Paper to be presented at the DRUID 2012

on

June 19 to June 21

at

CBS, Copenhagen, Denmark,

Early growth of new science-based firms: the influence of institutional

configurationsMarcela Miozzo

The University of ManchesterManchester Business Schoolmarcela.miozzo@mbs.ac.uk

Lori E. DiVito

Amsterdam University of Applied SciencesInternational Business School

lori.divito@gmail.com

AbstractThis paper seeks to explore the early growth phase of newly-established science-based firms, especially how theyaccess and mobilize their ?critical resources?, in particular the early entrepreneurial abilities to run the firm and raisefunds. It also explores whether and how firm set-up in the early growth phase may differ in different institutional settings.Drawing on a study of 18 biopharmaceutical firms in the UK and 17 in the Netherlands, we find that there are strongdifferences in how science-based firms can access critical resources at the early stage. We derive three models of earlygrowth phase of science-based firms: immediate, gradual and arrested set-up. These are strongly influenced by theinstitutional environment in which firms are embedded.

Jelcodes:L20,-

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Early growth of new science-based firms: the influence of institutional configurations1

Marcela M. Miozzo

Lori DiVito

15 June 2012

Abstract

This paper seeks to explore the early growth phase of newly-established science-based firms, especially how they access and mobilize their ‘critical resources’, in particular the early

entrepreneurial abilities to run the firm and raise funds. It also explores whether and how firm

set-up in the early growth phase may differ in different institutional settings. Drawing on a study of 18 biopharmaceutical firms in the UK and 17 in the Netherlands, we find that there are strong

differences in how science-based firms can access critical resources at the early stage. We

derive three models of early growth phase of science-based firms: immediate, gradual and arrested set-up. These are strongly influenced by the institutional environment in which firms are

embedded.

1. Introduction The growth of science-based firms in sectors like biotechnology, nanotechnology, and energy is

of increasing interest to research and to policymakers. Building on the seminal work of Penrose

(1959), we explore the early phase of growth of science-based firms. In this early stage, the development of the entrepreneurial team and access to funding plays a critical role (Garnsey

1988). Also, institutional configurations influence strongly the development of firms. Among the

functions of regional and national innovation systems is the ability to provide support for innovating efforts, including the financing of the innovation process and other activities that can

facilitate the commercialisation of innovation (Edquist 2005, Freeman 1987, Lundvall 1992,

Nelson 1993).

We ask how institutional configurations affect the access and mobilization of their critical

resources. By drawing on a comparative multiple case study research design of 18 British and

17 Dutch biopharmaceutical firms, we derive different paths of early growth phase. We argue that the institutional environment in which these firms are embedded influences the models they

follow in accessing these critical resources. We categorize the various paths in early stage

growth into three models: immediate, gradual and arrested set-up. In discussing the various

paths, we illuminate the institutional differences underlying the access founders have to critical resources for early stage growth of science-based firms. A better understanding of the early

growth phase of such firms will sharpen the descriptive power of management theories and

ultimately advance our ability to influence organisational performance.

2. Early growth of science-based firms: a Penrosian view

Successful new high-tech firms are often depicted as founded by eccentric technological wizards, who go on to attract venture capital and experienced executives to develop the firm. But this

typical pattern does not necessarily apply to science-based firms. Science-based firms are a

new class of entrepreneurial firms in sectors like biotechnology, nanotechnology and energy that

are deeply immersed in science and face distinctive management challenges. In contrast to firms in other sectors (even high-tech ones), their assets are largely composed of R&D projects

in emergent technologies. They face markets without a rich revenue stream and dominant

market position, facing uncertain prospects. In the case of science-based firms, the

1 The authors are grateful for financial support from the Economic and Social Research Council (RES-189-25-0227).

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establishment of the early management team and the funding mechanisms is not straightforward

and has strong consequences for firm set-up and development. There are a number of reasons for this. First, science-based firms are started by academics or managers who leave existing

firms to start new businesses. After external funding, the scientific inventor is essential to the

continuing success of the firm and access to his/her social networks of key academic scientists has a strong correlation with commercialization success (Liebeskind et al., 1996; Murray, 2004;

Owen-Smith and Powell, 2003; Zucker and Darby, 1998). Second, science-based firms need to

raise vast amounts of external financing from private investors, institutional investors or public

offerings of equity for products that take many years to reach the market (if at all). Although these are important funding sources, there are also implicit governance structures that constrain

and shape the science-based activities of the firms (Pisano, 2006). Third, in science-based firms,

R&D is about successively reducing uncertainty through the acquisition of information (selecting and screening), a process highly iterative and inductive, unlike high-tech industries where

products evolve through design-test iterations (Pisano, 2006). Therefore, also, the stages of

growth of the firm may be very different from new high-tech ventures, which after conception and development move into the commercialization stage where the focus is on learning how to make

a product work well and how to produce it beyond the prototype of the first stage (Kazanjian,

1988).

There are thus many open questions as to the early growth of science-based firms and

especially how they access and mobilize ‘critical resources’. Also, it is not clear how the access

and development of these resources may differ in different institutional settings. We draw here on the seminal work of Penrose (1959) to explore the early growth phase of science-based firms.

In Penrose’s framework, firms consist of human and non-human resources, under administrative

coordination and integration. Human, and especially managerial, resources are the most important. But the uniqueness of firms derives from the distinction between resources and the

services of those resources. As argued by Penrose (1959, p. 25): “It is never resources

themselves that are the ‘inputs’ into the production process, but only the services that the

resources can render”. The services of resources derive from the unique experience and purpose of each firm (Best and Garnsey, 1999). Indeed, while critical resources may be held by

individuals, organisational choices determine whether and how individual resources are

translated into organisational competence, which eventually lead to a firm’s superior economic position (Mosakowski, 1998, Nelson and Winter, 1982). Penrose (1959) views resources as

‘services’ that can be combined and used in different ways over time, to address opportunities

and deliver value. Penrose (1959) argues that the ‘quality of enterprise’, or the particular types of

entrepreneurial service available to the firm is of strategic importance in determining its growth. She argues that many of the most important services that a firm’s entrepreneurs can produce

are not the result of the ‘temperamental’ characteristics of the individual men, but are shaped by

the firm itself. This includes the type of entrepreneurial service needed to run the firm and raise funds. The type of entrepreneurial service needed to raise funds may not be closely related to

the type of services needed to run a firm efficiently, as the raising of capital depends on the

entrepreneur’s (or founding team’s) ability to create confidence. In a growing firm, entrepreneurial services will not be successful if the productive resources under the firm’s control

are not administered in an integral way. Therefore Penrose notes the critical importance to the

growth of the firm of ‘managerial services’ devoted to ‘administrative integration’ (see also

Lazonick, 2002).

For Penrose (1959), unused productive services provide excess capacity, and this excess

capacity provides an internal mechanism for growth of the firm. Managers create learning opportunities (see also Chandler, 1992), but there are managerial limits to firm expansion. The

firm-specific knowledge of managers is a prerequisite for the successful conception and

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implementation of expansion of the firm. Such managerial services are therefore not available in

the open market, so hiring new managers is often not a solution for organisational development and growth. Existing managers must train new managers, i.e. the development and integration

of new managers requires the services of existing managers (Pettus, 2001). Managerial

resources with experience within the firm are necessary for the efficient absorption of managers from outside the firm. Thus, the availability of inherited managers with such experience limits the

amount of expansion that can be planned and undertaken in any period of time. Indeed, Penrose

(1959, p. 47) illustrates this ‘receding managerial limit’ by arguing that: “If a firm deliberately or

inadvertently expands its organization more rapidly than the individuals in the expanding organization can obtain the experience with each other and with the firm that is necessary for the

effective operation of the group, the efficiency of the firm will suffer”. Thus, in young firms, the

original entrepreneurial team are the main providers of managerial services, which reside in their tacit knowledge and personal investment in the firm’s ongoing viability (Kroll et al., 2007).

Bringing outside managers (other than venture capitalists) to supplement the original

entrepreneurial team may constitute a distraction if they bring only general business expertise and lack the tacit appreciation of a firm´s resources and opportunities defined by the top

management team’s ‘collective vision´(Kroll et al., 2007).

Penrose addresses the incentives and constraints on growth of the firm, but while she was concerned in her work with growth in already established firms, she did not analyze new firms.

Garnsey (1998) explores the dynamics of early firm growth grounded on the work of Penrose,

showing path dependent process of change and growth and response to internal and external influences. She shows that the early phase of growth of new firms is dominated by search

activities, the initial problems centring around the perception of opportunities and resourcing

prospects. In this phase, the relationships among the founders and with former associates, including funders, are key. Access to finance is crucial at this formative stage, and convincing

funders of the prospects for their venture is the key to openings beyond the entrepreneurs’

immediate means. Garnsey (1998) argues that while success in doing so reflects entrepreneurs’

skill and persuasiveness, it also reflects institutional arrangements for investing in new ventures.

Indeed, institutional configurations influence strongly the development of firms and markets. It is

very likely that the access to and development of the entrepreneurial team and finance is strongly embedded in different ‘innovation systems’, including regional and national ones

(Lundvall, 1992; Freeman, 1987; Nelson, 1993; Laredo and Mustar, 2001; Dosi et al., 1988;

Edquist, 1997). Among the functions of these regional and national innovation systems is the

ability to provide support for innovating efforts, including the financing of the innovation process and other activities that can facilitate the commercialisation of innovation (Edquist 2005). Despite

acknowledging the powerful effect of institutions, such as finance and management on (the rate

and ‘style’ of) firm innovation, the innovation studies literature says relatively little about how and in what ways institutional configurations affect access and development of these critical

resources for firms. Indeed, we know little about the early growth phase of new science-based

firms, especially how they access, mobilize and deploy critical resources, including early management abilities to raise funds and run the firm in different institutional settings.

One reason explaining this relative lack of knowledge is that students of innovation have largely

neglected the relation between innovation and finance (O’Sullivan, 2000). Financial economists have shown that the economic impact of financial systems may be reflected not only in

aggregate growth but also in the differential development of particular industries (Beck and

Levine 2002, Carlin and Mayer 2003, Rajan and Zingales 1998). The contributions from the fields of varieties of capitalism (Hall and Soskice, 2001; Hollingsworth and Boyer, 1999) and

business systems (Whitley, 1999) have a wider focus and explore a broader range of institutions

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and organisations than the literature on innovation systems, such as the effect of financial

institutions. These contributions contrast the capital-based financial systems in countries like the UK and the USA with the bank-based financial system of Germany and Japan, for example. In

capital-based financial systems, stock markets play a crucial role in providing liquidity and

allowing investors to exit investments and redirecting investment into new areas of activity and radical innovation. This is in contrast to the bank-based financial system which provides patient

capital for low risk investments, which is most likely to be invested in industries characterized by

incremental innovation. Tylecote and Visintin (2008) show how countries exhibit different

patterns of innovation largely as a result of significant variations in financial and corporate systems.

Venture capital has received particular attention, as a specific type of finance well suited to the requirements of new technology-based firms. Venture capitalists are active investors; they are

involved in managing strategy and investment decisions; and they are active in advising the

firms they invest in (Gompers and Lerner, 1998). Also, venture capitalists monitor the management of the firm and often initiate changes in the top management (Hellman and Puri,

2002). In many cases, the funding is even less important than the reputation of venture

capitalists (which in turn depends on their experience, information network, and direct assistance

to the portfolio firms) (Hsu, 2004).! Recent work shows the varied patterns and dynamic development of the market for venture capital in different institutional contexts (Avnimelech et. al

2010, Avnimelech and Teubal 2004, Florida and Kenney 1988, Sunley et al. 2005). It is not

uncommon for science-based firms to raise several rounds of financing, often referred to as A, B, C and possibly mezzanine rounds. Securing early stage external financing is a significant

signalling event and establishes firm legitimacy. It alerts other actors in the organizational field

(competitors, potential collaborators, potential employees, other funders, etc.) that a ‘selection’ has taken place, that the technology has been validated externally and that there is support from

the constituents of that field. In addition, there is an implicit path to future financing as

subsequent financing rounds become easier for the firm to raise.

