Paper to be presented at the

35th DRUID Celebration Conference 2013, Barcelona, Spain, June 17-19

Early growth process and paths of entrepreneurial science-based firmsMarcela Miozzo

The University of Manchester, UKManchester Business Schoolmarcela.miozzo@mbs.ac.uk

Lori DiVito

Amsterdam University of Applied SciencesSchool of Economics and Management

lori.divito@gmail.com

AbstractOur research brings to light the differences in terms of the speed with which science-based firms can access andmobilize critical resources at the early growth stage, and how these differences are influenced by national institutionalsettings. Drawing on a study of 18 biopharmaceutical firms in the UK and 17 in the Netherlands, we find that earlygrowth of science-based firms involves the simultaneous process of early fundraising, managerial and technologicaldevelopment. This is an unfolding and interrelated process and depends on direct and indirect ties or relations. We alsofind that the unique features of technological development, including the profound and persistent (scientific) uncertaintysurrounding R&D that characterizes these firms, plays a strong role in the early growth of science-based firms. Usingprocess analysis, we identify different speeds of early growth: rapid, gradual and arrested development. In discussingthese, we illuminate the effect of institutional settings on how early growth unfolds.

Jelcodes:O32,O31

1

Early growth process and paths of entrepreneurial science-based firms

1. Introduction

Entrepreneurial science-based firms, such as biopharmaceutical R&D firms, face complex and

heterogeneous development paths, long term horizons, profound and persistent uncertainty (commercially but also scientifically), and their assets are largely composed of R&D projects in

emergent technologies (Pisano, 2006). The growth of science-based firms is an important factor

in discussions on the relative success of different economies in commercializing and benefiting

from the economic impact of science and innovation (Casper, 2007) and a crucial aspect of the technology transfer process (DiGregorio and Shane, 2003). However, our insights into how

these firms grow remain limited.

We use process theory to contribute to the development of theory on the process of early growth

of science-based firms. We draw on the process of early-firm growth of 18 British and 17 Dutch

biopharmaceutical R&D firms. These are firms that either sell services, for instance, platform technologies such as genetic sequencing, or primarily conduct R&D with the goal of developing

future marketable products such as new therapeutic drugs or diagnostic kits.

We show our findings by mapping the iterative and varied paths that firms followed in the early growth stage for early fundraising, managerial and technological development, highlighting the

influence of deep and persistent (scientific) uncertainty. We identify different speeds of early

growth: rapid, gradual and arrested development. In discussing these, we illuminate the effect of institutional settings on how early growth unfolds. A better understanding of science-based firms’

early growth process and paths will sharpen the descriptive power of management theories and

ultimately advance our ability to influence organizational performance.

2. Theoretical approach to early firm growth

Our focus is on firm growth, a topic that has received considerable research attention since

Penrose (1959), who was one of the first to develop a process theory of firm growth. Building on Penrose (1959) and Garnsey (1998), we view early firm growth from an evolutionary and

process point of view, as a dynamic phenomenon in which actions, events and influences evolve

over time. We first present a number of contributions on early firm growth and then examine how these ideas can be generalized and enriched to understand the dynamics observed in the early

growth 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 a firm’s uniqueness 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 individuals may hold critical resources, organizational choices determine whether and how individual resources are

translated into organizational competence, which eventually lead to a firm’s superior economic

position (Kor and Mahoney, 2004; Lockett, 2005; 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

2

the individuals, but are shaped by the firm itself. This includes the type of entrepreneurial service

needed to raise funds and run the firm. 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 its ‘managerial services’ devoted to ‘administrative

integration’ (see also Lazonick, 2002).

This literature building on Penrose examines the mechanisms of firm growth. For Penrose

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

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 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 organizational development and growth. Existing managers

must train new managers, since the development and integration of new managers require 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. In new firms, the original entrepreneurial team

is the main provider 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 thus points out that entrepreneurial service to raise funds has particular features

(which differ from the entrepreneurial service required to run a firm efficiently) and that this

service will be different in different firms.

Most work after Penrose (1959) has tried to identify differences among firms (i.e. firm age, size,

industry affiliation) in terms of growth, often based on a cross-sectional research design, rather than focus on understanding the process of growth (McKelvie and Wiklund, 2010). A number of

analysts on firm growth have called for research on how and why growth occurs in new firms in

which more explanatory variables are examined, that take into account the historical

accumulation of resources and sequence of activities, and the processes of learning and path dependence (Phelps et al., 2007; Stam, 2010; Storey, 1994; Wiklund et al., 2009). Delmar et al.

(2003) show that the growth patterns exhibited by firms are highly heterogeneous (i.e. there are

different causes and outcomes of growth) and that different measures (i.e. inputs, such as employment or investment funds, outputs, such as profits, sales or valuation, assets, such as

market capitalization) and methods for exploring organizational growth are important for an

understanding of firm growth processes and types (including organic growth or through acquisition).

While Penrose was concerned in her work with the process of growth in already established

firms, she did not analyze new firms. Garnsey and colleagues (Garnsey 1998; Garnsey et al., 2006) have examined the dynamics of early firm growth grounded on the work of Penrose,

showing path dependent processes of change and growth and response to both internal and

external influences. Garnsey (1988) shows that the early growth phase of new firms is dominated by search activities, the initial problems centering on the perception of opportunities

and resourcing prospects. In this phase, the relations between founders and former associates,

3

including funders, are key. Access to finance is crucial at this early stage, and convincing

funders of the prospects for their venture is 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.

Garnsey et al. (2006) explore the growth paths of a longitudinal sample of new firms and show that new firm growth is non-linear and prone to interruptions and setbacks. Garnsey and Leong

(2008) show how resource asynchronies can be a stimulus to growth, with firms generating

complementary resources from innovative partners in attempts to create a favourable niche from

which to launch innovations. They show how entrepreneurial learning and innovation advance technologies in ways that are obscured by a focus on individual firm performance.

The contributions above have focused on the early growth of high-tech firms and not explicitly on science-based firms. Entrepreneurial science-based firms in general (and biopharmaceutical

firms in particular) have peculiarities that may set them apart from high-tech firms in their early

growth. First, entrepreneurial science-based firms typically emerge as research spin-offs from academic or established industrial firms (Mustar et al. 2006; Knockaert et al., 2010; Rasmussen

et al., 2011), and they tend to be located near academic institutions, with which they collaborate

intensively. The academic/scientific inventors (often the founders) are essential to the continuing

success of the firm not only because of the scientific expertise they may bring but also through access to their social networks of key academic scientists, through the flow of complex technical

knowledge, which enables the firm to meet its technological milestones (Kenney, 1986;

Liebeskind et al., 1996; Murray, 2004; Owen-Smith and Powell, 2003; Zucker et al., 1998).

Second, the R&D process in entrepreneurial science-based firms is very different from that of

high-tech firms. While high-tech firms use science to develop innovation, science-based firms are engaged in the advancement of science itself. They not only face market, but also scientific

or technological uncertainty, as their main assets are R&D projects in emergent technologies.

For science-based firms, R&D is about successively reducing uncertainty through the acquisition

of information (selecting and screening), a highly iterative and inductive process, unlike high-tech firms, whose products evolve through design-test iterations (Pisano, 2006). In high-tech

ventures, after conception and development there is a 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). Indeed, science-based firms are different in

that they do not typically develop a prototype during the early growth stage that they then learn

how to make and commercialize.

Third, new science-based firms lack critical resources for long term R&D that are needed to

develop their innovations. They also lack capabilities in clinical testing, regulatory processes,

manufacturing and distribution or marketing. They need to raise vast amounts of external finance from private investors, institutional investors or public offerings of equity for products that take

many years to reach the market (if at all) and cannot rely on a progressive revenue stream. The

length of product development in science-based firms is around 10-15 years (Pisano, 2006). Also, capital requirement are extremely high, compared to those of high-tech firms. One option

for these firms is venture capital. Venture capital is not only a funding source but also a

governance structure, which involves knowledgeable investors capable of generating

complementary assets to generate value and which has implications for control and monitoring, shaping and constraining the activities of science-based firms (Pisano, 2006), and requires

developed exit markets (and therefore suitable institutional settings). This is also a governance

arrangement developed (and possibly more suitable) for high-tech firms as it has a short exit horizon (3-5 years) compared to the long product development time required by science-based

firms (Pisano, 2006). An alternative is alliances with (or acquisitions by) incumbent firms, which

4

may offer the funding or capabilities in clinical testing, regulatory processes, manufacturing and

distribution or marketing that these firms lack (Powell et al., 1996). Therefore, early growth of science-based firms may be influenced by the extent to which they are positioned not only in the

“markets for products” but also in the “market for assets” as an input into the development of

products by other, more mature corporations (including as a possible target for acquisition by these) (Colombo et al., 2010).

3. Institutional settings and early firm growth

A literature on comparative capitalisms (Hall and Soskice, 2001; Hollingsworth and Boyer, 1999, Whitley, 1999) explores the effects of the institutional settings on the production strategies of

firms and the likelihood of success in different product markets (Casper and Whitley, 2004;

Soskice, 1999). These contributions focus on the effect of national institutions, in particular, the industrial relations system, the education and training system, the financial system, and the

relations between organizations, which are viewed as mutually complementary (Amable, 2000;

Crouch et al., 2005). In general, the comparative capitalisms literature differentiates between the liberal market economies (LMEs), in which firms coordinate their activities chiefly through

hierarchies and competitive market arrangements, and coordinated market economies (CMEs),

in which firms rely more heavily on non-market institutions to coordinate their activities with other

organizations and to build competences. The general argument is that CMEs depend on highly skilled workers who have longer-term employment, develop firm-specific skills, are relatively

autonomous, and rely on an industrial relations system that sets wages through industry-level

agreements and ´patient capital´ from bank-based financial system to operate in product markets characterized by incremental innovation, requiring firms to build competence

enhancement. Instead, in LMEs, firms are discouraged from offering long-term employment to

skilled workers, as firms may have to move rapidly into areas with better growth prospects, the industrial relations system allowing greater freedom to hire and fire workers, and workers

investing in general skills so they can move easily between different companies, resulting in

more competence destruction in firm strategies. This is supported by capital-based financial

systems in which stock markets play a crucial role in providing liquidity and allowing investors to exit investments and in redirecting high-risk investments into new areas of activity and radical

innovation.

