Foreign Direct Investment is also an important source of funds for biotechnology firms. In order to attract more FDI and encourage foreign investors to invest in the biotechnology firms, government of different countries have come up with several strategies and incentives. For instance, the government of Singapore is taking considerable steps and measures in order to facilitate the growth and development of the biotechnology firms through Foreign Direct Investment (Finegold, Wong, & Cheah, T, 2004). CONCLUSION AND RECOMMENDATIONS: After exploring and analysing the current market situation along with the funding history, it can be concluded that the existing financial and market situation has made it difficult for the start up business to acquire funds from the external sources and there have been increasing financial gap. Apart from this there is increasing uncertainty among the entrepreneurs about the approval of the applications for funds. All this information and data implies that the new biotechnology firm should first go for internal sources of funds and the group of entrepreneurs should pool in the available money. Then, the remaining funds should be financed through the venture capitalists firms. Venture capitalists firms are ready to facilitate the new innovative business in the process of collecting required funds and finance. Also, these firms ensure a successful exit strategy and provide the entrepreneurs with their valuable insights and opinions. As the venture capital cycle turns bigger and stronger in this way, institutional investors might be tempted in this new venture which beneficial to further growth. In the third stage the biotechnology firms can go for Initial Public Offering (IPO). Apart from this, it is important to acknowledge that there is huge impact of the country of origin of the biotechnology firms on the process of attracting investment through Venture Capitalists. According to the research study, the biotechnology firms from the United States are able to capture more funds through Venture Capitalists firms. Also, different experience Venture Capitalists firms are investing in the biotechnology firms from Europe. However, the biotechnology firms from Asia-Pacific are not able to attract more funds from VC (Ang, 2006). List of References Ang, S 2006, ‘Contry-of-origin Effect of VC Investment in Biotechnology Companies,’ Journal of Biotechnology, vol. 13, no. 1, 12-19. Barrow, C, Burke, G, Molian, D, & Brown, R 2005, Enterprise Development: The challenges of Starting, Growing and Selling Businesses. Thomson Learning, Crotia. Finegold, D, Wong, P-K, & Cheah, T-C 2004, ‘Adapting a Foreign Direct Investment Strategy to the Knowledge Economy: the case of Singapore’s emerging biotechnology cluster,’ European Planning Studies, vol. 12, no. 7, 921-941. Fisken, J, & Rutherfold, J 2002, ‘Business Models and Investment Trends in the Biotechnology Industry in Europe,’ Journal of Commercial Biotechnology, vol. 8, no. 3, 191-199. Leach, J, & Melicher, R 2009, Entrepreneurial Finance. South-Western Cengage Learning, Mason, OH. Lebherz, A 2010, The Venture Capital Cycle and the history of Entrepreneurial Financing. GRIN Publishing, Munich. Rogers, S, & Makonnen, R 2003, Entrepreneurial Finance: Finance and business strategies for the serious entrepreneur. McGraw Hill, New York. Soderblom, A, & Wiklund, J 2006, Factors Determining the Performance of Early Stage High Technology Venture Capital Funds. Small Business Service, Available from, http://www.bis.gov.uk/files/file38270.pdf [Accessed 23 February 2012] Ullah, F, North, D, & Baldock, R 2011. ‘The Impact of the Financial Crisis on the Financing and Growth of Young and Established Technology Based Small Firms in the United Kingdom’. The 19th International High Technology Small Firms Conference: 9th- 10th June. Institute for Small Business and Entrepreneurship, Manchester, UK. Read More