From prior studies, we would expect that founders’ ability to raise early stage financing is directly

related to their prior experience and social network. Hsu et al (2007) found that a founder’s

experience in founding prior ventures increased the likelihood of technology-based start-ups acquiring venture capital through a direct tie and that this increased the venture’s valuation. The

higher venture valuation was positively associated with the founder’s ability to recruit executives

through his own social network. In a similar manner, Shane and Stuart (2002) found that

founders with direct and indirect ties to venture investors were more likely to receive venture capital financing and less likely to fail. In turn, receiving venture capital funding is a very

important determinant of the likelihood of an initial public offering (IPO). Trust through prior

experience and affiliations reduces information asymmetry between the parties and social network is regarded as a significant and important endowment for early stage ventures. These

studies thus show the effect of founders’ social network to explain how early stage ventures

acquire resources such as funding. However, since national and regional institutional environments vary, it is not clear how founders in different institutional environments access and

mobilize the critical resources that they need to start and grow a new science-based firm.

Similarly, students of innovation have largely neglected the relation between innovation and management. Innovation scholars have only dealt with the relation between management and

innovation at a very high level of generality. For example, the literature draws a contrast

between the greater historical understanding of US and German managers of production technology or management techniques compared to British managers (Albu, 1980; Swords-

Isherwood, 1980). A British Government report as late as 1980 (Committee of Inquiry into the

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Engineering Profession, 1980) underlined the need for more and better professionally and

technologically competent managers and engineers in manufacturing industry, a deficiency that dated back to well before World War I. Also, the wider literature on varieties of capitalism has

paid attention to the role of professional orientations and career incentives of management in

affecting time horizon (preference for short-termism) of firms (Aguilera and Jackson, 2003).

As a reaction to the mainstream literature on entrepreneurship, which tends to focus on the

individual entrepreneur, a strand of research has focused on understanding the founding teams

that come together and develop over time in high-tech firms. The literature on top management team demography (Pfeffer, 1983) and upper echelon (Hambrick and Mason, 1984) have

investigated how the prior experience of the top managers have consequences for

organizational strategy and performance, especially in terms of raising funding for new ventures. Recent studies on high-tech firms show that founders and founding team shape a firm’s initial

strategies, structures, actions, and performance. The idea is that routines and competencies are

embedded in managerial experience, and these routines are passed to new firms through mobility of managers. Building on this, studies show that entrepreneurs that are affiliated with

prominent prior employers (those that spawn numerous entrepreneurial ventures) are more likely

to follow innovator strategies and more likely to obtain external financing (Burton et al., 2002).

Moreover, firms that have founding teams whose members have both diverse and common affiliations are more likely to grow over time (Beckman, 2006). Also, functionally diverse teams

with management experience and diverse prior affiliations have positive effects on obtaining

venture capital and going public (Beckman et al., 2007). Indeed, these contributions show that the characteristics of the founding team affect both the relevant skills and experience available

to the firm as well as the ability to access and use these competencies. Founding team affiliation

and experience bring new knowledge to the firm and founding team growth helps firms reach the firm’s objectives. Similarly, it is acknowledged that firm growth requires an adjustment in

managerial capabilities with new leadership brought to meet growth expectations (Argote, 1999;

Finkelstein and Hambrick, 1996).

Although the above contributions have investigated the formation and performance of founding

and top management teams, the exact definition and demarcation of a founding management

team remains ambiguous. This problem is all the more important when examining science-based firms. For instance, does the founding team in science-based firms consist strictly of those that

set up the firm? Often, initial founders (academic scientists or venture capitalists) have no role in

the daily management of the firm. Furthermore, the start up phase of a science-based firm is

typically longer than that of other firms (including high-tech ones) due to uncertainty and long product development phase, making it difficult to determine the parameters of a founding

management team (when does it start and when does it end/mature?). Extant literature provides

very little insight into the development of the early entrepreneurial team and managerial competence in science-based firms. Similarly, the impact of funding in shaping the management

team remains largely unexplored. Baron et al. (1999) found no relation between early access to

venture capital and organizational form of firms. Boeker and Wiltbank (2005) show that venture capital ownership and board representation increases change in top management. There is also

some evidence that venture capital-backed firms are better able to develop a more complete

management structure and add experience that non-venture capital-backed firms (Beckman and

Burton, 2008); however, the mechanisms through which this is achieved are still largely unexplored.

Moreover, the causal relationship between the development of the early entrepreneurial team and raising early stage financing is ambiguous. We know from prior studies that managerial

competence in a founding management team inspires investor confidence and is positively

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related to finding and securing external financing. Yet, many science-based firms founded by

scientists lack managerial experience and are unable to recruit it until external financing is secured. Eckhardt et al. (2006) go some way in this direction by regarding access to venture

capital as a multi-stage selection process, where actions of founders as well as investors are

taken into account. Nevertheless, this is still a largely unexamined question. Also, most of the contributions cited above are based on data from US firms, many of which are located in

California’s Silicon Valley. In this area, labour (and especially managers), and the knowledge

intrinsic in that labour, is highly mobile, contributing to increased knowledge diffusion (Saxenian,

1994; Almeida and Kogut 1999). Venture capital is also particularly abundant compared to other regions and emerged out of the region’s base of technology enterprises, and is unusually

involved with new ventures, giving advise on business plans, finding co-investors, recruiting

managers and serving on boards of directors and the start-ups it pioneers are more successful than elsewhere. This raises questions about the generalizability of these findings for different

institutional settings.

In our study, we tease out this relationship between the development of the early entrepreneurial

team and the raising of external funding. Our study examines in depth the relatively unexplored

question of the different paths that founders follow to raise early stage funding and develop

managerial competence in diverse institutional environments.

3. Method

This paper is concerned with theory building, rather than theory testing. The authors designed an inductive exploratory (multiple) case study given that we know little about the early growth

phase of new science-based firms. The method is appropriate to capture the unfolding process

of new firm development and identify mechanisms of change, including expansion and interruptions in operating in dynamic processes. There was an expectation that national patterns

of finance and management would be reflected in the formation and composition of the founding

teams and ability of the founding teams to develop management resources to secure early stage

financing and run the firms, but this was a basis for analysis, not for hypotheses testing.

Context

The study explores biopharmaceutical firms in the UK and the Netherlands. This is an ideal context because the two countries have very different innovation systems. Theoretically, in the

British context we would expect biopharmaceutical firms to be able to access risk capital and to

access flexible managerial labour and skills. In contrast, in the Dutch context, there would be

less availability of risk capital and less mobile managerial resources.

Biopharmaceutical firms are ideal cases for analysis. They have already been investigated by

Casper and Whitley (2004) who found that it is possible for firms to follow innovation strategies in subsectors of industries that deviate from what the national institutional systems support. For

example, they found that in Germany, biopharmaceutical firms engaged in incremental

innovation in platform technologies (rather than radical innovation in drug discovery in the US context). Studies on the German biopharmaceutical industry from Herrmann (2006) and Lange

(2006) showed that German biopharmaceutical firms are increasingly following radical

innovation strategies by using ‘functional equivalents’ to compensate for the lack of financial and

labour resources in the national systems. However, even though a number of firms may be able to follow more radical strategies, it cannot be concluded that these functional equivalents provide

a sufficient supply of resources for the majority of German biopharmaceutical firms. These

suggest that, despite the biopharmaceutial industry being a global industry, institutional features of different countries play an important role.

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Sample

Several criteria were used to select the biopharmaceutical firms in the UK and Netherlands. We selected firms with different types of ownership. Also, we selected firms with specific numbers of

employees and age of the firm. The goal was to include firms between the ages of 3 to 10 years

with the number of employees ranging from 15 to 75. These criteria were used in order to ensure that the new firms had achieved a level of operations that required resource mobilization and

deployment. The actual selection includes 18 British firms ranging from 3 to 8 years old and

between 5 to 105 employees at the time of data collection. Also, we selected firms according to

their location only in the sense that one region did not become overrepresented in the study.

To aid the comparison between the countries, we aimed to balance the sample using the same

criteria in the Netherlands. The large majority of Dutch biopharmaceutical firms, however, are privately owned firms and, as a result, three public biopharmaceutical firms were included in the

study and the remaining firms in the study were privately owned. Also, a few older firms needed

to be included among the selected firms, primarily because these were the publicly-owned biopharmaceutical firms. These public firms were also somewhat larger in terms of number of

employees than originally intended. Meeting the criterion of size was the most difficult for firms

following drug discovery and development models and a few of these firms were very small in

size, having fewer than ten employees.

The selection process of firms was iterative and not random. As certain firms were added to the

selection in a country, an effort was made to include a comparable firm in the other country. The final selection consisted of 18 British and 17 Dutch firms. Table 1 shows the characteristics of

the selected biopharmaceutical firms. The firms included in the study are clearly not

representative of the respective biopharmaceutical industries for statistical generalization. The method used to select firms is based on the study’s theoretical framework and the ability to

compare theoretically and analytically a set of firms within and across national settings.

[Table 1]

Collecting and analyzing data

Data on the selected firms was collected from both primary and secondary sources. Prior to the interview, information about the firm published in secondary sources (e.g. web sites, annual

reports, press releases, trade press) was gathered and analyzed. This was useful in establishing

timelines, for instance on financing, or uncovering managerial changes that could be verified and

further explained during the interview. The information gathered from the secondary data was entered into a case study database. It was primarily used to triangulate the information gathered

from interviews, the main source of data used in the study. All interviews were conducted in

English.

Retrospective case histories to understand the context and events in the early phase

development of the firms were developed. For that purpose, a total of 48 semi-structured interviews were held with founders and executive managers and were conducted on-site at the

firms’ premises. The average length of an interview was 90 minutes. To gather sufficient detail

on the founding and financing history, an original founder was interviewed. In two of the 18

British firms, it was not possible to interview the founder and in one of these cases the accountant involved in the starting up of the firm was interviewed for the historical data and in

the other firm the longest tenured employee who was also involved in the founding. In three of

the 17 Dutch firms, the founders were not accessible and the longest tenured employee was interviewed. For a number of firms, we conducted additional and/or repeated interviews to

observe how changes unfolded. To reduce bias, utmost effort was made to keep the interview

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structured and factual. In addition to the firms interviewed for the study, 14 supporting institutions

were selected and interviewed, including trade associations, managers of science parks, university technology transfer offices, venture capitalists and policy makers. These interviews

aided in the analysis of the institutional context. At times, interviews with university technology

transfer offices and venture capitalists served to triangulate the data gathered from firms. Appendix Table 1 provides an overview of the number of interviews and the respondents’ job

titles.

In inductive research, close adherence to empirical data and their analysis by means of prior and emerging theoretical constructs and relations provides the discipline guiding the development of

robust and impartial conceptual insights (Eisenhardt and Graebner, 2007). Thus, to make sense

of our data we started building chronological stories for each case, triangulating the respondents’ interpretations against archival data. We then conducted within-case analyses. For coding the

data, we used sensitizing codes and logic derived from the research streams selected as our

cognitive frames of reference for this study (Van de Ven, 2007). The within-case analyses helped to develop a preliminary understanding of how firms developed different paths in terms of

firm formation and development of founding teams that rendered the services needed to raise

funds and run the firm. With no a priori hypotheses, we then conducted cross-case comparisons

to probe into which constructs and patterns of relationships would hold consistently across the units of analysis. We used cross-case comparative tabular displays to unscramble our empirical

findings and cluster and process our data (Miles and Huberman, 1994). Table 2 provides an

overview of the data used to develop constructs used in our analysis.

[Table 2]

As we iterated between data and emerging logic, we gradually built a clearer characterization of

the process by which firms created and extended critical resources required to build key

organizational capabilities in the early stages of firm development. We focused on the processes

or paths showing how and why early firm growth, development and change unfolded (Van der Ven 1992). The first round of external financing is a significant event for science-based firms,

which generally require large amounts of investment to progress their product development.

