Financial and Organisational Innovation in UK Biotech

Biotechnology firms in the UK increasingly access funds from financial markets, such as the Alternative Investment Market (AIM), rather than traditional venture capital (VC) firms because they are dissatisfied with the poor advice and lack of funding support from traditional VCs. In addition, many of these firms have adopted innovative business models that speed up product development processes by using highly experienced boards of directors and advisors to access external knowledge. Because previous research has focused on funding from venture capitalists, at present little is known about what sorts of business models are most appropriate for this new form of funding and how these boards and advisors are motivated by new forms of financing. This research seeks to (a) understand how these changes impact firm performance and (b) develop innovative management tools to help firms set up a powerful board, and show how that board should operate and how it should access AIM, other non-VC sources of money, and specialist advisors.Previous research on biotechnology start-ups typically draws on a model extrapolated from US experience in the 1980s, where the stages of firm development are linked to types of funding: seed funding (including university technology funds); business angels; V-C (venture capital) followed by IPO (initial public offering on financial markets) or trade sales. While the model may have once been useful, it is increasingly inappropriate for the UK as some firms are short-circuiting stages of the cycle, while others are developing alternative routes. The fact that AIM is now larger than VC as a total supply of finance to UK technology in general and to biotechnology in particular emphasises how the UK has moved towards a distinctive market-based biotechnology funding model.Under this new model, university spin-outs and other start-up firms exploit strong intellectual property over their technology to go straight from founding to forming a highly-skilled board of directors. These boards develop credentials impressive enough for a medium sized public-listed-company very early and are used to access levels of external, specialist professional knowledge normally associated with well established firms. Firms adopting this model rely much more heavily on high powered boards and specialists for managerial advice (rather than VCs and university technology transfer offices). It has been assumed that this knowledge outsourcing strategy could not work as start-up firms lack the resources to attract such high-level advisors. However, preparatory research and first hand experience (one of the proposers is on several biotechnology boards) suggests that the practice is increasingly important. The two strands of research within the project - funding innovations and new managerial knowledge arrangements - are closely connected. It seems clear that using high-powered boards and high levels of external advisors makes a young firm more attractive for floatation on public markets, enabling them to draw on much larger sources of funding. While the opportunity to be involved in public visible, fast growth firms attracts the high-powered boards in the first place. By better understanding these changes, and developing management tools to assit firms this project will asssit the development of high-tech biotech firms within the UK economy and extend the application of innovative forms of financing.