In this framework, it is the structure (and institutional setting) of the national economy as created

by the state and social processes that largely determines the strategic actions of firms and that

is the key to competitive advantage and national product specializations. It has been argued,

however, that this approach downplays the varieties of firms in the same institutional settings (Allen, 2004) and does not explain why some firms may be able to draw on other resources, so

called “functional equivalents”, or use institutions in new ways to develop capabilities, calling for

more fine-grained analysis at the firm level.

Indeed, there is plenty of evidence that a greater range of production strategies are open to firms

(and science-based firms in particular) within different comparative capitalisms than posited by a strict reading of the comparative capitalisms literature. Indeed, Casper (2000) and Casper and

Whitley (2004) found that in Germany, biopharmaceutical firms engage in incremental innovation

in platform technologies (rather than radical innovation in drug discovery as in the USA). Also,

Herrmann (2008) and Lange (2006) showed that German biopharmaceutical firms increasingly follow radical innovation strategies by using functional equivalents to compensate for the lack of

financial and labour resources in the national systems, but it is questionable whether these

functional equivalents can provide a sufficient supply of resources for the majority of German biopharmaceutical firms (Casper, 2009). Moreover, studies on biopharmaceutical firms in France,

5

Finland and the UK (Mangematin et al., 2003; Luukkonen, 2005; Hopkins et al., 2009) reveal the

wide spectrum of strategies of biopharmaceutical firms in each of these countries.

While the comparative capitalisms literature stresses the important role of institutional settings

on firms’ production strategies, it does not explore in detail how early (science-based) firm growth unfolds and how and why institutions may affect early growth. A possible avenue to

explore this is to draw on the strategy and entrepreneurship literature based on the resource-

based view of the firm, which explains firm competitiveness in terms of heterogeneity of valuable

and unique organizational resources and capabilities (Hoopes et al., 2003; Peteraf, 1993) and on the research on social capital (Granovetter, 1985). These two strands have different

assumptions on the basis of value creation, the first focusing on internally accumulated

resources or capabilities and the second on relations with other organizations, but they have been combined in many contributions (see, for example, Lee et al, 2001). A particular strand of

this literature seeks to explore how the heterogeneity in resources and capabilities arises, and

focuses on firm life cycle, and the different resources and capabilities that the firm needs to develop over time (Helfat and Peteraf, 2003; Hite and Hesterley (2001). Hite and Hesterley

(2001) explore the movement of firms from emergence to early growth and argue that, in that

transition, firms face problems of resource acquisition, including availability, accessibility and

uncertainty. They define early growth as “the point in the firm life cycle at which a firm makes clear strategic decisions to intentionally grow beyond mere survival, viability, or sufficiency” (p.

277). They argue that in the transition to early growth, firms need to access and develop more

and greater scope of resources. A clue to exploring the relevant resources for entrepreneurial science-based firms is provided by Mustar et al. (2006) who argue that the relevant resources

are technological resources (specific products and processes), human resources (knowledge,

skills and experience of the founding team, management team and personnel), social resources (industry and financial ties and contacts) and financial resources (amount and type of finance). It

is clear that possessing resources alone does not guarantee competitive advantage, but that

these resources must be managed and orchestrated (Helfat et al., 2077; Sirmon and Hitt, 2003).

Resource orchestration differs in each stage of the firm life cycle (Sirmon et al., 2011), with viability as the main objective in the emergence stage, which is characterized by great

experimentation in accessing finance, employees or managers that will make a substantial

contribution to the venture (organizations are very flat at this stage). In early growth, overcoming early deficiencies becomes the main concern, and resources may need to be accessed or

developed for operational and other activities (such as marketing), including the need to develop

connections to special stakeholders such as for building relations to financers to foster growth.

Venture capital (VC), has received much attention as a specific type of financial resource well

suited to the requirements of new high-technology firms. Venture capitalists are active investors,

involved in managing strategy and investment decisions and in offering advice to the firms they invest in (Gompers and Lerner, 1998). 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).

Penetrating venture capital networks is an important first step in securing financial resources for

new firms (Steier and Greenwood, 1995). Recent work shows the varied patterns and dynamic

development of the market for venture capital in different institutional contexts (Avnimelech et al., 2010; Florida and Kenney, 1988; Sunley et al., 2005). It is argued that founders’ ability to raise

early financing is directly related to their prior experience and social network (Uzzi, 1999). Hsu

(2007) found that a founder’s experience in founding prior ventures increased the likelihood of high-tech 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

6

ability to recruit executives through his own social network. Similarly, Shane and Stuart (2002)

show that founders with direct and indirect ties to 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 a founder’s social network is regarded as a significant and important endowment for early stage ventures

(Bonardo et al., 2011; Clarysse and Moray, 2004; Higgins and Gulati, 2006).

To understand how new firms access and mobilize managerial resources, we draw on the literature that investigates how the prior experience of the top managers has consequences for

organizational strategy and performance, especially in terms of fundraising for new ventures

(Hambrick and Mason, 1984; Pfeffer, 1983). Founders and founding teams are shown to shape a firm’s initial strategies, structures, actions, and performance. The idea is that routines and

competences are embedded in managerial experience, and that these routines are inherited in

new firms through the mobility of managers. Entrepreneurs that are affiliated with prominent prior employers (those that spawn numerous entrepreneurial ventures) are shown to be 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 competences. Founding team affiliation

and experience bring new knowledge to the firm and founding team growth helps firms reach

their objectives. Similarly, it is acknowledged that firm growth requires an adjustment in managerial competences, with new leadership being brought in to meet growth expectations

(Argote, 1999; Finkelstein and Hambrick, 1996). There is also some evidence that venture-

capital backed firms are better able to develop a more complete management structure and add

experience that firms without venture capital lack (Beckman and Burton, 2008).

Most of the contributions cited above, however, are based on data from US firms, many of which

are located in California’s Silicon Valley. In this region, labour (especially managerial) and the knowledge intrinsic in that skilled 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 high-tech

enterprises, and is unusually knowledgeable and involved with new ventures, giving advise on business plans, finding co-investors, recruiting managers and serving on boards of directors.

The start-ups it pioneers are more successful than elsewhere. This raises questions about the

generalizability of these insights on early firm growth both to science-based firms and to different institutional settings.

4. Research design and methods Our aim is to examine how the early growth of science-based firms unfolds and how and why

institutional settings may affect early growth. The authors designed an exploratory (multiple)

case study of biopharmaceutical R&D firms in the UK and The Netherlands. The focus on the

biotechnology segment of the pharmaceutical industry is representative of new science-based firms because of the extensive amount of funding that these firms need for developing new

products, the difficulty these firms experience in securing funding at early and developmental

stages, the high levels of scientific and technological knowledge involved in their activities and the high degree of uncertainty in their R&D. The case study method is appropriate for capturing

data that illuminates the process of early firm growth in real organizational contexts, when

7

multiple levels of analysis are involved and the boundaries between units of analysis are

ambiguous (Pettigrew, 1992; Yin, 1994).

Our aim is to develop theory on the process of early science-based firm growth. The case study

method is appropriate for identifying the particular mechanisms of firm creation and evolution, including expansions and interruptions in dynamic processes in particular institutional contexts

(Van de Ven and Poole 2005; Langley, 1999; Chiles et al., 2007). Our approach enabled us to

capture the sequences of events in time and context, paying particular attention to their temporal

ordering, interactions and institutional environment (Langley 1999; Chiles et al., 2007), to explore what Tsoukas and Chia (2002) call ‘organizational becoming’, that is, to explore

organization as an outcome, a pattern that is constituted, shaped and emerging from change.

The choice of biopharmaceutical R&D firms in the UK and The Netherlands is ideal because the

two countries have very different institutional settings, yet comparable investment and scientific

output in life sciences. UK is representative of LMEs, with high levels of stock market capitalization and low level of employment protection. The Netherlands is representative of

CMEs, with high employment protection but medium (higher than other CMEs) stock market

capitalization (Hall and Soskice, 2001). Theoretically, in the British context we would expect

biopharmaceutical firms to be better able to access and mobilize risk capital to fund the firm and mobile human resources to form the management team. In contrast, in the Dutch context, we

would expect less availability of risk capital and less mobile human resources. Both countries

show a relatively high technological advantage in biotechnology as defined by their patents applications (OECD, 2009), suggesting firms in both countries should be able to access and

develop technological and social resources. The UK is the second highest country developing

biotherapies in Europe per million population (after Switzerland) and The Netherlands is the fourth (after Austria) (OECD, 2009). The UK has 4.23% and the Netherlands 0.94% respectively

of the total venture capital investments in the life sciences of OECD countries in 2007, with

10.2% of all national venture capital going to the life science in the UK and 9.6% in The

Netherlands respectively (OECD, 2009)

To select firms, we used an age range of 3 to 10 years and an employee range of 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. We also selected firms according to their location only in the

sense that one region did not become overrepresented in the study, as well as aiming for a

variety of origin, model and ownership types. To aid the comparison between firms in the

different countries, we aimed to balance the sample using the same criteria in The Netherlands. Unlike the UK, most Dutch biopharmaceutical firms are privately-owned and, as a result, three

public biopharmaceutical firms were purposefully included in the study. 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. However, the type of ownership (public or private)

did not play a role in the initial start-up of the firm. Meeting the criterion of size was the most difficult for Dutch firms following drug discovery and development business 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 of firms 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, at which point we

achieved theoretical saturation. 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

8

firms is based on the study’s theoretical framework and the ability to compare analytically a set

of firms within and across national settings.