Securing financing is a catalyst to further growth of the entrepreneurial science-based firm allowing it to invest in human and capital resources. We define the first round of external

financing when the firm raises at least £1 million British pounds (or the Euro equivalent of !1.5

million). This level of investment was determined inductively from the data gathered and

functions as a natural distinction between the different sources of external financing. Financing rounds that raise less than £1 million British pounds (or the Euro equivalent) tend to be seed

funding.2 Often biotechnology firms are able to raise a few rounds of seed funding and sustain

their business activities until early stage external financing is raised. However, in order for a firm to grow, develop products, compete in a timely manner, and gain credibility in the market, larger

amounts of investment than what government (peer-reviewed) grants or informal investors

provide need to be raised. Investments above £1 million British pounds come from venture capitalists, corporate venture capitalists or IPO. The number of rounds and amount of financing

raised by the firms in our sample is shown in Table 2.

As we iterated between data and theory, we also examined the development and composition of the founding team from the year of the founding of the firm and its changes, especially at the

2 An analysis on data gathered from the British Venture Capital Association corresponds with the above definition. Looking solely at

biotechnology firms and the data from 1995 to 2006, the average amount of early stage financing is £1.01 million per biotechnology firm.

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time of securing a first round and then at successive rounds of external financing. We define a

management team as executives that have complementary technical and administrative skills and unravel how managerial resources are accessed if not recruited. Without managerial

resources, science-based firms cannot achieve a level of administrative integration that is

necessary for firm growth. By drawing on longitudinal information on the evolution of the founding team, we are able to investigate the different paths in terms of formation and

composition of the founding team and how the composition of the team affects the growth of the

firm in its initial stages.

In our iterations, we used alternative explanations to understand the data and develop

constructs through different theoretical lenses and at different levels of analysis, revealing

alternative underlying dynamics. We first sought to explain early stage fundraising and founding team formation in terms of their institutional context and compared the cases by whether they

originated from industry or university, or parent affiliation, and their national location. As we

iterated further, it became clearer that the different paths were strongly affected by the founders’ prior ties and relationships and we analysed our data further at the individual or firm level to

reveal the important effect of institutional configurations on these paths. These insights underpin

the framework that we present after analyzing our data.

4. Findings: paths to early fundraising and founding team formation This section presents the findings showing how the firms in our study harness entrepreneurial

services (fundraising) and build managerial competence (founding team formation). We focus on

showing how founders and managers develop abilities to discern and judge entrepreneurial opportunities and access and mobilize resources. We do this also by drawing on particular

examples from the cases in our study. The tables in appendices 2 and 3 provide an overview of

quotations from our interviews that support the identification of the paths.

Paths to early fundraising

The evidence from our cases shows seven distinct paths of how the entrepreneurial team

accessed early stage funding.

Assisted paths to external early stage financing

We found evidence of three ‘assisted’ paths to early stage funding. The first path, which we call directly-assisted, shows that founding scientists with prior managerial experience in

biotechnology firms accessed early stage funding through their direct relations to investors. This

path adheres to the expectations of prior literature in that these founders have prior ties to

investors, which establishes confidence and credibility in the very early stages of firm development. UK-XCI and UK-NEX provide good examples of these prior ties. UK-XCI, founded

in 1999, licensed technology (compounds) from UK universities and had several drug

development programs in different stages in skin repair and regeneration, including wound care and hair regeneration. The founding scientist was previously in a management position at a

similar type of firm in Boston. When his prior firm, facing financing difficulty, was reducing staff,

the founder of UK-XCI approached his personal friend and venture capitalist about founding a firm in the UK. The founder described the response from his friend: “Start a business and I’ll fund

it”. Within one year, UK-XCI had raised £1.4 million from venture capitalist and corporate venture

capital, both through personal relationships, which he described as: “I had known [venture

capitalist] for years and I’ve known [corporate venture capitalist], the other investor, for over a period of time. It wasn’t cold calling.” UK-NEX, a firm which has developed tools to understand

how drugs interact with the ion channel and has several drug development programmes in this

area, is a similar example. The CEO of UK-NEX described the founding as “a group of people came together … to do something in the ion channel”. The VC had already targeted this area for

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investment and had already invested in the firm where the CEO had previously worked. The

CEO of UK-NEX described the initial fundraising: “They knew the guys we know … it was not like looking for a needle in a haystack. If you want to do something and you know the right

people to talk to, then it turns out to be a fairly efficient [process].”

In the Netherlands, Dutch founding scientists also accessed early stage funding through their

prior ties; however the type of funding they were able to access was primarily corporate venture

capital. As spin outs from corporations, NL-VAA and NL-LAG received financial support from

their parent organizations, either in the form of corporate venture capital investment or incubation. NL-LAG, having discovered another use of technology from the parent firm, was

incubated for 18 months. The CEO of the parent firm described the initial idea: “if we can do

that … in a high throughput setting with robots we can become a genomics company as well … and I got [board] approval to set up a division of genomics within [the parent firm] with the

purpose of spinning it out as a separate company.” NL-HTP provides yet another example of

how a founding scientist with prior managerial experience in a Dutch pharmaceutical accessed early stage financing through prior ties. NL-HTP was founded by a prominent Dutch research

scientist and professor; the firm focuses on developing known molecules for new indications.

From his personal network, the founder brought together three investors: a Swiss firm and

competitor of his previous firm investing corporate venture capital, a Danish professor, entrepreneur and business angel investing seed capital and a Dutch business angel (a CEO of a

mid-sized IT services firm).

The second path we identified, TTO-assisted, shows that founding scientists access early stage

financing through their technology transfer offices (TTOs) or partners thereof. For this path, it is a

necessary condition that firms spin out of universities and have, generally, academic scientists as the founders. Our data shows that this path was prevalent in the UK and non-existent in the

Netherlands. UK-YLP, a firm that developed platforms to use polymers in developing new drug

products, provides a good example. The academic founder’s university lacked a TTO and

retained the services of a nearby university’s TTO: “They had been very helpful and … useful in navigating through the process … the funding … They had a much bigger operation than the

[founder’s school] for setting up companies.” A similar example is UK-XOX, a firm that had

proprietary technology that it used to develop cancer, hepatitis B and HIV vaccines. One of the founding scientists described the contact: “we were put in touch with the head of the department

[who] personally knew [the venture capital investor], who went to medical school here … He had

been through that process of financing and spinning out companies and had experience … in

the US and … was recruited to head the [venture capital fund].”

UK-XOR also followed a TTO-assisted path to raise early stage financing from an initial public

offering (IPO), instead of venture capital. UK–XOR follows a hybrid business model and started the business on the academic founder’s research laboratory that had an established list of long-

term pharmaceutical clients. Through a TTO-partnership, UK–XOR raised seed financing,

recruited external managerial competence and then raised its external early stage funding from an IPO. The academic founder explains how they raised early stage funding: “we recruited a

CEO … and we were off very quickly singing our song around the city to the investment

managers … and to my surprise, since we had done nothing, but we had a lot of ideas and a

good team, we did very well. We offered 23 million on which we took 13.5 million of the initial placement and basically got ourselves listed.” Furthermore, the academic founder emphasized

that the success of their fundraising was due to the assistance from the TTO-partner to access

managerial competence. “I don’t think [the university] had the expertise to really take these things into a commercial environment because most of the people running it came from an

academic environment. They didn’t know the City.”

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In the third path, which we call the intermediary-assisted path, founders lacked direct access to venture capital investors or established TTOs (or TTO partnerships). Instead they relied on their

own personal networks, using friends, family, professional relationships to facilitate access to

investors for early stage financing. An example is UK-KRA, which had discovered a growth factor in the heart and planned to exploit it to protect the heart from damage, gene therapy. The

academic founder described the process: “My own technology transfer office at the university

was not very good. Through private contacts I got in touch with a venture capital company. They

came to see me and gave me a tough time … They were quite impressed by this and … we founded a company …”. UK-SAV provides another example. The academic founder of UK-SAV

talked about how he started his first firm, which provided services using combinatorial chemistry.

“It was a [technological] area I was working in, we knew some customers. I set the company up … and went out to look for backers. I talked to dozens of venture capitalists … I learned to

hate them … their only requirement was to find something to fund and … get their money back

as fast as possible. I basically gave up on VCs and banks and … came across some business angels. They were prepared to put in the business expertise, some property expertise and some

money and help me build a business.” When [the academic founder] started his second firm UK-

SAV, that uses zebra fish as a platform to provide toxicity testing services as well as develop

their own drug products, the academic founder was his own business angel.

In the Netherlands, NL-AREK provides a good example. The founding scientists worked together

in a laboratory of an academic medical hospital. They had developed a labelling system to label DNA probes for a client and decided to exploit that technology. One of the founders described

the way they financed their start. “We found a business angel, through our own private

network. … He [the business angel] was not in biotechnology, both my co-founder and I have a large private network of friends and people we know and … one of our friends is a filmmaker and

for his film he also needs investments and he came across this guy and at that moment he didn't

need an investment for his films so he said, well if you like to invest, I have an idea for you that

might be interesting. And that is how we met each other. … [in a six year period] he put in [approximately] !2,5 million.”Unassisted paths to external early stage financing

We found evidence of two ‘unassisted’ paths to early stage financing. In what we call founder-

controlled, founding scientists avoided venture capital investment and raised early stage financing by going directly to an IPO in order to maintain firm control. Our evidence shows that

this path was followed only by UK firms. UK-RAS originated from industry and was founded by

three scientists who had prior common work experience at the same biotechnology employer.

They started UK-RAS after their unit had been closed down and realized that they could take advantage of the specialised skills and talent that had become available. UK-RAS’s business

model was a hybrid model, combining a services offering with its own internal drug discovery

and development programmes based on crystallography and structural-based biology. One of the founders described their decision for early stage financing. “We had four or five ways of

funding the company … controlling the company was big … we didn’t want to give away the

whole company … we didn’t want [poor investors] involved with the company … we didn’t have any confidence in mergers and acquisitions … we went down the AIM route … our objective was

always to float on AIM very quickly.” The founding management team had the requisite

managerial competence to successfully establish confidence from investors and raise early

stage funding from the stock market.

Other unassisted paths to early stage financing are what we call revenue-generation and

grant-generation. In these firms, founding scientists, although they had no prior ties to investors, continued their search for external financing and eventually developed the ties to access early

stage funding. For both paths, there was a substantial period of time between the initial founding

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of the firm and the eventual raising of funds. To bridge this gap, the firms survived by generating

revenue and/or grant funding.

From our data, we find that there are several more Dutch firms following revenue and grant

generation paths than British firms. UK-SXD and UK-SPE provide two examples of British firms that generated revenue to bridge the gap to their first round of early stage financing. UK-SXD, a

diagnostic firm that spun out of a large pharmaceutical, began by offering services on its

proprietary platform technology and eventually developed a diagnostic product to determine the

effectiveness of drug therapies for cancer. UK-SXD bridged a 6-month start up period with personal financing until they sold their first service contract. Six months later they secured their

first round of early stage funding. As a service-oriented firm, UK-SXD did not need to raise the

same level of funding as firms following drug development models. UK-SXD financed its further product development in collaboration with a large pharmaceutical firm. In comparison with other

firms following this path, UK-SXD raised its early stage funding relatively quickly, even though it

did not have any established ties. One of the founders explained: “Raising the cash was hard … We had never done it before, had a lot of conflicting advice. … We

made it up ourselves as we went along initially because we had advice that that wasn’t going to be

a problem. … As it turns out, it is much better to have personal introductions from a person they

[investors] have dealt with before.”

UK-SPE was founded by a retiring academic scientist and his senior post-doc. The founder’s academic department focused on epithelial cancer and had developed assays to measure stem

cells. Before the founding of UK-SPE, the founder and his department had engaged in

collaborations with biotechnology and pharmaceutical companies that were interested in gaining access to their stem cell biology knowledge. When starting UK-SPE the founder already had a

set of customers and they did not need any seed financing. However, from the start, UK-SPE

also aimed to develop new drug products and its internal revenue stream was not sufficient to

fund this development. Four years after the founding, UK-SPE raised its first round of external funding from angel investors. Two years later, an IPO followed.

Turning to the Dutch firms, we see similarities with the British examples; Dutch firms also offered services in order to generate revenue until they were able to secure their first round of external

financing. The main difference lies in the duration of time needed for the Dutch firms to develop

ties to investors and to raise the first round of external funding. An example is NL-EPP, which was founded by a university spinning out an academic department to exploit protein technology.

NL-EPP retained all the employees in the academic department and secured seed investment.

NL-EPP raised its first round of external financing for new drug product development six years

after its founding.

