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Coaching Small Biotech Companies into Success: The Value-adding Function of VC

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  • Terttu Luukkonen,
  • Mari Maunula,
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    Abstract

    The paper reports an empirical study on the non-financial value-added provided by Venture Capital investors to their investee firms. This study will use a four-class grouping of the various non-financial value-adding capabilities provided by VC firms, namely, scouting, monitoring, signalling and value-adding services. The study examines biotechnology industry in Finland. Finland has a dual system with independent (partially ever-green) VC companies and public or semi-public VC organisations. Additionally, informal VCs are fairly active. Whether the different types of VC organisation aim, are able and indeed do deliver non-financial value-added, in addition to their financial input, is the central focus of this study. The paper has an evolutionary perspective on Venture Capital according to which VC promotes a variety of experimentation with new technologies, especially through the foundation of new firms oriented to experimentation and development of new ideas. At the same time, VC industry fulfils a selection function in its role as a financial intermediary. The study data have been collected through interviews, conducted at the end of 2005, with the total population of small and medium-sized, VC-backed biotech companies established in Finland since 1986. Central findings of the study include an observation that all three VC types did provide value-added in the meaning outlined above. Nevertheless, there were clear differences between them in terms of the overall perceived value-added as well as in their activity profiles. Informal investors were found to have the highest overall value-added and kept closest contacts with their investee firms.

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    Bibliographic Info

    Paper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 1032.

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    Length: 33 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:rif:dpaper:1032

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    Keywords: venture capital; biotechnology;

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    References

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    1. Walter Powell & Kenneth Koput & James Bowie & Laurel Smith-Doerr, 2002. "The Spatial Clustering of Science and Capital: Accounting for Biotech Firm-Venture Capital Relationships," Regional Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 36(3), pages 291-305.
    2. Paul Gompers & Josh Lerner, 2006. "The Venture Capital Cycle, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572389, December.
    3. Jan Fagerberg, 2003. "Schumpeter and the revival of evolutionary economics: an appraisal of the literature," Journal of Evolutionary Economics, Springer, vol. 13(2), pages 125-159, 04.
    4. Avnimelech, Gil & Teubal, Morris, 2006. "Creating venture capital industries that co-evolve with high tech: Insights from an extended industry life cycle perspective of the Israeli experience," Research Policy, Elsevier, vol. 35(10), pages 1477-1498, December.
    5. Teubal, Morris & Luukkonen, Terttu, 2006. "Venture Capital Industries and Policies: Some Cross-Country Comparisons," Discussion Papers, The Research Institute of the Finnish Economy 1006, The Research Institute of the Finnish Economy.
    6. Dosi, Giovanni & Nelson, Richard R, 1994. "An Introduction to Evolutionary Theories in Economics," Journal of Evolutionary Economics, Springer, vol. 4(3), pages 153-72, September.
    7. Christopher Palmberg, 2004. "The sources of innovations - looking beyond technological opportunities," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 13(2), pages 183-197.
    8. Fritsch, Michael & Schilder, Dirk, 2006. "Does venture capital investment really require spatial proximity? An empirical investigation," Freiberg Working Papers 2006,07, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    9. Luukkonen, Terttu, 2005. "Variability in organisational forms of biotechnology firms," Research Policy, Elsevier, vol. 34(4), pages 555-570, May.
    10. Sapienza, Harry J. & Manigart, Sophie & Vermeir, Wim, 1996. "Venture capitalist governance and value added in four countries," Journal of Business Venturing, Elsevier, vol. 11(6), pages 439-469, November.
    11. Hyytinen, Ari & Väänänen, Lotta, 2002. "Government Funding of Small and Medium-sized Enterprises in Finland," Discussion Papers, The Research Institute of the Finnish Economy 832, The Research Institute of the Finnish Economy.
    12. Maunula, Mari, 2006. "The Perceived Value-added of Venture Capital Investors. Evidence from Finnish Biotechnology Industry," Discussion Papers, The Research Institute of the Finnish Economy 1030, The Research Institute of the Finnish Economy.
    13. Baum, Joel A. C. & Silverman, Brian S., 2004. "Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups," Journal of Business Venturing, Elsevier, vol. 19(3), pages 411-436, May.
    14. Schilder, Dirk, 2006. "Public venture capital in Germany: task force or forced task?," Freiberg Working Papers 2006,12, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    15. Dorothea Schäfer & Dirk Schilder, 2006. "Informed Capital in a Hostile Environment: The Case of Relational Investors in Germany," Discussion Papers of DIW Berlin 549, DIW Berlin, German Institute for Economic Research.
    16. Mitchell Berlin, 1998. "That thing venture capitalist do," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 15-26.
    17. Barney, Jay B. & Busenitz, Lowell W. & Fiet, James O. & Moesel, Douglas D., 1996. "New venture teams' assessment of learning assistance from venture capital firms," Journal of Business Venturing, Elsevier, vol. 11(4), pages 257-272, July.
    18. Luukkonen, Terttu, 2006. "Venture Capital Industry in Finland - Country Report for the Venture Fun Project," Discussion Papers, The Research Institute of the Finnish Economy 1003, The Research Institute of the Finnish Economy.
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    Cited by:
    1. Luukkonen, Terttu & Maunula, Mari, 2007. "Non-financial Value-added of Venture Capital: A Comparative Study of Different Venture Capital Investors," Discussion Papers, The Research Institute of the Finnish Economy 1067, The Research Institute of the Finnish Economy.

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