Table 1

Data on the selected firms was collected from both primary and secondary sources. Prior to the

interviews, information about the firms 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 and R&D or product developments 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 of firm growth 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, and, in the other, the longest tenured employee, who was also involved in

the founding, was interviewed for the historical data. 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 interviews 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 policymakers. These interviews aided in the analysis of the institutional settings.

Interviews with university technology transfer offices and venture capitalists also served to triangulate the data gathered from firms. Appendix 1 provides an overview of the number of

interviews and the respondents’ job titles.

Our aim to develop theory on the process of early growth of science-based firms required

strategies for making sense of process data. Thus, we built chronological stories for each case,

triangulating the respondents’ interpretations against archival data. The idea was to

conceptualize events and interactions in inescapably local contexts, to detect mechanisms leading to change over time, or patterns among them through process theory. This is in contrast

to predictive variance methods (that explore associations, or how independent variables lead to

changes in dependent variables) more apt for simpler phenomena (Chiles et al. 2007; Langley 1999). Our approach was partly deductive (inspired by theory) and partly inductive (inspired by

data). This mixed approach can be useful because it allows researchers to develop creative

insights from the data, without necessarily rejecting or reinventing previous concepts or categories (Denis et al., 2001). Deductive and inductive approaches were used iteratively in

sequential case studies, and insights from one case generated constructs that served as a basis

for probing the process of change in the other cases (Eisenhardt, 1989; Yin, 1994).

Drawing on Penrose (1959) and Garnsey (1988), which point to the search activities in early

growth phase, in particular regarding perception of opportunities and resourcing prospects, and

on Mustar et al. (2006), which point to the critical resources of science-based firms, we developed two constructs: fundraising development (how firms are able to access and mobilize

the amount and type of finance resources they require) and managerial development (how firms

9

build the founding and management team and the industry and financial contacts they are able

to leverage for their early growth). As we iterated between data and emerging logic, we gradually built a clearer characterization of the process by which firms accessed and developed critical

resources in the early stages of firm growth. We differentiate between firm emergence (a stage

of experimentation in obtaining finance and the initial management team) and early growth (a stage involving the strategic decision to grow beyond survival, seeking to overcome earlier

deficiencies through accessing and developing new resources) (Hite and Hesterley, 2001;

Sirmon et al., 2001), We focused on the processes or paths showing how and why early firm

development and change unfolded. From our iterations, the first round of external financing emerged as a significant event for science-based firms. Securing financing is a catalyst to further

growth of the entrepreneurial science-based firm, allowing it to invest in human resources and

R&D. We define the first round of external financing when the firm raises at least £1 million British pounds (or the Euro equivalent at the time of data collection). This level of investment

was determined inductively from the data gathered and presents a practical distinction between

the different sources of external financing. Financing rounds that raise less than £1 million tend to be seed funding. Biopharmaceutical firms are often 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 seed money provided by government (peer-reviewed) grants or informal investors need to be raised. Investments above £1 million tend to come from

venture capitalists, corporate venture capitalists or IPO.

Regarding managerial development, as we iterated between data and theory, we examined the

development and composition of the founding team from the year of founding and its changes,

especially at the time of securing a first round and then at successive rounds of external financing. As many science-based firms emerge as research spin-offs from academic or

established industrial firms, many founders lack management expertise. We focus on the

development of the management team, which we defined as the set of executives that have

complementary technical and administrative skills and explored how managerial resources are recruited. By drawing on longitudinal information on the evolution of the founding team, we are

able to investigate the different paths in terms of team formation and composition 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 fundraising and managerial development in terms of whether firms originated from industry or university, or parent affiliation,

or their national origin. As we iterated further, it became clearer that resource development was

strongly affected by the founders’ prior ties and relationships and we analyzed our data further at the firm level to reveal the important effect of the institutional settings on this. Nevertheless, an

observation emerging from the data also drew our attention inductively. This was the importance

of profound and persistent (scientific) uncertainty surrounding R&D. It was at this point that we started looking at how this influences early firm formation. We then included a focus on

technological development into the analysis and how technological development evolves and

interacts with fundraising and managerial development. These insights underpin the framework

that we develop after presenting our findings.

We used narrative and ‘visual mapping strategies’ (Langley 1999) to represent the process data

in a systematic way, as it allows the simultaneous display of a number of dimensions (fundrasing, managerial and technological development) and can easily show precedence, parallel processes,

interactions and time duration (see selected cases, figures 1 to 6). The visual maps present

10

event chronologies (the horizontal time scale allowing the depiction of the order and duration of

events) coded in several ways. The location of the box in one of the three horizontal bands shows the issue domain with which the event is associated. Certain boxes are across more than

one band. The arrows leading from each box indicate the influence one event has on another.

The thickness indicates the impact of that influence, a thin line having low-medium impact, a thick line having medium-high influence. The shape of the boxes indicates whether the event is a

decision (rounded corners), an activity (square corners) or an event outside the control of the

firm (oval). Links with the qualitative database are maintained though short descriptions of each

element in its corresponding box.

Figures 1 to 6

5. Key findings on early science-based firm growth

From the analysis of the narrative data and the process maps, we derive two findings on early

growth of entrepreneurial science-based firms. In this section, we present these findings and

supporting evidence in Appendices 2 and 3.

First finding: Early growth of science-based firms involves the simultaneous process of

early fundraising, managerial and technological development. This is an unfolding and

interrelated process, and depends on direct and indirect ties and relations. From our process analysis, we see a continuous and iterative pattern between technological,

managerial and financial development. For some firms, founders first needed access to

complementary managerial expertise to access fundraising resources; and for other firms, founders first needed access to funding in order to pursue R&D and develop managerial

resources. We uncovered different paths of development that founders (or the entrepreneurial

team) follow to access resources and advance early growth. We identified six distinct paths of

how the entrepreneurial team accessed early stage funding and five distinct paths of how they accessed managerial expertise. We distinguish between what we call ‘assisted’ and ‘unassisted’

paths of both early fundraising and managerial development. Appendix 2 provides evidence from

the data in the form of narrative and quotations that supports the identification of these paths. What we call ‘assisted’ paths refers to the cases in which founders relied on their own or an

intermediary’s relations to access and mobilize critical resources and grow the firm. What we call

‘unassisted’ paths refers to the cases in which founders did not have the established relations to access critical resources and were forced to rely on their own abilities to progress the firm.

Assisted paths to fundraising development

We found evidence of three ‘assisted’ paths to early fundraising. For directly-assisted access to funding, founding scientists with prior managerial experience in biopharmaceutical firms

accessed early stage funding through their direct relations to investors. An example is NL-LAG,

in which the founding scientist discovered a new use for existing technology. The founding scientist approached management and management secured investment from the board to

incubate the firm. After four years of incubation, the parent company spun off the firm by raising

VC. In technology transfer office (TTO)-assisted paths, founding scientists accessed early stage financing through their TTOs or partners thereof. This applies to firms that spin out of

universities and tend to have academic scientists as the founders. Our data shows that this path

was prevalent in the UK and not used in the Netherlands. As argued by the CEO of NL-QIP,

“TTOs in the UK and the USA!have the contact with the seed funds! they know a number of VCs, they have a track record, whereas in the Netherlands [this is not the case]”. An illustrative

case is UK-XOX, a university spin out with four scientific founders. UK-XOX had proprietary

technology that it used to develop cancer, hepatitis B and HIV vaccines and the TTO provided assistance in licensing agreements and acted as an intermediary to the seed investor. In the

11

indirectly-assisted path, founders lacked direct access to venture capital investors or

established TTOs. Instead, they relied on their own personal network, using friends, family and professional relations to facilitate access to investors for early stage financing. UK-KRA is an

example. The academic founder had discovered a growth factor in the heart and planned to

exploit it as gene therapy to protect the heart from damage. He explained: “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 !”. From our sample, 12 firms followed

assisted paths to access fundraising.

Unassisted paths to fundraising development

We also identified three ‘unassisted’ paths to the development of early fundraising. In what we call the founder-controlled path, founding scientists avoided VC and raised early stage

financing by going directly to an IPO in order to maintain firm control. Our evidence shows that

only UK firms (four firms) followed this path, as the founding management teams had the requisite managerial competence to establish confidence from investors and raise early stage

funding successfully from the stock market. An example is UK-RAS, which originated from

industry and was founded by three scientists who had prior common work experience at the

same biotechnology employer. 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 went down the AIM route ! our objective was always to float on AIM very quickly.”

Furthermore, we identified revenue-generation and grant-generation paths of fundraising

development. In more than half of our firms (19 firms), the founding scientists had no prior ties to

investors and had to devote considerable time to the search for external financing, building the ties to access investors and raise early stage funding. In order to bridge the period of time

between the emergence of the firm and the eventual raising of funds, firms survived by

generating revenue and/or grant funding. UK-XHP, a firm offering services based on technology

that gets compounds across the blood brain barrier, tried to raise external financing but reverted to revenue generation early in its formation. “We were trying to get funded in 2002 ! nobody

wanted to give out money at all ! we said let’s try to generate some revenue ourselves.”

From our data, we find that there are more Dutch firms than British firms following revenue-

generation paths (eight and five firms, respectively). The main difference lies in the length of

time needed for the Dutch firms to develop relations to investors. For many of the Dutch firms,

although founders raised small amounts of seed funding, they did not raise any significant amount of early stage funding, and simultaneously pursued revenue-generation offering services

while continuing more capital intensive drug development research. It could be argued that these

Dutch firms did not raise external financing because they 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), and did not need

external financing. However, we observed that these firms continued to search for external financing from venture capitalists, most raising external funding after several years of

developments in research and technology (five out of eight Dutch firms). By contrast in the UK,

we see that the firms following a revenue generation path had no ambitions to develop drug

products and therefore could not attract funding on the promise of their research and technological developments; these firms discontinued the search for external financing.