Other founders relied on peer-reviewed grants or government funding to bridge the gap to

raising their first round of funding. In the UK, firms that follow this financing route were pure drug discovery and development firms. Yet, grant funding from government, charitable and other

institutions is not sufficient to develop drug products through all clinical phases and the firms

continued to search for larger rounds of financing. The CEO of UK-XSS, a firm founded by academic scientists and developing treatments for Alzheimer’s, explained why he thought the

founders followed this route: “… they [charity organizations] were the investors that ended up backing this because it is a

slightly longer term opportunity. Therefore maybe the trust invests behind good science. If they

make money out of it, fantastic. If they have invested behind good science, that's great and they

call it a grant. [The investor] has a long term strategic interest in this area of science. I suppose you

could argue that they are more strategic investors than your traditional VC fund.”

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Another example is UK-GGF, founded by academic scientists and developing anti-fungal drugs.

The academics retained their university positions and the firm developed slowly. One of the founding employees described the growth:

“… the first couple of years [there were] just two employees, two technical employees plus the

founders. So, that was really done through grants, European grants and some small seed funding

and that’s how we survived for the first couple of years. Proved the platform and that attracted

some more funding and then eventually some venture capital funding in 2002.”

UK-GGF raised its first round of funding four years after its founding. Having relatively early and unproven technology, the grant funding these two firms raised allowed them to continue the

development of their technologies and eventually secure the external funding needed for further

product development.

We see a similar pattern in the Dutch cases; however, there were more Dutch firms (those with

drug discovery and development business models as well as those developing technology

platforms for services) that followed the grant-generation path. The Dutch cases were similar to the British ones in that the technologies were in relatively early and unproven stages. NL-BRN is

an example of a Dutch firm that survived on grant money to build its platform technology on drug

delivery to the brain. The founder had maintained close ties to the university where he studied; he explained the founding:

“We founded the company as a legal entity in 2003. There was no reason to do it earlier. We did

use the name somewhere in 2001. but the legal entity was in 2003. [Before that it was part of the

university] until 2004. ... once we got the [seed] investors in, that was the first time I was on the

payroll of the company. Before that I was paid on the grant from the university.”

It took NL-BRN four years to raise a first round of external funding from a local venture capitalist fund, from the time of the founding of the legal entity and eight years from the initial grant

funding.

Another example is NL-ORP, a firm that was founded by a scientist with biotechnology experience and developing a product for Duchene muscular dystrophy. As Duchene is a rare

disease, NL-ORP was able to raise grant funding not only from government funds stimulating

start ups but also patient organizations. He clarified the grant fundraising, “I think I got a total of 6 grants from [a government funding scheme] and about 3 to 4 grants from patient organizations.

That amounts up to ... six or seven million euros.” Five years after the founding, NL-ORP raised

13.5 million euros from a local venture capitalist fund.

Lastly, in the founder-constrained path, although founders raise small amounts of seed

funding, they do not raise any significant amount of early stage funding. By definition, these firms

must be revenue generating and therefore follow models that allow them to generate revenue quickly after founding, either by selling services or developing low-risk products with short

development periods (such as equipment or devices). It could be argued that these firms did not

raise external financing because they did not need to; however, we observed that these firms initially searched for external financing from venture capitalists but discontinued their search.

In the UK, we see that the firms following this path had no ambitions to develop drug products.

By contrast, in the Netherlands, the firms had tried to raise funding for drug development. In the case of NL-OIB, the founders’ efforts were unsuccessful and eventually this firm focused more

on service provision. In another case, NL-TOC, the firm, after changing its strategy, raised the

external funding from local venture capitalists 10 years after founding. NL-RIV is an exception and has pursued a business model as a technology broker. NL-RIV was set up by a university

TTO to exploit a breakthrough technology from a prominent professor and his academic

department. The university TTO appointed a CEO, who explained the initial funding.

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“No investors. We started with zero in the bank and we just did it. And nobody invested anything,

just time and effort and then direct costs.”

NL-RIV’s technology and patent position allow it to be, in the words of the CEO, an “outlicensing

factory with full support”. Having discovered and patented a whole new virus, NL-RIV is able to

exploit new products for prevention, treatment and diagnosis. For prevention and treatment, NL-

RIV has outlicensed the rights to develop vaccines and antibodies, respectively. The outlicensing agreements generated revenue from upfront and milestone payments. NL-RIV also

supports these outlicensing partners by providing services. For diagnostic product development,

NL-RIV is pursuing non-exclusive outlicensing partnerships. The CEO explained that “NL-RIV will become more of a holding company for the royalties we are going to receive. It will definitely

not grow.” Even though NL-RIV is developing drug products, given the nature of their business

model, there was no need to raise early stage external financing.

Paths to developing managerial competence

Our evidence shows five distinct paths that firms followed in developing managerial competence.

Assisted paths to managerial competence

We found evidence of three ‘assisted’ paths to developing managerial competence. The first

‘assisted’ path is what we call investor-appointed, which represents firms that, after securing external financing, were able to tap into their investors’ networks for complementary managerial

competence. The VC investors appointed managerial resources and either retained or removed

one or more of the founders in the founding team. An example is UK-XOX, the firm developing cancer vaccines. UK-XOX had several scientific founders, professors that took non-executive

positions on a rotating basis and a post doc that co-founded the firm and remained its CSO. The

co-founder/CSO explained how the investor supported their initial start-up phase. “… we had quite a lot of support from our first investor … guidance and direction. I made it

happened but … there was quite a lot of hands on involvement from our investors. The CEO was

recruited with the help of recruitment agencies, headhunters and the investor had a big role in that.”

UK-GGF, the firm that is developing anti-fungal drug products, survived on grant funding before

securing external financing. The academic founders had assumed the positions of CEO and

CSO, alongside their academic positions. When they raised early stage funding, the venture capitalist recruited the CEO (from the USA), replacing the academic founders. UK-YLP, which

has proprietary polymer technology for drug development, is another example where the

founders were replaced. One of the academic co-founders explained how managerial competence was recruited:

“It took six months to get [the CEO] to agree because my co-founder and I were too involved.

Mostly my co-founder. They had to get him off the board and the deal was that he and I would go

together. But I wasn't going to do a round robin and come back in a year later. So the deal was we'd

both leave. Once we came off the board, the CEO came on …”

In the Netherlands, there are also several examples of firms following the ‘VC-appointed’ path. NL-VAA, which spun out of a large chemical firm, had raised substantial external financing from

corporate venture capitalists and shortly after the founding of the firm, the investors replaced the

CEO and founder due to a “difference of opinion with the board”. The CEO that replaced the founder had been recruited as a business developer and was appointed to the CEO position.

Another Dutch firm, NL-AREK had raised a substantial amount of financing (approximately !2.5 million) from informal, seed investors over a period of six years. The scientific co-founder

describes the support from these investors as ‘very important’ and as an ‘influential coach’ but

the seed investors did not recruit additional managerial competence to complement the skills of

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the two academic founders. Much later in the life cycle of NL-AREK, after they had raised

financing from venture capitalists, the investors intervened and replaced the founder CEO because of a disagreement in the strategic direction of the firm.

The other examples in the Dutch sample (NL-QIP, NL-AIK) follow similar trajectories. By raising external financing several years after the founding of these firms, the founders had to rely on

their own (limited) managerial competence prior to external early stage financing. After external

financing was raised from venture capitalists, the investors appointed external and/or additional

managerial competence and removed the founders from managerial (CEO) positions.

The second ‘assisted’ path is what we call founder-appointed, in which founders used their own

network or third parties (e.g. executive search, headhunters) to search for (complementary) managerial competence. Founders in both the UK and Netherlands accessed managerial

competence following this path. For example, the academic founder of UK-KRA had a long

established network in the pharmaceutical industry due to collaborations with his academic department. He realized his own shortcomings as a CEO and recruited managerial competence

through his own network. He explained: “I realized that I was not a good chief executive. I was running the company and I realized I didn't

have the personality of a CEO. I didn't have the commercial focus and understanding of a CEO. …

as an academic I realized that I had to give up control. At that time I was doing some work as a

consultant for … a drug company in Europe and their VP was working with me very closely and

we got along very well. He saw I did a very good job for them and I said do you want to join,

would you be the CEO of UK[Ark]?”

The academic founder of NL-TOC also appointed a CEO, a former PhD student, using his own

network. The founder explained: “He was a student and I was a teaching assistant, ... and then afterwards we met on a regular basis,

discussing collaborations, projects together. … he wanted to start his own business. He is an

entrepreneur, he comes from an entrepreneurial family … but he also needed some sort of

academic background, academic information, know how and network. I had at that time a very big

academic industry network … we sat together and we worked out a plan. …”

Even though Dutch firms tried to tap into their own business networks, founders relied primarily on using third parties to recruit complementary managerial skills. Having secured its early stage

financing from international venture capitalists, NL-RUC, was unable to tap into a local network

of executives via their investors and relied on third parties to recruit business development

competence. The founder explained how he recruited complementary managerial competence. “I think the strength of what I've done is actually recruit very, very strong managers which is

proven by the fact that those are the people who are still running this large company. I recruited

them when we were still a small company ... I used headhunters for most of those people. [But] just

using a headhunter is not sufficient. I found those people because I was truly interested to identify

and work with the best of the best of the best. I never said yes to second choice. When I had any

doubts I said forget it, we'll continue to search. [I hired] the current CEO as a business developer

because I wanted to reinforce the business end of the company. We were a very scientifically

driven organization and I wanted to do deals and outlicense and make sure that we didn't make any

mistakes there and have aggressive marketing. [Then I hired] the CFO, [via a] headhunter. …”

The third ‘assisted’ path is what we call parent-appointed and represents firms that accessed

managerial competence by appointment from their originating institution or parent. In most cases,

these firms originate from university environments and the appointments were made before external early stage financing. UK-XOR and UK-SAV provide good examples of this path. Both

of these firms originated from universities with strong TTO partnerships. In the case of UK-XOR,

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an interim CEO was appointed to help start up the firm and transfer university lab personnel to

the newly founded firm. The academic founder elaborated on the recruitment of the CEO: “… there were a number of things I was certain of. First of all you … never leave the scientists in

charge because we are very good at burning money but not doing much else. We didn't want

somebody who had a pure background in pharmaceutical. What we wanted was somebody who

knew the business world and the markets and knew the money side of things. If we were going to

develop, we had to have investment of some kind. So [the CEO] came in and we started a number

of research programs, very primitive. We recruited another key member of the team, … who had

first year drug development experience. So I had the research experience. [The other] who I had

known for a long time had the drug development experience, having worked for a company in San

Diego. [The CEO] had the business sense …”

UK-SAV shows how the founder also used its originating institution’s ties and TTO partnerships

to access managerial competence. “… they [TTO partner] put in the expertise to help spin out … but what I wanted was take some

people who were working with [the TTO partner] and use them as my management team. … they

put in the full management team until we went public … What we actually did was take the CEO,

who was very good and has set up 30 businesses before … So we stole him … and he is now the

CEO.”

In the Netherlands, NL-PMA and NL-LAG provide examples of firms following the parent-appointed path. NL-PMA spun out of a university department and the university’s TTO appointed

a CEO. The CEO explained, “I ran a small venture capital fund … I was approached by the Free

University because they had invented and patented their invention.” None of the original inventors were involved in the founding or the firm. Another manager in NL-PMA described the

founding CEO as, “well-known, one of these tycoons in biotech in Holland, doing his business in

biotech companies only. He was not an academic.” However, the founding management team in

NL-PMA lacked sufficient scientific management as none of the academic inventors were involved in the firm. The founding CEO recognized this weakness:

“The problem is … I don't have a scientific background, I have a business background and it is

either you take the scientist that has no business background or you take the business man with no

science background.”

NL-LAG spun out of a biotechnology firm and was incubated within this firm for 18 months. The

CEO of NL-LAG was recruited by the parent firm to run the division before NL-LAG was spun out

as an independent firm.

Unassisted paths to managerial competence

In the ‘unassisted’ paths, managerial competence is not recruited or appointed and founders rely

on their own managerial competence to provide managerial services. There are two variants to these ‘unassisted’ paths: founding teams with skills that are what we call complementary or

limited. Founders who had previously worked together at a prior employer were more likely to

have a complementary founding team. This path was more prevalent in the UK.

UK-SXD, which makes diagnostic products and spun out of a large pharmaceutical, is an

example of a founding management team that was ‘complementary’. The founders’ department

was made redundant and a small group of three decided to take the technology they had been working on and start a company. The main head of the department became the CEO and the

lead scientist on technology became the CSO. They recruited another colleague from the parent

firm to become the CFO. UK-RAS is a similar story, starting with a group of colleagues that had been made redundant by their former employer.

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In contrast, the ‘limited’ founding teams are those in which no (external) managerial competence

was recruited and in which the founders, generally academic founders, assumed the various managerial roles and responsibilities. This path was prevalent in the Netherlands. In the UK, all

firms in our sample were able to recruit complementary managerial expertise through one of the

paths previously discussed.

NL-OIB was founded by a group of eight founders that were previously employed at the same

employer; however only one of these founders assumed the roles of the management team. The

previous employer, a biotechnology firm developing drug products and primarily doing R&D, was struggling to secure financing. NL-OIB’s founding scientists believed that their prior firm would

not survive and left together to start NL-OIB, which was based on a hybrid model combining

service provision as well as drug development. At the founding, two of the eight founders became members of the management team but one of the founders in the management team

left, leaving one founder to form the management team.

NL-KLA provides another example of this ‘limited’ path. The scientific founder of NL-KLA, a firm

developing drug candidates, explained that they weren’t yet ready to hire managerial expertise,

“because we think it is not yet necessary to have full heads, financial or CEO functions at this

moment”. The lack of external financing made it difficult for NL-KLA to recruit not only managerial but also scientific expertise. Working with a local university, NL-KLA relied on post

docs to progress its drug programmes.

NL-KYS, a firm developing a diagnostic product, was run primarily out of a university laboratory.

The university had hired a consultant to write grant proposals and the consultant eventually

became the CEO. He explained: “I became more and more interested in the project … during the same time that we got the grant it

was decided that we would found a company based on this program, which was also one of the

aims of the first stage grant. So we started a company and basically I was involved and am still

involved as a CEO …”.

NL-KYS had not recruited any additional managerial competence.

5. Discussion This study seeks to understand the early phase of growth of science-based firms. Our findings

show a diversity of paths regarding how science-based firms can access and mobilize critical

resources at the early growth stage. We posit that the institutional environment in which these firms are embedded influences the different models of early growth of science-based firms.

Our study builds on and extends Penrose’s (1959) work to show how new firms mobilize resources to form a productive resource base in science-based firms. Penrose (1959) views

resources as ‘productive services’ that can be combined and used in ways that change over time,

pursuing opportunity and mobilizing resources to create, deliver and capture value through

business activity. Garnsey et al. (2006), building on Penrose (1959), show that new firm growth is non-linear and prone to interruptions and setbacks. Our contribution builds on this and also

regards the early growth paths of science-based firms as non-linear. Existing studies on high-

tech firms address the ability of founders’ (including founders’ ties) to raise early stage financing or explore the relation between ownership (and venture capital involvement) and changes in top

management team (see, for example, Burton et al., 2002; Hellman and Puri, 2002). However,

they do not examine how and why these relations occur. Our cases show that the development of early finance and of managerial competence is an unfolding and interrelated process. This

may be explained by the characteristics of science-based firms, including the important degree

of uncertainty, iteration and induction associated with R&D, in contrast to firms in other sectors

(including high-tech ones). For this reason, institutional configurations, including the availability,

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strength and coherence of institutions of finance and management may play an even more

important role than for firms in other sector.

We find that the paths to raising funding and to the development of managerial competence are

highly interrelated. The combination of these two processes allows us to derive three general early firm growth models: immediate, gradual and arrested set-ups. Table 3 shows the diversity

of the combinations pursued by the firms in our study and identify the three main models.

[Table 3]

Discussions about science-based firms typically assume a model in which entrepreneurs (like in

high-tech ventures) rely on growth forecasts to persuade business angels and venture capitalists to invest in radical innovation projects (the ‘directly-assisted’ financing path), draw on the

relationships of investors to recruit managers to complement the founding team (the ‘investor-

appointed’ path to developing managerial competence), seek to extend production and do an initial public offering which enables initial investors to exit (by floating on stock exchange or a

merger and acquisition) and make profits that offset risky initial investment. Institutional

environments that support this ‘typical ‘access to critical resources are associated with ‘liberal

market economies’ (Hall and Soskice, 2001). We would expect therefore to see more British firms and less Dutch firms following the typical paths.

Our findings, however, show that this ‘typical’ set-up is only one of several combinations of paths. We show below that the early firm set-up can sometimes unfolds relatively rapidly and in other

cases in a more gradual way or is even arrested (when firms are unable to develop a ‘complete’

management team or cannot access early finance, for example, depending on university funds for long periods of time). Also, we make the further step of showing that these processes are

strongly determined by the institutional environment in which firms are embedded.

We can see in Table 3 that we have called the combination of assisted paths to early fundraising and assisted paths to developing managerial competence the ‘immediate set-up’ model. This

model includes the ‘typical’ case of ‘directly-assisted and investor-appointed’ paths. Yet, we can

see that only a few firms can be included in this ‘typical’ combination; there are several firms following different paths that fall into the category of the immediate set-up model. Within the

‘immediate set-up’ model, we see that there is a marked institutional difference in the role of

intermediaries, especially the TTO, acting as ‘mediators’ and facilitating access to venture capital

investors, who in turn appoint managerial resources in the founding team. Investors generally remove one (or more) academic founders from the management team; nevertheless, academic

founders remain strongly involved in non-executive or advisory roles. In the UK, academic

founders combined their early management roles with their academic positions and the firms maintained the links to the academics’ knowledge and network. In contrast, in the Netherlands,

assisted paths via intermediaries such as TTOs played a lesser role in early fundraising. In fact,

the Dutch firms categorized as having ‘immediate set-ups’ did not originate from university environments. This suggests that institutionally, in the Dutch context, TTOs are underdeveloped,

placing limits on this route for firms originating from university in The Netherlands. The lack of

mediation, or assisted paths in fundraising, also has consequences in accessing managerial

competence. Without the facilitation of mediators, Dutch founders, especially academic founders, relied on their own abilities and primarily followed unassisted paths, as can be seen in Table 3.

Also, Dutch academic founders left their academic positions to commit fully to the firm and to

increase its credibility. The institutional environment, namely, the lack of facilitation and mediation in early fundraising, lead Dutch founders to follow more gradual and arrested set-up

models.

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There are also institutional differences in the type of risk capital that is available to firms. In the UK, firms were able to raise funding from IPOs and bypass venture capital investors. To utilize

this path, firms need to have the managerial resources to coordinate an IPO. In the Netherlands,

firms are hindered from following this path not only due to the lack of a liquid small-cap stock exchange but also the lack of intermediaries to facilitate access to the requisite managerial

competence. Instead, in the Dutch context, which also lacked domestic venture capitalists, firms

accessed international venture capital and corporate venture capital. However, these types of

investors do not provide the brokering or mediation role needed to access managerial competence. While firms could ‘compensate’ for risk capital constraints by using ‘functional

equivalents’ such as international sources of venture capital, access to managerial competence

is limited by national or regional boundaries and labour regulations, making functional equivalents difficult to create and use. In the context of labour systems, the use of an

international functional equivalent, or the search for executives from abroad, has limitations.

Whereas capital and product markets can cross borders relatively easily and transparently, labour markets do not and there are various costs associated with accessing labour resources

internationally. For the firms in the Netherlands, the search for executives in neighbouring

countries, like Belgium and Germany, would seem an obvious alternative; yet very few Dutch

firms in the study chose to recruit from international sources, and of those that did, they generally accessed international labour markets after having successfully raised external

financing. By raising early stage external financing, these firms had not only the financial

resources but also legitimacy and credibility to offer executives from international labour markets incentives attractive enough to persuade them to join the firm. Again, this protracted access to

critical resources lead to a more gradual set-up for Dutch firms.

Finally, we have a number of firms with an ‘arrested’ set up, in which firms neither raise early

financing nor recruit managerial competence. There is a sharp distinction between the

institutional contexts. In the UK, the founding teams consisted of complementary skills and it was

the founders’ decision to cease the search to raise early financing. In the Netherlands, the firms were unable to recruit complementary managerial competence, due to lack of financial

resources but perhaps also due to a lack of managerial talent to absorb new managerial skill.

Without the mediation of investors or TTOs, the (academic) founders were obliged to assume the various roles of a management team. These firms remained in a prolonged period of

‘arrested’ set up and were dependent on the facilities of universities.

Following from this research, it would be important to assess how different set-up models affect firms’ growth (in terms of inputs, such as funds invested or employment figures, or outputs, such

as revenues or profits, or composite indicators such as valuation) (Garnsey et al., 2006). This

would be our next project. By identifying the different paths, however, we contribute to the discussion on the relative success of different economies in commercialising and benefiting from

the economic impact of science and innovation (Casper, 2007). Science-based firms (and

biopharmaceutical firms in particular) are very heterogeneous. A number of studies based on different countries have already pointed out the inappropriateness of the ‘typical’ model to

describe the large spectrum of biotechnology firms (Mangematin et al., 2003; Luukkonen, 2005;

Hopkins et al., 2009). Other studies have shown the how institutional features of different

countries play an important role in the innovation strategies of biopharmaceutical firms (Casper and Whitley, 2004; Herrmann 2006; Lange, 2006). The findings from our study contribute to this

literature by showing that firms develop different early growth models in different institutional

environments to respond to the institutional constraints and advantages in accessing critical resources.

20

The literature has addressed the different development of venture capital in different institutional

environments. Less attention has been paid to how firms develop early managerial competence in different institutional environments. The evidence suggests that the USA (and to some extent,

the UK), have been more successful at developing a mobile inter-firm network for managerial

expertise (Saxenian, 1994; Almeida and Kogut, 1999). Dutch entrepreneurs (and managers) are more cautious when making decisions to hire employees, especially employees in executive

levels, possibly because employment protection regulations are stricter than in the USA or UK.

Mid-career managers are also less likely to make abrupt changes in their career pattern,

especially if they have been working for the same employer for several years, and possibly because of the lack of clusters of firms with alternative jobs in case of firm failure (Casper and

Murray, 2005). The less aggressive search behaviour of founders coupled with the lack of a

supply of executive managers on the external labour market and an absence of consolidation of the pharmaceutical industry impedes the development of a labour pool of managerial expertise.

This limited access to financial and management resources may hinder the market dynamics

needed to create and maintain a ‘flexible recycling mechanism’ (Bahrami and Evans, 1995; Casper, 2007), which can be used to reallocate resources to other firms as projects or firms

succeed and fail.

6. Conclusion This paper examined the early growth phase of new science-based firms. A study of 18

biopharmaceutical firms in the UK and 17 in the Netherlands provided insights to derive different

paths of early firm growth. We find important differences in how science-based firms can access and mobilize critical resources at the early growth stage according to the institutional

environment in which they are embedded. This study thus contributes both to conceptual

discussions of new science-based firm growth and has important policy implications.

Understanding the early growth phase of new science-based firms in different institutional

environments is an important question for practitioners and policy makers. Many countries have

attempted to orchestrate the institutional conditions needed to stimulate the growth of science-based industries but very few have been successful at creating viable science-based clusters. It

has become apparent that ‘copying’ the Silicon Valley model does not work, even for regions in

the USA. Instead, policymakers need to be aware of the alternative paths that are used by different firms in their national and regional economies and develop policies that facilitate and

stimulate these, for example, by encouraging the use of international venture capital as a form of

early stage financing, or creating schemes that facilitate the development of social networks,

creating initiatives that promote ‘protected’ forms of employment mobility (rather than precarious forms) and the transfer of managerial skills and knowledge and international recruitment of

executives. In addition, policymakers need to reconsider their policies on academic spin-outs

and technology transfer. The challenges that academic founders face need to be addressed by effective policies to engage industry-experienced professionals through various means (e.g.

building ties through collaboration with firms) in the development and growth of new firms

originating from university.

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Table 1: Summary of the characteristics of the sampled firms

*IND=Industry origins include biotech, pharmaceutical and other related industries such as chemicals; UNIV=University origins include university and government research institutes.