Founders also relied on peer-reviewed grants or government funding to bridge the gap to raising their first round of external financing. Both Dutch and British firms (four and two respectively) that

relied on this path for fundraising had primarily technology in early and unproven stages. Grant

12

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. Again, once they developed further their technological resources, the firms were able

to raise external financing (four out of the six firms). NL-ORP is a good example, raising grant

funding for five years to advance their technology and then raising funds from venture capital after receiving orphan drug status for their drug development programme.

Assisted paths to managerial development

We found evidence of three ‘assisted’ paths to managerial development. 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

resources. The VC investors appointed managerial resources and either retained or removed one or more of the founders in the founding team. UK-YLP, which has proprietary polymer

technology for drug development, is an example where the founders were replaced by investors

but remained involved in the development of the technology. One of the academic co-founders explained: “It took six months to get [the CEO] to agree because my co-founder and I were too

involved. They had to get [the co-founder] off the board and the deal was that he and I would go

together. ! Once we came off the board, the CEO came on !”.

In a second ‘assisted’ path, founder-appointed, founders used their own network or third

parties (e.g. executive search, headhunters) to search for (complementary) managerial

resources. Founders in both the UK and Netherlands accessed managerial competence following this path. Even though Dutch firms tried to tap into their own business networks, Dutch

founders relied primarily on using third parties to recruit complementary managerial competence.

The academic founder of NL-TOC appointed a CEO using his own network, a former PhD student when the founder was a teaching assistant. The academic founder had maintained the

relation and knew that he had biopharmaceutical industry experience and that he wanted to start

a business. The academic founder of NL-RUC years engaged headhunters to search and recruit

complementary managerial expertise, hiring a business develop two years after founding and a financial controller four years after founding. He explained: “! 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.”

The third ‘assisted’ path, parent-appointed, represents firms that accessed managerial

resources by appointment from their originating institution or parent. In most cases, but not

exclusively, these firms originate from university environments and the appointments were made before raising external early stage financing. An example is NL-RIV, a firm that was established

to outlicense and service the exploitation (prevention, diagnosis and treatment products) of a

university department’s discovery of a new infectious virus. The academic scientist initially set up a firm but the university intervened and appointed an external CEO to manage the firm.

Unassisted paths to managerial development In the unassisted paths, managerial competence is not accessed or appointed and founders rely

on their own managerial expertise to provide managerial services. There are two variants to

these ‘unassisted’ paths: founding teams with skills that are complementary or with skills that are

limited. Founders who had previously worked together at a prior employer were more likely to develop a complementary founding team of managerial expertise, or a team with functional

diversity. This complementary path was more prevalent in the UK (three firms compared to none

in the Netherlands). In contrast, the limited founding teams are those in which no (external) managerial competence was recruited and in which the scientific founders assumed the various

managerial roles and responsibilities (two firms in the UK and seven in the Netherlands). By

13

raising external financing several years after the founding (if at all) and lacking access to

managerial competence via the investor-appointed path, founders had to rely on their own (limited) managerial competence. If external financing was raised from venture capitalists,

investors tended to appoint external and/or additional managerial resources and removed the

founders from managerial (CEO) positions. NL-KYS, a firm developing a diagnostic product and run primarily out of a university laboratory, is an example. The university had hired a consultant

to write grant proposals and the consultant eventually became the CEO. He explained:

“! it was decided that we would found a company based on this program ! and basically I was

involved and am still involved as a CEO !”. NL-KYS recruited additional managerial competence several years later after raising external financing from local venture capital.

Second finding: The unique features of technological development, including the profound and persistent (scientific) uncertainty surrounding R&D that characterizes these

firms, plays a strong role in the early growth of science-based firms.

In contrast to firms in high-tech industries, such as in engineering or software, science-based firms do not typically have a ‘prototype’ that they initially develop in the early stage, learn to

produce well and then commercialize at the development stage. Instead, science-base firms

face profound and persistent scientific uncertainty with high risks of technological failure long

into the development cycle. R&D in these firms is highly inductive, based on reducing uncertainty through acquiring information through processes of selection and screening (Pisano,

2006). There is also a high degree of tacit knowledge in interpreting the success or failure of this

kind of R&D process. We see from our process analysis that intermediate outputs of inventive activity (such as patents) and other manifestations of the firms’ know-how, such as the

announcement of partnerships or acquisitions, the development of services, success in clinical

trials are important signals that attract early stage financial and managerial resources and progress the firm in its early growth.

These ‘signals’ of know-how intervene in the early firm growth process, having both positive

and/or negative mediating effects. From our process analysis, we see that establishing ‘proof of principle or concept’ for the technology is a key turning point in accessing early stage resources.

The cases of UK-XOR and NL-ORP are good examples of the positive effects that it has on

early growth (see also Figures 3 and 4). The case of UK-XOR shows that although the firm started with the scientific reputational benefits of its academic founder and raised external

financing, it was the continued validation of its technology that fuelled firm development, first

through outlicensing its founding technology which provided milestone payments and positively

influenced UK-XOR’s ability to raise more external financing and then through acquisition of technology which further developed its technology resources and filled the firm’s pipeline, again

positively influencing outlicensing and collaboration agreements. In the case of NL-ORP, its

technology was validated by receiving the orphan drug status and, in turn, allowed the firm to raise substantial external financing and enter numerous development collaborations and

alliances with large pharmaceutical companies, accelerating its firm development.

At the same time, however, without these signals of know-how, access to and development of

early stage resources remains constrained. Firms that cannot show these signals primarily

follow ‘unassisted’ paths in accessing early stage resources and developing the firm. A good

example is NL-BRN (Figure 6) as it lacked these signals of know-how in its emergence stage and followed unassisted paths to sustain the firm. Appendix 3 provides evidence from our data

illustrating the signals that affect fundraising and managerial development.

6. Discussion

14

The key findings described above suggest, in turn, three contributions to the development of

theory on the process of early growth of science-based firms. The first is that our research brings to light the differences in terms of the speed with which science-based firms can access and

mobilize critical resources and progress firm development and early growth. From the findings

above and repeated iterations of analysis, which lead to abstracted visual maps of categorized activities (see figures 7 to 12), we can derive different speeds of early growth. We argue that

firms can progress from emergence to early growth in a relatively straightforward and ‘rapid’ way,

a more ‘gradual’ way or an ‘arrested’ way. We posit that firms follow different paths to access

critical resources which in turn lead to difference in firm development (Table 2) and that these paths and patterns of resource and firm development are influenced by the institutional settings.

Figures 7 to 12 and Table 2

Indeed, early growth can unfold in a ‘rapid’ way through a combination of what we called

assisted paths to early fundraising development and assisted paths to managerial development. This kind of development adheres to the expectations of prior literature in that when founders

have prior ties to investors, this establishes confidence and credibility in the very early stages of

firm development (Clarysse and Moray, 2004; Shane and Stuart, 2002), reducing or eliminating

many of the obstacles in the accessibility of resources that emerging firms face. A steady stream of funding supports the progression of technological development (e.g. including through clinical

development, acquisitions or licenses to support or diversify their pipelines). However, there is a

marked institutional difference in the role of intermediaries, especially the support of VC and TTOs. Where these are available and strong, the period of time it takes for founders to develop a

functionally diverse management team and raise funds is shorter. The availability and swift

mobilization of critical resources and the successive reduction of uncertainty in their technological development leads to a rapid development of early growth.

In contrast to this, a ‘gradual’ development occurs when firm development is in small steps, with

the firm finding alternatives when institutional support is not forthcoming to facilitate early growth (DiVito, 2012). This gradual development represents impeded access to early stage financial

resources; yet firms are able to access managerial resources, which in turn, allows firms to

access fundraising resources and grow further. In many cases, firms generate revenue or obtain grants, which supports their technological development and, eventually, the raising of funds

through VC or IPO enabling them to recruit management. As these firms show signals of know-

how (clinical trials, collaborations or alliances), reducing uncertainty, access to financial

resources (e.g. VC or IPO) is more forthcoming. Having access to managerial resources provides new ventures with funding alternatives that are also rooted in institutional differences.

In the UK, firms were able to raise funding from IPOs and bypass venture capital investors. To

utilize this financing path, firms need to have the managerial development 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 expertise to coordinate an IPO. Instead, in the Netherlands, where domestic venture capital and private equity is less forthcoming, firms accessed international venture capital and

corporate venture capital – investors that do not typically provide the brokering or mediation role

needed to access local managerial expertise. Nevertheless, once firms had secured

international investment and gained legitimacy, they were able to recruit managerial competence through other types of local intermediaries (e.g. recruitment agencies). In the Netherlands, while

firms can compensate for constraints on financial resources by using ‘functional equivalents’,

such as international sources of venture capital, access to managerial resources appears more limited by national or regional boundaries and labour regulations, making functional equivalents

more difficult to access and use (see Casper and Matraves, 2003; Herrmann, 2008; Lange,

15

2006). 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. This more obstructed access to critical

resources lead to a firm development that was more gradual for many Dutch firms.

Finally, we can define as ‘arrested’ development that in which firms neither raise early financing

resources nor recruit managerial resources for a functionally diverse management team,

depending, for example, on university resources and grant funding for long periods of time.

Here these firms use unassisted paths to access critical resources and lack (or build slowly) signals of know-how that reduce technological uncertainty (success in clinical trials, etc). As

such, they are more constrained in their development of early fundraising, management and

technology. Yet, there is a sharp distinction between firms in different institutional settings. In the UK, firms categorized as having arrested early growth were revenue-generating firms in which

the founders made a strategic choice to cease the search for external financial resources. It

seems that these firms with limited managerial resources and limited financial resources were unable to orchestrate resource development beyond an experimentation and survival stage (Hite

and Hesterley, 2001; Sirmon et al., 2011). However, more Dutch firms used unassisted paths to

access financial and managerial resources (six Dutch compared to two British firms). In the

Netherlands, institutional factors may have a greater influence on firm development. The founders of these firms lacked social resources and the ties (via TTOs or otherwise) to access

financial and managerial resources and were often dependent on the facilities of universities.