26

Table 2: Overview of data used in creating constructs

27

Table 3: Paths to early fundraising and developing managerial competence

Paths to Developing Managerial Competence

Assisted Paths Unassisted Paths

VC-appointed Founder- appointed

Parent- appointed

Complementary Founder Skills

Limited Founder Skills

Directly-Assisted

UK-NEX NL-VAA

UK-XCI NL-HTP

NL-PMA NL-LAG

TTO-assisted UK-XOX UK-YLP

UK-OVE UK-PNI

UK-XTG

Assis

ted

Pa

ths

Intermediary-assisted NL-AREK UK-KRA

Founder-controlled

UK-TRG UK-XOR UK-SAV

UK-RAS

Revenue-generation

NL-QIP NL-AIK

NL-RUC NL-MPA

NL-EPP UK-SXD UK-SPE

Grant-generation

UK-GGF UK-XSS

NL-ORP NL-KLA NL-KYS

NL-BRN

Pa

ths t

o E

arl

y F

un

dra

isin

g

Un

assis

ted

Pa

ths

Founder- constrained

NL-TOC NL-RIV UK-NGP UK-XHP

NL-OIB

Gradual set-up

Immediate set-up

Arrested set-up

28

Appendix Table 1: Job roles of key informants and number of interviews

Job roles Number of Interviews

UK Firms

GGF Chief operating officer; financial consultant at start up 2

KRA Academic founder/CSO 1

NEX Founder/CEO 1

NGP Founder/CEO; Founder/CSO 2

OVE Chief Financial Officer 1

PNI CSO; CFO 2

RAS Founder/VP Services 1

SAV Academic founder; CEO 2

SPE Academic founder/CSO 2

SXD Founder/CSO 3

TRG CFO 1

XCI Founder/CSO 2

XHP Founder/CEO 1

XOR Academic founder/CSO; CEO 2

XOX Academic founder/CSO 1

XSS Academic founder/CSO; CEO 2

XTG CEO; Academic founder/CSO 2

YLP Academic founder; 2 scientists 1

NL Firms

AIK Chief financial officer 1

AREK Founder/CSO 1

BRN Academic founder/CEO 1

EPP Academic founder/CSO 1

HTP Chief Business Officer 1

KLA Founder/CSO 1

KYS Founder/CEO 1

LAG Founder 1

MPA Founder/CEO 1

OIB Founder/CEO 1

ORP Founder/CEO 1

PMA CSO; CFO; Founder/CEO 2

QIP CSO; CEO 2

RIV Founder/CEO 1

RUC Academic founder/CEO 1

TOC Academic founder/CSO 1

VAA Chief Business Officer 1

Support

Organizations

UK 3 venture capitalist firms 3

UK DTI policy maker 1

UK TTOs in Manchester, Oxford and London 3

NL 2 venture capital firms 2

NL TTOs in Utrecht and Leiden 2

NL Industry association 1

NL Policy maker, Ministry of Economic Affairs 1

Denmark International venture capital firm (investor in UK firms) 1

29

Appendix Table 2: Data supporting categorization of early fundraising paths

Type of path

Firm

(year

founded)

Data supporting approach to fundraising Timing indications of fundraising

Assisted

Directly-

assisted

UK-NEX

(2002)

"We didn't need to [search for funding] because all this

sort of came together. The [VC] wanted to do ion

channels; these guys were around; I was around; so it all just came together."

"... we came to together with our group of

founding VC .... and they had similar

thoughts and so a group of people came

together at the same time and that is how things got started."

UK-XCI

(1998)

Founder had dinner with two of his old friends from the

UK, one was a VC. Founder mentioned that he wanted

to return the UK and VC said, start a business and I’ll

fund it.

"I had known VC now for years and I've

known, the other investor (CVC) for over a

period of time. It wasn't cold calling. From

their actual firm commitment to closing, it was 2 months."

NL-HTP

(2001)

"[The founder] brought these three [investors] together

and said I have a good idea to start a company and you

three should at least initially come up with some money."

"We started with 4 or 5 projects [that the

founder had] ...on January 1st, 2001 with these three business angels."

NL-VAA

(2000)

"We are a spin out of ... a mix of petrochemical

pharmaceutical companies and three technology

universities. [The founder] managed to convince [them]

that it had a better chance to flourish outside of [the

company] and that [they] could still benefit from it by

investing. ... He managed to attract quite a few

companies, both initially and in the consecutive financing rounds."

We were founded in Feb 2000 officially ...

at that time no VCs but not too long after that VCs came on board.

NL-PMA

(2002)

"It is not the first company I founded ... then they know

you personally and they say well if you invest, we are

invest as well ... When it started in 2000, ... there were

other VCs that were willing to invest along with [lead

investor] ... but [lead investor] had the preference of

doing it alone and then later on ... letting other VCs

in. ... then biotech deteriorated and we were not able to

close the deals with the other VCs ... So we were stuck with one VC which was not the original planning ..."

"... with that [seed] money you start the

contract, you start the subsidy, you have it

and then you go to the VC ... then we had the

first round, then the merger and then later on

[more rounds]."

NL-LAG

(1998)

"... So we spun it out, first as a 50/50 joint venture.

[And then we had to make a decision] dilute our 50%

stake by allowing VCs in or not. ... we attracted a group of VCs ... to get external funding ..."

"... we decided to write a business plan on

this as a separate entity and presented that to

the board and got their approval to set up a

division of genomics within [parent firm]

with the purpose of spinning it out as a

separate company."

TTO-assisted UK-OVE

(1998)

The very early financing was from high net-worth

individuals who put in a matter of a few hundred

thousand. ... the first major round was something like 2

million, or maybe 3 million, and that was put in by

[VC] plus a few of these high net worth individuals.

"[for flotation] we had a pre-money value of 6 million

which is basically the money pound to pound put into

the company at that date. There was no premium

whatsoever and we raised 6 ... and that was really the first time we had had sensible money if you'd like.

[VC] made their investment in 2001, we

were the last investment just before they

changed their strategy and then we went in

the bottom drawer and it proved extremely

difficult [to raise financing] if your lead VC investor is no longer investing ...

in April 2004, we were pretty well out of

money, ... and it had proved very challenging

to raise VC money so we floated or died.

[Floated in August 2004]

UK-XTG

(1997)

"[The TTO] provided some funding or underwrote

some funding. They helped with the first major funding

exercise which was a complex investment involving a

limited partnership by a group of investors invested into

a group of companies. The founding was very much a

consequence of [the TTO] and them being very flexible

in how they did things. "

"It was set up in 1999 as an entity for

investment ... the funding exercise was around the same time, 99/2000 ..."

30

UK-XOX

(1999)

"... we were put in touch with the head of the

department in time ... he personally knew [investor]

who went to medical school here and he basically

started up the venture arm of the MRC. We pitched it to

[investor] and then we went to a couple of other [investors]."

"We received 1.1 million pounds as a seed

investment. That is what we started with on day one."

UK-PNI

(1998)

"... there were a bunch of angel investors at [university].

They had a VC arm, a set of high net worth individuals who were looking for spin outs from the university."

"Fairly quickly it transitioned to being an

independent stand-alone company and the

shareholders from the UC got diluted over

time as further investment came into the

company."

UK-YLP

(2001)

"We went to the Wellcome Trust and BioSeed Fund and

they finally gave us the seed money, which was 2001 or

2002. Two and half really to get our seed funding.

Basically, 750,000 pounds to start. [The TTO] had also put some money in ..."

[The] seed funding for 775K pounds was

budgeted to last 18 months but we got it to

last close to three years. [We] were funded a

little bit by grant, but not much. We formed

the company [in 2001] and then we did the

seed investment. "

Intermediary-

assisted

NL-AREK

(1990)

"We found a business angel. By our own private

network. … He [the business angel] was the first to start

with and then after two years we found another investor

which was initially a customer of ours, a distributor and

he thought we could develop very fast all kinds of

products so he was very interested. He took shares and

invested in the company and later on we found a private investor from South Africa."

"That [the informal investors, high net worth

type of individuals] was for the first six

years and then in 1999 we get our first

institutional investor ..."

UK-KRA

(1997)

"... my own tech technology transfer office at the

university were not very good. ... through private

contacts I got in touch with a venture capital company ..."

"... on the first of July 1997 we founded a

company ..."

Unassisted

Founder-controlled

UK-TRG

(1998)

"The [inventors] brought the idea to people who had

money in this country [UK] to get the whole project off

the ground and part of those founders did get rewarded

with shares when it was initially set up. So, [UK-TRG]

was a company set up to acquire the [inventor]

companies and then, when it was floated, shares were

issued to the people who had been there at the beginning."

"We went on to OFX in 1998. ... Then a bit

of money at the end of 1999 just to keep it

going until we floated on AIM in March 2000 and raised 5 million pounds.

UK-XOR

(2004)

"... there is always this worry about dilution going to

VC and wanting both arms and both legs and before

you look around you don't own the company anymore. I

think one of the reasons for doing it the other way

[floating] was to sell off a portion of the company but

retain control. To float, I think that largely came from

[the CEO]."

"It was a bit of a surprise to me that we

[floated] so fast. ... it did come around very

rapidly considering that we hadn't done

anything. We had just ideas and people and that is what we sold them [the investors]."

UK-SAV

(2003)

"I've made some money out of [prior venture]. So now I

don't need any business angels. I can be one to myself.

There was only two or three people in the company and

we were in the university lab but we managed to

persuade a set of investors that we were worth 35

million pounds and they put in 15 million on top of that."

"Listed on AIM and then we had 10 million

in the bank, so off we went. It took us a day

and 1/2 to raise the 15 million. I didn't have to go further in London."

Revenue-

generation

NL-QIP

(1999)

"... the science park foundation invested ... then [a bank]

put in some money as well in 93. Then [a seed fund]

was the first investment ... We had a little bit more

space to develop but it was not a serious financing round."

"We have sold quite some products and started to

change things ... the investment [from the regional investor] was 3/4 of a million ..."

"We were ready with a financing round in

2001 or 2002, … it was a combination with

[a regional investor] and a German company

who we had been dealing with for a couple

years and we could trust them, but they had a

financial problem and from one day to

another they said they cannot do it anymore.

It was in 2002, this happened at the end of

2001. One and 1/2 years later, [regional

31

investor] decided that they wanted to invest."

NL-AIK

(1997)

"… [initial company] was financed by two private

persons and the university ... grants from the

government. And they generated revenue, small, most

of it was financed by grants and the initial money of the

founders. …"

"In 2002 VC came in ... one from the

Netherlands and one from the UK. [We

moved for regional investment] because we

needed more money in 2004. At the end of

2004 we had a second financing round, with the same VCs and [regional investor]."

UK-RUC

(1992)

"I did my own due diligence by finding out who were

the best VCs in the industry. I used peers for that ...That

was the seed. Then we established a consortium of VCs

and then we did another round with those VCs and then

we did the mezzanine. In total four, including the

seed. ... [and] licensing income from licensing this

platform technology that we had generated to actually manufacture the gene therapy products."

NL-MPA

(2000)

"Our first funds were my private funds, the second

funds came from a very early deal. And the third source of funding was a private investor ...

[There was a syndicate of three partners] but that was

the [crucial] step because the other two [local] parties,

were very interested but were not fully there. So when

[lead investor] … says yes to this guy [founder], are we

going to say no? I don't think so. There was a very, very

thorough due diligence from the [lead investor] and [the

others] look at it from there and nothing can be wrong.

… revenue also includes license money and everything.

It is all the income apart from VC income. It is non-

equity related income, services ... so what is happening

now a bigger part of the revenue is becoming product sales and services.”

“I tried to get a deal first with an UK venture

group and Dutch venture group and a

university. … that didn't work out that broke

up somewhere before the summer after we

started.

We had a major reorganization in 2003. The

investment done was conditional more or less on cutting costs …”

NL-EPP

(1999)

“… the salaries of the group was paid for through 2001

by the university … The money for [salaries] was

funded by one of the investors and the other 1/2 was

earned by ourselves by serving services and products to

other companies and laboratories.”

“… gradually we started to pay our own

salaries, that could have been in 2002.