This may be due to a lack of risk financing institutions (VC, IPOs on small-cap exchanges) but perhaps it also due to a lack of managerial talent to absorb new managerial skill. Without the

mediation of investors or TTOs, the founders had constrained access to complementary

managerial expertise and were obliged to assume the various roles of a management team. Again, without these intermediaries, the (limited) managerial teams of these firms remained

intact for prolonged periods of time, resulting in arrested firm development.

The second contribution is that the research shows that the process of fundraising, managerial and technological development is highly interrelated and the causal direction is highly

ambiguous. Indeed, this is related to the profound uncertainty surrounding R&D and the

development of early science-based firm growth. Signals of know-how through patents, clinical trials, announcements of research collaboration, licensing and acquisition play an important role

in attracting and developing the management team and early funding. This is because of the

high degree of iteration in R&D in science-based firms, with each of these signals contributing to

reducing uncertainty and improving expectations about future returns. These signals may contribute to alleviating information asymmetries between entrepreneurs and funders or new

managers (Pisano, 2006). Our research is in line with Tylecote and Visintin (2007) who suggest

that the visibility of (potential) innovation may affect the readiness to invest by financiers. We contribute to this line of research by showing that these signals can be interpreted as a way to

make the (highly uncertain) R&D process of science-based firms more visible to outsiders in a

context of high technological opportunities (Malerba and Osenigo, 1996) to attract not only finance but also management. Thus, visibility may not be limited to the highly formalized and

regulated process of R&D and protection afforded by patents (which may take many years to

materialize), but includes a host of other signals at a more early stage of firm development.

Although these signals may not be entirely reliable, as firms may have different standards in advancing drugs from one stage to the next in clinical trials (Pisano, 2006), our research shows

that these signals contribute to not only attracting finance but also managerial resources (both

national and international) to form a functionally diverse management team.

16

The third contribution is that our research shows that the availability, strength and coherence of

institutions of finance, labour and public science influences early science-based firm growth. Our data shows that the paths founders follow to access critical early stage resources are highly

influenced by their institutional settings. The national institutions that shape the financial,

industrial relations and education and training systems vary between The Netherlands and the UK and therefore we see clear distinctions in the ways that Dutch and British firms access early

stage resources and develop further in their growth process. For example, one of the funding

paths that British firms followed was to bypass VC/private equity funding and raise financing by

an IPO on the stock exchange. Having a small cap stock market, the UK financial system offered this avenue to developing funding.

Both the UK and the Netherlands have high levels of scientific research and information infrastructure, yet they both face challenges in the ability to commercialize and benefit from the

economic impact of science and innovation (BIS, 2011; den Hertog et al., 1995). Many of the

challenges are related to the early growth phase of science-based firms. While in the UK there is strong supply of new (doctoral) graduates and access to globally mobile skills, the Netherlands

faces a shortage of graduates in science and engineering (EC, 2003; OECD, 2004). The

existence of clusters around respected universities conducting research in the life sciences in

the UK appears to facilitate managerial development in UK firms. The availability of knowledgeable and relatively mobile managers and also an additional network of private equity

and specialized services such as lawyers specialised in intellectual property rights facilitates the

emergence of science-based firms by providing both a labour pool and services supporting early firm growth but also a safety net (or recycling mechanism) for scientists and managers if firms

fail, given the strong uncertainty associated with the science and commercial outcomes. This

may also make available the managerial resources needed to execute an IPO without venture capitalist expertise and support. In contrast, the Dutch financial system lacks liquidity on a small

cap stock market and the labour system with less mobility of managerial and scientific labour,

and less support from specialized services, which may explain why firms may be less likely to

follow the direct IPO funding path. Indeed, from our data, we have no Dutch firms that access early stage funding from IPOs.

Both countries face challenges in the funding of science-based firms, although of a different nature. The UK has a relatively more developed venture capital market (directed towards both

UK and European business), and although it has been successful in producing science-based

start-ups, it has failed to grow a sizable portion of these into independent firms. Many of these

have been forced into trade sales or acquired by domestic or foreign firms (Miozzo et al., 2010). This is despite some recent efforts to draw in hybrid venture capital schemes backed by both

private and public sector funding (NESTA, 2009). Funding of science-based firms is also a

challenge in the Netherlands, and firms in the emergence and early growth early phase experience difficulty in attracting venture capital, despite support measures to promote start-ups,

mainly in the form of grants, subsidized loans, tax incentives and guarantees (EC, 2009).

In the UK, technology transfer offices are relatively more established and provide more

systematic assistance and support to the academic founder in accessing seed financing and

managerial competence. For all of our UK firms originating from universities, the TTOs or their

partnering institutions aided the firms in their emergence. This contrasts with the Dutch firms in our sample. Where TTOs were involved in the emergence of the firm, Dutch academic founders

were not involved in the firm founding or further development. The TTOs appointed external

managerial resources in the early stage. In cases where academic founders played a key role in the firm founding, they received no TTO assistance and followed ‘unassisted’ paths to access

early stage resources.

17

The literature on comparative capitalisms (Hall and Soskice, 2001; Hollingsworth and Boyer, 1999, Whitley, 1999) emphasizes the effect of the incentive structure provided by the network of

interactions among national institutions on the production strategies of firms, ultimately

influencing and shaping the technological specialization of firms and that of countries. While it is argued that resources available to firms are influenced by the orientation of the financial system,

industrial relations, educational institutions and that these institutions will support or hinder

efforts by firms to develop organizational and technological capabilities in different product

markets, there is relatively little research on the mechanisms through which these institutional variables influence the development of newly-established firms. While the research on

comparative capitalisms points to the effect of institutions on product market or technological

specialization, our research builds on this stream of literature but shows how and why these institutions influence the development of science-based firms in early growth, particularly how

firms can access and mobilize critical resources necessary for early growth and the speed of that

development.

7. Conclusion

We began this paper by asking how the early growth of science-based firms unfolds and how

and why institutional settings may affect early growth. Our response has three main components, which together represent an emerging process theory of science-based firm growth. Our

research stresses the importance (and interactions) involved in early fundraising, management

and technological development of science-based firms, including the effect of the broader institutional setting, including the science knowledge base, institutions of finance, professional

careers and mobility of R&D and technical management personnel, role of bridging institutions,

and university-industry relations.

Our research shows that we can usefully define early growth of science-based as the combined

development of early funding, managerial, and technology development. Different studies have

used different indicators (employment, funds invested, market capitalization) for exploring organizational growth. Our process analysis has enabled us to take what is usually viewed as

outcomes and to consider them explicitly as inputs (management team as input to funding,

funding as input to developing a management team). Therefore, for example, rounds of funding can be seen not as a measure of performance but as an input that can persuade managers to

join the firm. Thus, we are able to collapse (conventional) independent and dependent variables.

We see the combined development of a complementary management team, early fundraising

and development of technology as indicator of organizational growth.

Our work shows how management teams, fundraising and technology development interact and

how the broader institutional setting in which these operate influence early growth of science-based firms. In so doing, it answers the call for more in-depth process and context-oriented

research that can enable us to deepen our understanding of organisational phenomenon (Low

and Macmillan Tsoukas and Chia, 2002; Greenwood and Higgins 1996).

References

Allen, M. (2006). The Varieties of Capitalism Paradigm: Explaining Germany´s Comparative

Advantage? London: Palgrave. Almeida, P. and Kogut, B. (1999). ‘Localisation of knowledge and mobility of engineers in

regional networks’. Management Science, 45(7), 905-917.

Amable, B. (2000). ‘Institutional complementarity and diversity of social systems of innovation and production’. Review of International Political Economy, 7(4), 645-687.

18

Argote, L. (1999). Organizational Learning: Creating, Retaining and Transferring Knowledge.

New York: Kluwer. Avnimelech, G., Rosiello, A. and Teubal, M. (2010). ‘Evolutionary interpretation of venture

capital policy in Israel, Germany, UK, and Scotland’. Science and Public Policy, 37 (2),

101-112. Beckman, C. (2006). ‘The influence of founding team company affiliations on firm behavior’.

Academy of Management Journal, 49(4), 741-758.

Beckman, C. and Burton, M. D. (2008). ‘Founding the future: path dependence in the evolution

of top management teams from founding to IPO’. Organization Science, 19 (1), 3-24. Beckman, C., Burton, M. D. and O’Reilly, C. (2007). ‘Early teams: The impact of team

demography on VC financing and going public’. Journal of Business Venturing, 22(2),

147-173. Best, M. H. and Garnsey, E. (1999). ‘Edith Penrose, 1914-1996’. The Economic Journal, 109,

187-201.

BIS (Department for Business, Innovation and Skills) (2011). Innovation and Research Strategy for Growth, BIS Economics Paper No. 15. London: BIS.

Bonardo, D., Paleari, S. and Vismara, S. (2011). ‘Valuing university-based firms: the effects of

academic affiliation on IPO performance’. Entrepreneurship Theory and Practice, 35 (4),

755-776. Burton, M. D., Sorensen, J. B. and Beckman, C. M. (2002). ‘Coming from good stock: career

histories and new venture formation’, in Lounsbury, M. and Ventresca, M. J. (Eds.),

Research in the Sociology of Organizations. Oxford, UK: Elsevier: 229-262. Casper, S. (2000) Institutional adaptiveness, technology policy, and the diffusion of new

business models: the case of German biotechnology, Organization Studies, 21 (5), 887-

914. Casper, S. (2007). ‘How do technology clusters emerge and become sustainable?: Social

network formation and inter-firm mobility within the San Diego biotechnology cluster’.

Research Policy, 36(4), 438-455.

Casper, S. (2009). ‘Can new technology firms succeed in coordinated market economies? A response to Herrmann and Lange’. Socio Economic Review, 7(2): 209-215.

Casper, S. and Matraves, C. (2003) Institutional frameworks and innovation in the German and

U/k pharmaceutical industry, Research Policy, , 1865-1879. Casper, S. and Whitley, R. (2004). ‘Managing competences in entrepreneurial technology firms’.

Research Policy, 33, 89-106.

Chandler, A. (1992). ‘Organizational capabilities and the economic history of the industrial

enterprise’. Journal of Economic Perspectives, 6, 79-100. Chiles, T. H., Bluedorn, A. C. and Gupta, V. K. (2007) ‘Beyond creative destruction and

entrepreneurial discovery: a radical austrian approach to entrepreneurship’, Organization

Studies, 28 (4), 467-493. Clarysse, B. and Moray, N. (2004). ‘A process study of entrepreneurial team formation: the case

of a research-based spin-off’. Journal of Business Venturing, 19, 55-79.

Colombo, M., Mustar, P. and Wright, M. (2010). ‘Dynamics of science-based entrepreneurship’. Journal of Technology Transfer, , 1-5.

Crouch, C., Streek, W., Boyer, R., Amable, B., Hall, P. and Jackson, G. (2005). ‘Dialogue on

“institutional complementarity and political economy”’. Socio-Economic Review, 3(2),

359-382. Delmar, F., Davidsson, P. and Garntner, W.B. (2003). ‘Arriving at the high-growth firm’. Journal

of Business Venturing, 18, 189-216.

den Hertog, P., Roelandt, T.J. A., Boekholt, P. and van der Gaag, H. (1995). Assessing the Distribution Power of National Innovation Systems. Pilot study: the Netherlands,

STB/95/051. The Hague: TNO.

19

Denis, J. L., Lamothe, L. and Langley, A. (2001). ‘The dynamics of collective leadership and

strategic change in pluralistic organizations’, Academy of Management Journal, 44 (4), 809-837.

DiGregorio, D. and Shane, S. (2003). Why do some universities generate more start-ups than

others? Research Policy, (2), 209-227. EC (European Commission) (2003). Third European Report on Science and Technology

Indicators. Brussels:EC.

EC (European Commission) (2009). INNO-Policy Trend Chart. Innovation Policy Progress

Report The Netherlands. Brussels:EC. Eisenhardt, K.M. (1989) Making fast strategic decisions in high-velocity environments. Academy

of Management Journal, 31, 543-576.

Finkelstein, S. and Hambrick, D.C. (1996). Strategic Leadership: Top Executives and their Effect on Organizations. St. Paul, NM: West.

Florida, R. and Kenney, M. (1998). ‘Venture capital-financed innovation and technological

change in USA’. Research Policy, 17 (3), 119-137. Garnsey, E. (1998). ‘A theory of the early growth of the firm’. Industrial and Corporate Change,7

(3), 523-556.

Gansey, E. and Leong, Y. Y. (2008). ‘Combining resource-based and evolutionary theory to

explain the genesis of bio-networks’. Industry and Innovation, 15 (6), 669-686. Garnsey, E., Stam, E. and Heffernan, P. (2006). ‘New firm growth: exploring processes and

paths’. Industry and Innovation, 13 (1), 1-20.

Gompers, P. and Lerner, J. (1997). What drives venture capital. Brooks Papers Microeconomic Activity, 149-204.

Granovetter, M. S. ‘Economic action and social structure: the problem of social embeddedness’.

American Journal of Sociology, 31, 481-510. Hall, P. A. and Soskice, D. (2001). Varieties of Capitalism: The Institutional Foundations of

Comparative Advantage. Oxford: Oxford University Press.

Hambrick, D. C. and Mason, P. (1984). ‘Upper echelons: the organization as a reflection of its

top management’. Academy of Management Review, 9, 193-206. Helfat, C. E. and Peteraf, M. (2003) ‘The dynamic resource-based view: capability lifecycles’.

Strategic Management Journal, 24, 997-1010.

Hellman, T. and Puri, M. (2002). ‘Venture capital and the professionalization of start-up firms: empirical evidence’. Journal of Finance, 57 (1), 169-197.

Herrmann, A. M. (2008). ‘Rethinking the link between labour market flexibility and corporate

competitiveness: a critique of the institutionalist literature’. Socio-Economic Review, 6,

637–669. Higgins, M.C. and Gulati, R. (2006). ‘Stacking the deck: the effect of upper echelon affiliation for

entrepreneurial firms’. Strategic Management Journal, 27, 1-26.

Hite, J. M. and Hesterley, W. S. (2001). ‘The evolution of firm networks: from emergence to early growth of the firm’ 33, 275-386.

Hollingsworth, J. and Boyer, R. (1999). Contemporary Capitalism: The Embeddedness of

Institutions.Cambridge, UK: Cambridge University Press. Hoopes, D.G., Madsen, T.L. and Walker, G. (2003). ‘Guest editors´ introduction to the special

issue: why is there a resource-based view? Towards a theory of competitive

heterogeneity’. Strategic Management Journal, 24(10), 889-902.

Hopkins, M. M., Alvarez Tinoco, R., Nightingale, P. and Baden-Fuller, C. (2009). Servants in drug discovery and development: a neglected organizational form for biotech firms.

Working Paper presented at EGOS 2009 in Barcelona.

Hsu, D. (2004). What do entrepreneurs pay for venture capital affiliation? Journal of Finance, 59 (4), 1805-1844.

20

Hsu, D. H. (2007). ‘Experienced entrepreneurial founders, organizational capital, and venture

capital funding’. Research Policy, 36(5), 722-741. Kazanjian, R. K.(1988). ‘Relation of dominant problems to stages of growth in technology-based

new ventures’. Academy of Management Journal, 31 (2), 257-279.

Kenney, M. (1986). Biotechnology: The University-Industrial Complex. New Haven: Yale University Press.

Kor, Y. Y. and Mahoney, J. T. (2004). ‘Edith Penrose’s (1959) contributions to the resource-

based view of strategic management’. Journal of Management Studies, 4 (1), 183-191.

Knockaert, M., Ucbasaran, D., Wright, M. and Clarysse, B. (2011). ‘The relationship between knowledge transfer, top management team composition, and performance: the case of

science-based entrepreneurial firms’. Entrepreneurship Theory and Practice, 35 (4), 777-

803. Kroll, M., Walters, B. and Le, S.A. (2007). The impact of board composition and top

management ownership structure on post-IPO performance in young entrepreneurial

firms. Academy of Management Journal, 50 (5), 1198-1216. Lange, K. (2009). ‘Institutional embeddedness and the strategic leeway of actors: the case of the

German therapeutical biotech industry’. Socio Economic Review, 7, 181–207.

Langley, A. (1999). ‘Strategies for theorizing from process data’. Academy of Management

Review, 24 (4), 691-710. Lazonick, E. (2002). ‘The US industrial corporation and the theory of the growth of the firm’, in

Pitelis, C. (Ed), The Growth of the Firm: The Legacy of Edith Penrose. New York: Oxford

University Press. Lee, C., Lee, K. and Pennings, J. M (2001). ‘Internal capabilities, external networks, and

performance: a study on technology-based’. Strategic Management Journal, 22, 615-640.

Liebeskind, J, Oliver, A.L., Zucker, L. and Brewer, M. (1996). ‘Social networks, learning, flexibility: sourcing scientific knowledge in new biotechnology firms’. Organization

Science, 7(4), 428-443.

Lockett, A. (2005). ‘Edith Penrose’s legacy to the resource-based view’. Managerial and

Decision Economics, 26, 83-98. Luukkonen, T. (2005). ‘Variability in organizational forms of biotechnology firms’. Research

Policy, 34, 555-570.

Malerba, F. and Orsenigo, L. (1996) ‘Schumperian patterns of innovation are technology specific’, Research Policy, 25, (3), 451-478.

Mangemation, V., Lemarie, S., Biossin, J.-P., Catherine, D., Corolleur, F., Coronini, R. and

Trommetter, M. (2003). ‘Development of SMEs and heterogeneity of trajectories: the

case of biotechnology in France’. Research Policy, 32, 621-638. McKelvie, A. and Wiklund, J. (2010). ‘Advancing firm growth research: a focus on growth mode

instead of growth rate’. Entrepreneurship Theory and Practice, 34(2), 261-288.

Miozzo, M., DiVito, L. and Desyllas, P. (2011). Cross border acquisitions of science-based firms: Their effect on innovation in the acquired firm and the local science and technology

system DRUID working paper no. 11-17, Copenhagen Business School.

Murray, F. (2004). ‘The role of academic inventors in entrepreneurial firms: sharing the laboratory life’. Research Policy, 33, 643-659.

Mustar, P., Renault, M., Colombo, M. G., Pica, E., Fontes, M., Lockett, A., Wright, M., Clarysse,

B. and Moray, N. (2006). ‘Conceptualising the heterogeneity of research-based spin-offs:

a multi-dimensional taxonomy’. Research Policy, 35, 289-308. Nelson, R.R. and Winter, S.G. (1982). An Evolutionary Theory of Economic Change. Cambridge,

USA: Harvard University Press.

NESTA (2009). From funding gaps to thin markets. UK government support for early-stage venture capital. London: NESTA.

OECD (2009). Biotechnology Statistics. Paris: OECD.

21

OECD (2004). Case Study on Innovation: The Dutch Pharmaceutical and Food Biotechnology

Innovation Systems, STB-04-12 www.tno.nl. Owen-Smith, J. and Powell, W. (1998). ‘Knowledge universities and the market for intellectual

property in the life sciences’. Journal of Policy Analysis and Management, 17(2), 253-

277. Penrose, E. (1959). The Theory of the Growth of the Firm. Oxford: Oxford University Press.

Pettigrew, A. (1992).’The character and significance of strategy process research’. Strategic

Management Journal, 13, 5-16.