[We found] a major investor who attracted a

number of other ones and ended up in a

financial round at the beginning of this year

[2006] which was sufficient to carry us

over.”

UK-SXD

(2000)

“Raising the cash was hard, pretty hard. We had never

done it before, had a lot of conflicting advice. We made

it up ourselves as we went along …”

“We got funding in the June 2001 and our

first contract was in Christmas 2001. … then

the following summer we did our first

licensing deal which was a large one. Stuff

kicked off fairly quickly; we kind of opened

for business in October 2001 and shortly thereafter we got our first contract through.”

UK-SPE

(2001)

“We didn’t need any seed investment. We could cover

the cost of our rent from the revenue we were getting and paid the salaries.

… we set up the R&D division and at about that time

we had a few small angel investors … they invested

about 800,000 pounds, largely to sustain the R&D

division and then in June last year we had our first fund raising exercise …”

“We started in January of 2001 with 4 or 5

staff and we had a revenue stream from the word ‘go’.”

Grant-

generation

UK-GGF

(1998)

“The company was set up on 100,000 pounds. That was

the original chunk of money. That was raised from the

European Union grants and put in by the founders and

associates. Following that there was a small round of

seed finance, which was really through high net worth

individuals who invested in the company at that stage. Contact through friends, …”

“The original money was grant and that

lasted for 18 months, 2 years. Subsequent to

that there was a small round of money which

lasted another 18 months to 2 years. And then we ran into some venture finance.”

UK-XSS

(2001)

“We initially contacted about 100 VCs, went around

and talked to a load of them, presentations and all this

kind of stuff, eventually, [charity organizations] agreed

“[Charity organizatios] gave us 1.4 million

to start with and then about a year ago [2005] they gave us another million.”

32

to fund us.”

NL-ORP

(2002)

“We were able to attract a lot of grant money. That is

our main source of income.”

“… it was 350.000 euros [grant money]. With that I got

another [government] grant because they matched the

money. Some small [investors] came in.... then we were

able to attract larger grants. I got a total of 6 grants from

[the government] and about 3 to 4 grants from patient

organizations. That amounts up to ... six or seven million.”

“… they came up with enough money to

take us into the next step. That was ... and so

late last year I started looking for VC for

now, for this particular phase and I

approached somewhat larger VC firms But

now it is a little bit different because we are

in the clinic, we are a little bit bigger, new

technology so that they find us now

interesting and we have now some very good potential investors coming on board.

NL-KLA

(1997)

“As you can see we have no money. What we did is ... I

came here [university] and I work with this professor

for more than 30 years. [the co-founder] … I try to get

some money together to pay for some graduate students

which then would be employed by [professor’s]

department and paid by us. If that is possible, I have a

desk to sit at and use the facilities … I propose projects

which go up for grants and if they are granted then I can stay for another few years.”

NL-KYS

(2004)

“we were successful at applying for the … grant. I

became more and more interested in the project and

during the same time that we got the grant it was

decided that we would found a company Skyline

Diagnostics based on this program, which was also one of the aims of the first stage grant.

“[Lab personnel are still employed at the

university] that is part of the IP and licensing

deal that we have with the [university]. I

don't get paid for my services and in

exchange I have shares … At some point

that will change and then if people are involved they get paid.

… we are at the point [that] it has to be funded by external sources.”

NL-BRN

(2003)

[The grant money in the beginning lasted] 3 years. The

investors that we did find … came in through my co-founding partner. … not when we started but later on ...

The first round was 600,000 in total. It's not that much.

We had to go back for another round. That was August

2004. At the beginning of this year January 2006 we did an additional round with the same investors.”

“We founded the company as a legal entity

in 2003. There was no reason to do it

earlier. … once we got the investors in that

was the first time I was on the payroll of the

company. Before that I was paid on the grant from the university.”

Founder-

constrained

UK-NPG

(2001)

“The first round of financing was about 175,000

pounds.”

“We tried [to find VC funding]. … in 2002 when we

got the first round of funding, we spent money on a guy

to look for significant venture funding to give the

business a leg up. We tried, we failed, we really don't want to go down that route again.”

“We’d rather grow the company

organically … We only have to make 3 or 4

sales and we can double our turnover year on

year very easily ... I think VC is less relevant for us now.”

NL-TOC

(1995)

“In our case [in the beginning], VCs were not interested

and the banks were not interested. Nobody was

interested in it so in the end it was personal capital that

went into it and a loan from the bank. That was because we had two contracts in our hands.”

“So we first came with contracts and then we

got the loan.

The first VC was probably in 2002. We had two rounds and now it's the floating.”

NL-RIV

(2002)

“[Founders invested personal capital] to set it up, if the

venture would not have gone right, we would have lost that money and ended up with nothing. No investors.”

“We started with 0 in the bank and we just

did it.”

UK-XHP

(2002)

“We were trying to get funding in 2002 … and we went

down that road and everybody had their hands

permanently stuck in their pocket. Nobody wanted to give out any money at all.

… we said well you know, let's try to generate some

revenue ourselves. We put money in ourselves.”

“We did get an investor behind us [in 2004]

and that allowed us to get the company up

and running. We got the lab set up, bought

some equipment, we then got a grant from

the DTI which helped get moving and extend

the revenue generation so it steadily increased from there.”

NL-OIB

(2003)

“Financing ... was only the money from the university

and the [regional government] and of course generating revenues after a few months …”

33

Appendix Table 3: Data supporting categorization of managerial competence paths

Type of path

Firm

(year

founded)

Data supporting approach to fundraising Timing indications of founding team

formation

Assisted

Investor

appointed

UK-NEX

(2002)

“We thought it was an area that been underexploited and

we came to together with our group of founding VC … a

group of people came together at the same time and that is how things got started.”

“… at the same time … we purchased the

technology, we actually transferred into

the new company some of those

employees that had actually worked on

that technology, … and at the same time

we raised 4 million pounds from the VC,

already having identified that this was an area that they wanted to do something in.”

UK-XOX

(1999)

“The CEO was recruited again with the help of

recruitment agencies, headhunters and the seed investor had a big role in that.”

“... the first few months I was given a

room at the university until things were

sort of up and going. Then we moved to a

business center [and] we recruited people.

[It took] probably three to four months to hire the CEO.”

“We now have a third CEO. He started beginning this year [2006].”

UK-YLP

(2001)

“[The academic co-founders] were alternating as

chairman of the board meetings and that was a disaster.

We didn't know what we were doing and [he] was so anal

and I let discussions go on and on and [he] would talk all

the time. It was almost a dysfunctional board because we

didn't know what we were doing. We had good guys on

[the board] who were patient enough to let it get out of

our system. There is a lot to be said for what they allowed

us to do. In order for us to move forward we needed real

experience.”

“I [founder] put in as much time now as I

did before but before when we were

directors and legally liable we were more

involved in managing it. Now [current

CEO] is managing it. He basically came

on as CEO and we left the board. He has

taken over the statuatory requirements of the CEO.”

NL-VAA

(2000)

“[The founder CEO] left because of a difference of

opinion with the board. Then we had a CEO-less period

and then a CEO and then again a CEO-less period and

then [someone internal] became CEO. [The current CEO] was headhunted.”

“The founder left late 2002. [The current CEO] joined us in 2002.”

NL-

AREK

(1990)

“My co-founder and I were head of experimental

pathology department at the Academic Medical Center in Amsterdam.”

“One of the demands of the business angel was we should

stop every other job and be 100% dedicated to NL-

AREK.”

“Until 2001, he was CEO and then we had

a management change and he was until

2003 scientific officer [CSO, not an

advisor] and then he left the company. He

disagreed with the strategy that we developed between 2000 and 2003.”

NL-QIP

(1999)

“I [current CEO] started to work for [the seed fund] and a

few years later … the guy that should run the company

and the company didn't really match … general things

didn't work like you expect and then you quarrel and you have to solve that, so that was my task.”

“There was one [employee] and then after

a year there was another technician. There

were only 2 people working there and with revenues.”

“I [current CEO] started working there

part time. … in 93 … in 1996 I started to

work there full time …”

NL-AIK

(1997)

“The board [appointed the current CEO]. [The preceeding

CEO] had another view on leading the company and

where it should go and that conflicted with the board.”

“The [current] CEO started in 2004 … she

started as a business developer for the first

year or 8 or 10 months and at that time the

[preceeding] CEO left the company. He

was CEO for a few years, 2 or 3

[preceeding him a founder was CEO.]”

UK-GGF

(1998)

“[The current CEO is] based [in Seattle] and it just

worked out that way that he was appointed CEO.”

“We had two founding directors for at

least 2 ! years and they were supported

by an industry professional who worked

for the company on an ad hoc basis. …

about three years in that we hired a CEO

who had commercial and financial

experience. Right around the time of proof

34

of principle and the initial funding. We recruited the CEO.”

UK-XSS

(2001)

“[The second CEO] joined at funding when [the investors]

put some money in and part of the conditions of money

going in was somebody like myself joined. I was

interviewed and got the job.”

“[The co-founders] started working with

me [in UK-XSS] … and quit his job so

that he could do the fundraising full time.

He left about a year ago [2005].”

Founder

appointed

UK-XCI

(1998)

The founder had dinner with two of his friends (they knew

each other from university) and the founder mentioned

that he wanted to return the UK and start a business. The

original intention was that they would found the company

together but he ended up being the sole founder.

The CEO started a few years after the

founding but he was a non-executive chairman since the founding.

NL-HTP

(2001)

“[The CEO is the only founder, the sole founder.] We are

a project management organization, virtual ...”

“First he hired the secretary. … she saw

what was happening and said if you're

leaving I want to join you. Then there was

someone at a department [from prior

employer], he said yes I'm interested.

Then he hired someone via a headhunter. I

heard that he left … so I phoned him …

Currently we are with 8, a couple of people left in between.”

UK-PNI

(1998)

“[First CEO was found] through networking at UC. He

was a part time CEO … in 2000, we had a new CEO, a

full time CEO. … the last CEO was a sort of jobbing CEO

within the biotech sector. He was more of a qualified CEO, from a public company.”

“in Jan 2001 … we had the management

team that was fully functioning and we

took over complete responsibility for the

fundraising [series B]…”

UK-OVE

(1998)

“… the original founding shareholders wanted someone

who could run the business. So they recruited our medical

director who has basically been here since the beginning.

He was brought in to move the company forward and to

exploit the technology.”

UK-KRA

(1997)

“I [academic founder] was running the company and I

realized I didn't have the personality of a CEO. I didn't

have the commercial focus and understanding of a CEO.

One of the reasons that Ark is so successful is because I as

an academic realized that I had to give up control. At that

time I was doing some work as a consultant for a drug

company in Europe and their VP was working with me

very closely and we got along very well. He saw I did a

very good job and I said do you want to join, would you be the CEO?”

UK-TRG

(1998)

“In the beginning, there was basically two founders and

the chairman came on board at that time, the OFX time.

He’s still the chairman and CEO now. There was an

original chairman in the early days who stepped down or

went elsewhere and then [the current one] came on board,

ex analyst and broker worked in the pharmaceutical

industry, one of his great strengths is that he has lots and

lots of contacts in terms of raising finance.”

“I [CFO] came on board in 1999 which is

after we floated on OFX but before AIM,

which was 6 or 9 months later. End of

2000, [development director] came on

board.”

NL-RUC

(1992)

“I've [recruited] very, very strong managers which is

proven by the fact that those are the people who are still

running this large company. I recruited them when we

were still a small company ... I used headhunters for most of those people …”

“[First I hired] a business developer

because I wanted to reinforce the business

end of the company. [Then] the CFO, via

a headhunter. Just prior to the acquisition

and the IPO, the general counsel whom

we found through the network of the CFO.

NL-MPA

(2000)

“I was still at [prior employer] … they gave me some time

to write a business plan, they supported me with a person who knew the venture capital world …

[The first investor], an American, he steps in with ‘I want

to help the CEO to become successful because when he is

successful the company is successful’. … In general, VCs

especially the less experienced ones they think that they

should help very much in steering the company and stuff

“Then I left the first of January 2000, and

started NL-MPA. The first [hires] were

ex-colleagues, people who were on the

project. The first person I hired was the

CFO. Before [financing] I think two or

three people came on board … the VP

Scientific Applications, the inventor of the

technology. … we started with 7 people in

35

like that. In this case, I'm a 10-year [prior employer]

veteran and I have big company background and that was

sometimes difficult because they are used to work with

professors or young people who have no business experience.