Peteraf, M. A. (1993). ‘The cornerstones of competitive advantage: a resource-based view’. Strategic Management Journal, 14 (3), 179-192.

Pettus, M. (2001). ‘The resource-based view as a developmental growth process: evidence from

the deregulated trucking industry’. Academy of Management Journal, 44 (4), 878-896. Pfeffer, J. (1983). ‘Organizational demography’, in Staw, B. and Cummings, L. (Eds), Research

in Organizational Behavior, Vol. 5. Greenwich, CT: JAI Press,: 299-357.

Phelps, R., Adams, R. and Bessant, J. (2007). Life cycles of growing organizations: A review with implications for knowledge and learning. International Journal of Management

Reviews, 9(1), 1-30.

Pisano, G. (2006). Science Business: The Promise, the Reality and the Future of Biotech.

Cambridge, USA: Harvard Business Press. Rasmussen, E., Mosey, S. and Wright, M. (2011). ‘The evolution of entrepreneurial

competencies: a longitudinal study of university spin-off venture emergence’. Journal of

Management Studies, 48 (6), 1316-1342. Saxenian, A. (1994) Regional Advantage: Culture and Competition in Silicon Valley and Route

128. Cambridge, MA: Harvard University Press.

Shane, S., and Stuart, T. (2002). ‘Organizational endowments and the performance of university start-ups’. Management Science, 48(1), 154-170.

Sirmon, D. and Hitt, M. (2003). ‘Managing resources: linking unique resources, management

and wealth creation in family firms’. Entrepreneurship Theory and Practice, 27(4), 339-

358. Sirmon, D., Hitt, M., Ireland, R. D. and Gilbert, B.A. (2011). ‘Resource orchestration to create

competitive advantage: breadth, depth and life cycle effects’. Journal of Management,

37(5), 1390-1412. Soskice, D. (1999) ‘Divergent production regimes: coordinated and uncoordinated market

economies in the 1980s and 1990s’, in Kitschelt, H., Lange, P., Marks, G. and Stephens,

J. D. (Eds), Continuity and Change in Contemporary Capitalism. Cambridge: Cambridge

University Press: 101-134. Stam, E. (2010). ‘Growth beyond Gibrat: firm growth processes and strategies’. Small Business

Economics, 35, 129-135.

Steier, L. and Greenwood, R. (1995). ‘Venture capitalist relationships in the deal structuring and post-investment stages of new firm creation’. Journal of Management Studies, 32 (3), 351-

357.

Storey, D. J. (1994). Understanding the Small Business Sector. London: Routledge Stuart, T., and Sorenson, O. (2003). ‘The geography of opportunity: spatial heterogeneity in

founding rates and the performance of biotechnology firms’. Research Policy, 32, 229-253.

Sunley, P., Klagge, C., Berndt, C. and Martin, R. (2005). ‘Venture capital programmes in the UK

and Germany: in what sense regional policies?’ Regional Studies, 39 (2), 255-273. Tsoukas, H., Chia, R. (2002). On Organizational Becoming Rethinking Organizational Change.´

Organization Science, 13, 5, 567-582.

Tylecote, A. and Visintin, F. (2008). Corporate Governance, Finance and the Technological Advantage of Nations. London and New York: Routledge.

22

Uzzi, B. (1999). ‘Embeddedness in the making of financial capital: how social relations and

networks benefit firms seeking financing’. American Sociological Review, 64, 481-505. Van de Ven, H. and Poole, M.S. (2005). ‘Alternative approaches for studying organizational

change’. Organization Studies, 26(9), 1377-1404.

Whitley, R. (1999). Divergent Capitalisms: The Social Structuring and Change of Business Systems. Oxford: Oxford University Press.

Whitlund, J., Patzelt, H. and Shepherd, D. A. (2009). Building an integrative model of small

business growth. Small Business Economics, 32, 351-374.

Yin, R. K. (1994). Case Study Research. Newbury Park, CA: Sage. Zucker, L. G., Darby, M. R. and Brewer, M.B. (1998). ‘Intellectual human capital and the birth of

U.S. biotechnology enterprises’. American Economic Review, 88 (1), 290-306.

23

Figure 1: Visual map of UK-XCI

24

Figure 2: Visual map of UK-SPE

25

Figure 3: Visual map of UK-XOR

26

Figure 4: Visual map of NL-ORP

27

Figure 5: Visual map of NL-RUC

28

Figure 6: Visual map of NL-BRN

29

Figure 7: Rapid development: abstracted visual map based on UK-XCI

30

Figure 8: Gradual development: abstracted visual map based on UK-SPE

31

Figure 9: Gradual development: abstracted visual map based on UK-XOR

32

Figure 10: Gradual development: abstracted visual map based on NL-ORP

33

Figure 11: Gradual development: abstracted visual map based on NL-RUC

34

Figure 12: Arrested development: abstracted visual map based on NL-BRN

35

Table 1: Overview of selected cases

36

Table 2: Paths to early fundraising and developing managerial competence

Paths to Developing Managerial Competence

Assisted Paths Unassisted Paths

Investor-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

As

sis

ted

Pa

ths

Indirectly-assisted

UK-KRA NL-AREK

Founder-controlled

UK-TRG

UK-XOR UK-SAV

UK-RAS

Revenue-generation

NL-RUC NL-MPA NL-TOC

UK-XTG NL-EPP NL-RIV

UK-SXD UK-SPE

NL-QIP NL-AIK NL-OIB

UK-NGP UK-XHP

Pa

ths

to

Ea

rly

Fu

nd

rais

ing

U

na

ss

iste

d P

ath

s

Grant- generation

UK-GGF UK-XSS

NL-ORP

NL-KLA NL-KYS NL-BRN

Rapid Development

Gradual Development

Arrested Development

37

Appendix 1. Number of interviews and job titles of respondents

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 CFO 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 CFO 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

38

Appendix 2. Evidence from data on paths of early fundraising and managerial capabilities

Funding Type of path

Definition of path Examples of quotations / narrative from UK firms

Examples of quotations / narrative from NL firms

Assisted Paths

Directly-assisted

Founders have direct ties through their

own professional network to various types of

early stage funding (e.g. informal, seed,

VC, corporate venture capital).

UK-XCI licensed technology (compounds) from UK universities and had several drug development programs in different stages in

wound repair and hair regeneration. The founding scientist worked previously in a management position at a similar type of firm

in Boston. Facing redundancy, the founder of UK-XCI approached his personal friend and venture capitalist about founding a firm

in the UK. His friend responded: “Start a business and I’ll fund it”. Within one year, UK-XCI had raised £1.4 million from venture

capital and corporate venture capital, both through personal relationships.

UK-NEX was founded by “a group of people who thought that it would be a good idea to do something in the ion channel area. The

investors who were looking at this opportunity and who were considering this had invested in my previous company so

they brought us together. We didn't need to [search for funding] because all this sort of came together.”

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 fundraising: “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.” After four years of incubation, the parent company raised [VC] funding to spin it off.

TTO-assisted

Academic founders access early stage

funding through a TTO, either at their own

university or a partnering institution.

The university of the academic founder of UK-YLP, a firm that developed platforms to use polymers in developing new drug

products, lacked a TTO and relied on 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.” UK-XOX is also a university spin out and the

TTO “administered the IP that is owned by the university and were involved in signing the IP to us.” The TTO in this case primarily

supported the licensing agreements but the recruitment and financing was supported more by the seed investor. However the

TTO acted as an intermediary to the seed investor.

[No evidence from Dutch firms.]

Indirectly-assisted

Founders access early

stage funding through indirect ties and are

referred to sources of funding

(informal, seed, VC, corporate venture capital).

UK-KRA, founded by an academic who had discovered a growth factor in the heart

planned to exploit it as gene therapy to develop drugs to protect the heart from damage, explained: “My own technology

transfer office at the university was not very good. Through [a friend] I got in touch with a venture capital company.”

In NL-AREK the founding scientists worked together in a laboratory of an academic

medical hospital. They had developed a system to label DNA probes for a client and sought to exploit that technology. “We found a

business angel, through our own private network ! one of our friends ! came across this [investor] and ! he said, ! I have an idea

that might be interesting.”

Unassisted Paths

Founder-controlled

Founders choose a funding route

(IPO) that allows

UK-RAS was founded by three scientists who had prior common work experience at the same biotechnology employer. It

followed a hybrid business model, combining

[No evidence from Dutch firms.]

39

them to exercise control of their

firm.

services offering with its internal drug discovery and development programs based

on crystallography and structural-based biology. “We had four or five ways of funding the company ! controlling the company was

big ! we went down the AIM route.” UK-XOR bypassed venture capital funding

and after an initial seed investment, floated on AIM. The founder explained, “we were off very quickly indeed singing our song around

the city to the investment managers, etc. And to my surprise, since we had done nothing, but we had a lot of ideas, and we had a good team, we did very well. We

offered 23 million on which we took 13,5 million at the initial placement. And basically got ourselves listed.”

Revenue generation

Founders rely on service provision

to generate revenue and fund growth

organically.

UK-SXD, a diagnostic firm that spun out of a large pharmaceutical firm, generated

revenue until it raised early stage financing. It offered services on its proprietary platform technology and eventually developed a

diagnostic product to determine the effectiveness of drug therapies for cancer. UK-SXD financed its further product

development in collaboration with a large pharmaceutical firm. It raised external VC funding one year after founding but relied

primarily on revenue generation and R&D collaborations to finance product development.

After attempting to raise external financing, UK-XHP turned to revenue generation:

“We were trying to get funding in 2002 ! and nobody wanted to give out any money ! we said let's try to generate some

revenue ! we then got a grant from the DTI which helped get moving and extend the revenue generation !”

NL-EPP was founded by a university that spun out a department and its staff as a firm to

exploit protein technology. NL-EPP generated revenue until it raised its first round of external financing for new drug product development

six years after its founding.