My 2nd CFO was an introduction from [one of the

investors]. And actually he did a great job … For the rest,

they brought in people but not very successfully. Again,

financial end, great. Operation and R&D, they have no clue what it is about.”

January. ... there was an office manager and a few researchers.

I had a VP Bis Dev, starting in 2002 ... didn't do a lot. ...

I hired [for marketing] in the summer

2003. He gave us the connection to the

pharmaceutical market He left for a big

job, a general manager job with one of the

biotech, life science companies, end of 2004. So we replaced him …”

NL-ORP

(2002)

“Just me [founder, CEO] at the founding. [The advisory

board] had a lot of experience in the compounds …

[and] … in starting up younger companies …”

“...we have a research [head] coming in later this year

[2007] … Then we have the development group [head]

and … a clinical director … we have project managers

and technical project managers … There is one major

project director … we have a lawyer … we have a quality

control … we have a financial CFO type, he is not on the

payroll but I am hiring him. He is too expensive for us

right now but the new money comes in I have to hire one of those types of guys.”

“... I [left prior employer] in 2002 and by

the end of 2002 we had started ... We

didn't have a big pot of money to bring in management and stuff like that.”

“[In 2006] There are about 20 employees”

NL-TOC

(1995)

“We knew each other for a long time ... met on a regular

basis we were discussing collaborations, projects together.

He is an entrepreneur, he comes from an entrepreneurial

family … but he also needed some sort of academic

background, academic information, know how and network … we sat together and we worked out a plan.”

“I didn't want to quit my job and for reasons … I am an

academic … I was seconded. I stayed at university but I

got a number of hours to work at NL-TOC.”

“[the CEO] tried to find a team with industry background,

financial background, more academic background and then put that together and that worked.”

“[As academic founder and CSO for a day a week] I didn't

do any management at any time. I tried to help with the

acquisition in the beginning, provide scientific know-how, also at a very operational level in the beginning …”

“There was no scientific director. Later

[one was hired to] lead the new

technology department. [That was] 4 or 5

years ago. [Up until that time the CEO

was managing the science and] there were

project managers. It was a very flat

organization.”

Parent

appointed

NL-PMA

(2000)

“I [CEO] ran a small venture capital fund. I was

approached by the Free University because they had invented [technology] and patented their invention …”

“then 2nd CEO came along and he stayed

there for a year and then the (3rd CEO)

came and he stayed for a year … that was

not very good for the company. Too many changes.”

“The first one was Dutch … he was one of

the founders. The second was Dutch but

he stepped down. The third one was

German but he was recruited away after

one year. Then there was an interim who

was our last CMO. He was interim CEO

who then turned into CMO. And then we

have [the current CEO]. We had three

Dutch and two German [CEOs].”

NL-LAG

(1998)

“We [CEO of parent firm] recruited the guy to run the

division who would become the CEO of that company.”

“[The CEO] worked as [the head of the

division in the parent firm] for a year and

half working with us to spin it out.

UK-XTG

(1997)

“[TTO] provided a managing director, because you need

to have various positions filled in a company. They also

provided a financial director and a part time project manager.

“... the CEO was a bad appointment and we were going

through the last investment round … the leader of the

group said we do want to go forward with this but we

don't want to have your current CEO. That is fine by me;

“There were four when we were doing

this work between 96 and 99 … By 2004 I had seven in the lab …

We are on our 3rd CEO now.”

36

if you want to invest without them, then we'll get rid of

them. During the process of things I meant the man who is

the current CEO …”

UK-XOR

(2004)

“[University TTO partner] put one of their people in place

to look after us, a guy, who has now gone off to run a

[another biotech] company. … he sort of came in and

pushed us all around. There were some important steps to

go through; the college … had a very limited history of

spin outs and all of this came as a nasty shock to our

finance department, our personnel department, all sorts of departments.… then we recruited a CEO …”

“We recruited another key member of the team, who had

first year drug development experience. I [academic

founder] had the research experience and he, who I had

known for a long time, had the drug development

experience, having worked for a company called in San

Diego.

“… we transferred over most of the long established staff

[the university lab employees]. We brought the expertise with us.”

“[The CEO] was appointed in 2004 …

and we started a number of research

programs.”

UK-SAV

(2003)

“… I [academic founder] didn't need the expertise to help

me spin out but what I wanted to take some people who

were working with [university TTO partner] and use them

as my management team. … they put in the full

management team until we went public.”

“We set up in March and by August I

persuaded this guy to come in and be the

CEO and so we floated in AIM in September of the same year.”

“[At the time of IPO] there was only two

or three people in the company and we were in the university lab …”

NL-EPP

(1999)

“It was one of the first investors who brought [the

executive management] in. He brought in [business

development] and he also brought also in the previous

CEO but that was a bit of a mistake. We had quite a

number of mistakes before we ended up with the management team that we have now.”

“The company was founded as a spin off

of a department of which I [academic

founder] was the head. At the end of the

90s there was a lot of reorganization [at

the university] and they wanted to spin out

my department because the potential was

much larger than just veterenary

applications. So the procedure started in

1999 and it was finished in 2002, the

whole department then moved to this

company.”

“Later on we had a management team

established here in the late 90's, a CEO …”

NL-RIV

(2002)

“… the university because they were not in control, they

asked me … can you structure this? They needed

management, they needed structure and that was the reason we said ok, let's do this together.”

“I'm the CEO, responsible for more business decisions,

more strategic decisiions. Most of the work is done by the

deputy CEO …he is supported by a full time legal

assistant because we have so much deal flow and

documents that we really needed a full time legal person.

We scouted for [the deputy CEO]. We thought we needed

somebody with exactly that background … we knew his

name because he did his PhD with somebody from the

department. We convinced him that he should leave [prior employer].”

[The deputy CEO started] 2003, spring.

[The legal person started] two years ago

[2004]. A secretary supports the two of

them. Then in the lab we have at the

moment [2006], three PhDs senior

molecular biologists and the rest of the personnel is all technicians.

Unassisted

Complemen-

tary Skills

UK-RAS

(2003)

“We were part of a big company, an American company.

They shut down the UK site ... we all worked in the same

department at [prior employer] and we all worked very

well together. [The CEO] was our boss at [prior

employer]. When we founded the company, there were just the three of us.”

“[we wanted to] keep people involved

with the company … We did several

things. A few of us went over and

transferred some technology to [parent

firm] so we spent six months in America

transferring technology. I took three

people with me when we went to the U.S.

That kept people employed for about six

months. Then we kept two other people

37

employed by doing contract work that we

got paid for. … we haven’t got labs, we

haven’t got offices but we wanted to keep

people [feeding] their families … that’s

what we did until we could actually start

paying wages.

UK-SXD

(2000)

“We were working for [large pharmaceutical]. We pitched

a couple of business models internally and they decided

not to do that internally. But we perceived that there was a

market opportunity … we saw there was a market need,

we had an opportunity to go, we were going to get our

salary paid for 12 months anyway, possibly longer, on this

redundancy term, and we were able to take the technology with us.”

“[The founder CEO] was in charge of R&D at [prior

employer] and I [CSO] was in charge of, below him, the

technology development assessment … we’d become

aware of a finance accountant [and] asked her was she interested in joining us …”

“… we three were the three founders and

we put our redundancy package into the

funding. And then we recruited the 4th

director later in the year once the business was founded.”

UK-SPE

(2001)

“I worked as an academic cancer researcher … for 35

years … I had the opportunity to retire at the end of the

year 2000 and with my senior post doc who had been with

me for about 10 years, we thought there was a business to be had providing that scientific know-how …”

“I had a big group about 25-30 people … highly trained

scientists and technicians and post docs and when I

retired, that department was closed down. So there was a

resource of highly trained very relevant people out there to call upon.”

“We have two managing directors that manage the two

divisions [R&D and CRO services]. We have a research

director who manages [R&D] on a day to day basis … we

have a managing director and a commercialization

director for that division and then we have a scientific

advisor that oversees everything and that is me.”

“The co-founder heads the director of the contract

services division. The CRO services division has a senior

business development director who has just been appointed in the last 4 weeks.”

“We have a finance director. We have an executive

chairman. And my role until very recently effectively a

CEO and CSO. I provide scientific direction for the two divisions.”

“… we have 30 people, probably 15

people have worked for me in my previous life.”

UK-XHP

(2002)

“I [founder, CEO] met a colleague at [prior employer] ....

We could see a niche in the market in the area of the

assessment of the ability of compounds to get into the

brain … We could see that not many companies were

addressing this issue very effectively so we thought … if we move into that area there is a good business.”

“My [co-founder] is working as the

managing director so there is a role for a

CSO but for the moment he is covering

that one.”

“Three PhDs in the lab ... analytical, in

vitro and in vivo and each of those has one person in them.”

UK-NGP

(2001)

“There were three [founders] … we put it forward but the

day to day running of the company and technical development is me [co-founder, CEO].”

Limited

Skills

NL-KLA

(2005)

“We are with 3 or 4 co-founders in which the content part

is by this university professor and myself and the financial part is by the other one.”

“He [the professor] is writing some of the proposals that

we want to submit to get grants. He is guiding the

students. [the two at the university]. We are let's say the scientific heart of the company.”

“… we decided to go on and make a team,

mgmt team to set up the context/concept

of the whole company. Then a univ

professor joined as a member and co-founder.”

“We have about 5 people in the hospital.

We have [in the university] two people

who are involved [in doing clinical trials]

and we have a CRO.”

“… we attracted part time CEO as well

38

to ... he is now involved since Feb or Jan

[2007] in this company. Because we think

it is not yet necessary to have full heads,

financial or CEO functions at this moment. He still has to be installed.”

NL-KYS

(2004)

“Two-and-a-half years ago [beginning 2004] … I got

involved [with the university to write a grant proposal] …

I became more and more interested in the project and

during the same time that we got the grant it was decided that we would found a company …”

“We have somebody who is a technician who is doing the contract research [in the lab at the university.]”

“Hiring the scientists will be initiated by the department

of immunology [at the university] but I [CEO] will be involved in the process of interviewing …”

“we started a company and basically I was

involved and am still involved as a CEO

and there were 5 additional scientists who

became the founders and the university.”

NL-BRN

(2003)

“I had someone helping me, right from, even before I

submitted that first grant, … someone I knew from my

studies, … we had a mutual friend and he had just started

a company … I figured that I needed an external person

next to me to negotiate with the university because I was

totally dependent on one hand on getting the money,

because the university gets that grant money and so I

needed to get in with them and then I needed to negotiate

how to spin out. That was a conflict. … we decided to do

that together and I could pay him as a consultant from the

grant. … when we got to the point of the spin off

collaboration we already decided that we would continue

to do it together and he would become a shareholder and part of the management.”

“One of the other founders is the scientific head of the

research program. [He is an] academic partner … what we

do with him is apply for research grants, academic grants.

I think 4 people working in his group already totally on

our technology. I just pay the university a bench fee and

we share the work meetings.”

“Financing and business development is mostly by my

partner.”

“End of 2000 I quit my job in Amsterdam

then I needed to convince the university to

hire me back … I had hired myself and

someone in the lab and we were totally dependent on that grant money.”

NL-OIB

(2003)

“At that time we started with 8 people who were

employed at another company, an R&D company which

was founded a few years before [2003]. [Of those

founders] there are three people who are the most

important for the founding. Without one of them we

probably wouldn't have done it.

“Myself and [a co-founder] were together the

management of [prior employer] and we asked people we already worked with to join us.

“The management team is me. So, I'm a team in myself.

[A co-founder] is here but he is not been a member and

never has been a member of the management team … but

to other companies and to VCs it is important to have

somebody who can call themselves a CSO. [The other

important founder] is not really employed here but he is still involved. Two of them are departments heads.”

“ [the 8 people] we said we are going to

leave because we think that [prior

employer] will not survive … So we started working on the 1st May 2003.

In the relocation we lost 2 employees and

founders because the travel was too far,

they stepped out … there are now only 4

founders with us of which I am still the director …”