Grant generation

Founders apply for grant funding to bridge the gap

to either greater revenue generation or

more significant fundraising from other sources

(e.g. VC).

UK-GGF, founded by academic scientists, develops anti-fungal drugs. “European grants and some small seed funding, 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.”

NL-BRN survived on grant money and university resources to build its platform technology on drug delivery to the brain.

“We founded the company as a legal entity in 2003 ! Before that, I was paid on the grant from the university.” It took NL-BRN eight

years from the initial grant funding to raise a first round of external financing.

NL-ORP, founded by a scientist with biotechnology industry experience, is developing a product for Duchene muscular

dystrophy. As Duchene is a rare disease, NL-NL-ORP was able to raise grant funding from government funds and patient organizations. “I

got a total of 6 [government] grants from and about 3 to 4 [patient organization] grants. 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.

Managerial Competence

40

Assisted Paths

Investor-appointed

Dependent on raising VC

funding, managerial competence is

accessed through investor’s ties.

UK-XOX, which developed cancer vaccines, had several academic founders, professors

that took non-executive positions, and a post-doc that co-founded the firm and remained its CSO. “The CEO was

recruited ! and the investor had a big role in that.”

UK-GGF, the firm 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. After raising early stage funding, the venture capitalist recruited a

CEO (from the USA), replacing the academic founders.

NL-VAA spun out of a large chemical firm and raised substantial external financing from

corporate venture capitalists. Shortly after the founding of the firm, the investors replaced the founder CEO due to a “difference of opinion

with the board” and appointed the business development manager as CEO.

Founder-appointed

Founders use their own direct or indirect ties to

access and recruit managerial

competence.

The academic founder of UK-KRA had a long established network in the pharmaceutical industry due to

collaborations with his academic department. “I was running the company and ! I didn't have the commercial focus

and understanding of a CEO. ! At that time I was doing some work for ! a drug company in Europe and their VP was

working with me very closely! and I said, do you want to join [as CEO]?”

Having secured its early stage financing from international venture capitalists, the founder of NL-RUC was unable to tap into a local network

of executives via their investors and relied on third parties to recruit by himself business development 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 used headhunters for most of those people. ! [I hired] the current CEO as a

business developer !” The academic founder of NL-TOC appointed a

CEO, a former PhD student, using his own network. The founder explained: “He was a student and I was a teaching

assistant, ! he wanted to start his own business ! 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.”

Parent-appointed

Managerial competence is accessed

through the parent firm, either from their

internal resources or through

recruitment.

The parent university of UK-XOR appointed an interim CEO to help start-up the firm and transfer university lab personnel to the newly

founded firm. The interim CEO then recruited a CEO.

The parent university of NL-PMA appointed a CEO; he explained: “I was approached by the Free University because they had invented

and patented their invention.”

Unassisted

Paths

Comple-

mentary skills

Generally a

small team of founders that have

complementary managerial and scientific skills

and experience.

The founders of UK-SXD, which makes

diagnostic products and spun out of a large pharmaceutical firm, knew each other from their prior employer. Facing redundancy, 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 the 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.

[No evidence from Dutch firms.]

41

Limited skills

A founder that is unable to access

managerial competence through the

above assisted paths and must rely on his own

skill and experience to manage the

early stage firm. Or, founders that comprise management

teams that only include scientific skills and

experience.

UK-XHP, having established a method to get compounds across the blood brain barrier,

followed a revenue-generation financing path. The founders, both having prior experience in biotechnology firms, formed a

founding team consisting of similar skills. The CEO of UK-XHP explained “[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 [too].”

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

same employer; 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: “The management team is me. So, I'm a team in

myself.” Furthermore, the founder/CEO explained that another founder holds the title of CSO but is not a member of the

management team: “[The CSO] is here but he is not a member and never has been a member of the management team ! to other companies and to VCs it is important to have

somebody who can call themselves a CSO.”

42

Appendix 3. Evidence from the data on how signals know-how affect the development of early

fundraising and managerial capabilities in science-based firms

Mediating

Effects

Signals of

know-how

Examples

Positive Patents

The academic founders of UK-KRA patented the use of a “growth factor in the heart to protect the heart against damage.” To exploit the invention, the founder approached the funder of the project and large pharmaceuticals;

both were uninterested. “! so the only way is to do this ourselves.” At their prior employer, the founders of UK-SXD “had invented, licensed and accessed various technologies to

enable the company to do genetic analysis !”. The founders “perceived that there was a market opportunity ! and if [they] could take some of the technology with [them], [they] would be well positioned to take advantage of that.”

The academic founder of UK-XOR “realized that a lot of what was going on had IP attached to it which was not being exploited !”. He had tried to get the university’s TTO involved to start a drug company but he “couldn’t

make it fly”. After the university partnered with a technology development firm, the founder’s department and technology were spun out to start a new firm.

NL-BRN used grant money to advance their technology to a point of external validation “! we really needed that grant money to get a patent out of it. There was nothing. ! normally a company would [spin] out at the phase were we are now ... There is a patent and you have some validation.”

NL-PMA bought patent rights from the University of Amsterdam and NL-PMA was founded on that technology. A few years later, NL-PMA bought patents from another Dutch biopharmaceutical firm. The drug programmes of

NL-PMA are built on these two technologies. NL-ORP’s core technology, which is gene expression that allows for correction of a mutation with a “molecular

bandaid”, originates from university technology and was similar to what the firm was developing. It changed the nature of the firm “ ! “that particular technology was patented together with our knowledge of the compounds to do the masking of the mutation and our product development experience. We started slowly but surely to

develop as a product development company.”

Iterations of

R&D

UK-SPE, founded first on offering services but set up shortly afterwards an R&D division for internal drug

development, attracting informal investors to sustain it before raising funding from an IPO four years after founding. The fundraising was primarily for internal drug development.

NL-RUC went through several iterations of technology development. The firm started by exploiting gene therapy, but they decided to “move away from gene therapy and use our technologies to develop vaccines. We started with an idea about products that failed. Then we refocused on other products that we stopped. Then we

decided to focus on vaccines and acquired another firm’s technology and had the antibodies on oncology and that failed. Eventually we settled on infectious diseases, ! but that was very late after all the different reiterations.” Several years later NL-RUC acquired a biotech firm that had antibody technologies.

Collaboration, licensing, acquisition

UK-SPE developed a new assay product based on plucking a hair to run tests. This assay “is the basis for the first contract that the R&D division has had ! that will provide us with validation data and then we can market that screen in a commercial way.”

UK-SXD developed and launched assays by persuading a large pharmaceutical (their prior employer) “to pay us to develop this assay ! it was an assay similar to that we had developed when we were [employed there] ...”

Then another large biopharmaceutical “commissioned [UK-SXD] to turn our assay into a regulated diagnostic [product]. They paid us to develop our own product.” This collaboration gave UK-SXD “a direct route into regulation bodies and a strong link between our assay and the drug therapy. ! We didn't have a technology

edge, we were just first movers. Now, we have a regulatory [product] ... we ramped up our staffing, manufacturing, regulatory but still we didn't have enough resources to meet their demand ! but we got there.”

UK-XOR established several collaborations for development of their own and acquired drug development programmes. The collaborations include foreign partners such as NIH, large Swedish and American pharmaceuticals and are in various clinical stages. Announcement of positive clinical trials with these

partnerships followed. NL-RUC generated revenue from licensing their platform technology, which they had developed to actually

manufacture their own gene therapy products. NL-BRN initially tried to do drug development by engaging in collaborations with large (bio)pharmaceuticals.

Only one partner “paid us for the hours and materials put into the project. And the [other] partner, ! in the end, because of all kinds of technical reasons that it was easier if they would produce it themselves and we would just teach them how to do it. So they never got to the point that they needed to pay for something other than just

43

Collaboration, licensing,

acquisition

UK-SPE developed a new assay product based on plucking a hair to run tests. This assay “is the basis for the first contract that the R&D division has had ! that will provide us with validation data and then we can market

that screen in a commercial way.” UK-SXD developed and launched assays by persuading a large pharmaceutical (their prior employer) “to pay us

to develop this assay ! it was an assay similar to that we had developed when we were [employed there] ...” Then another large biopharmaceutical “commissioned [UK-SXD] to turn our assay into a regulated diagnostic [product]. They paid us to develop our own product.” This collaboration gave UK-SXD “a direct route into

regulation bodies and a strong link between our assay and the drug therapy. ! We didn't have a technology edge, we were just first movers. Now, we have a regulatory [product] ... we ramped up our staffing, manufacturing, regulatory but still we didn't have enough resources to meet their demand ! but we got there.”

UK-XOR established several collaborations for development of their own and acquired drug development programmes. The collaborations include foreign partners such as NIH, large Swedish and American pharmaceuticals and are in various clinical stages. Announcement of positive clinical trials with these

partnerships followed. NL-RUC generated revenue from licensing their platform technology, which they had developed to actually

manufacture their own gene therapy products. NL-BRN initially tried to do drug development by engaging in collaborations with large (bio)pharmaceuticals.

Only one partner “paid us for the hours and materials put into the project. And the [other] partner, ! in the end, because of all kinds of technical reasons that it was easier if they would produce it themselves and we would just teach them how to do it. So they never got to the point that they needed to pay for something other than just

the information.” NL-ORP entered several different alliances to develop its drug development programmes. The partners for the

different collaborations include universities (Dutch as well as other European/US universities), hospitals and large pharmaceuticals. Announcements of positive phase I/II trials followed.

Negative Lack of technology validation

UK-XCI began with five drug development programmes and cancelled two of them. One was cancelled because they felt the market for it was too long term. The other programme was cancelled because it was controversial and when they floated they didn’t want to be associated with controversial programmes.

UK-YLP started with IP that hadn't been patented and for some of it, they had done very little experimental work.