Title: Venture capitalists' selection process: the case of biotechnology proposals

Authors: Katleen Baeyens, Tom Vanacker, Sophie Manigart

Addresses: Department of Accounting and Corporate Finance, Ghent University, Kuiperskaai 55E, 9000 Ghent, Belgium. ' Department of Accounting and Corporate Finance, Ghent University, Kuiperskaai 55E, 9000 Ghent, Belgium. ' Department of Accounting and Corporate Finance, Ghent University, Kuiperskaai 55E, 9000 Ghent, Belgium; Vlerick Leuven Gent Management School, Reep 1, 9000 Ghent, Belgium

Abstract: The paper analyses venture capitalists| (VCs) selection process in biotechnology ventures. Biotech ventures operate in an extremely risky environment making this an interesting research setting. The majority of venture capitalists exclude certain biotech sectors ex-ante because of regulatory uncertainty, the long development process to a market-ready product and the difficulty to understand the technology. The more thorough due diligence process focuses on financial, market and technology criteria. Management team capabilities are more important for later stage investors, whereas early stage investors expect to have an impact on the future recruiting of professional managers. Despite the higher risk of biotech investments, we find no evidence that VCs require higher hurdle rates or more complete contracts for these investments, compared to investments in other technology-based companies. The most important reason for not reaching an investment agreement is disagreement over valuation, due to large differences in risk perception between entrepreneurs and venture capitalists and the lack of a standard valuation tool for biotech projects.

Keywords: venture capital; selection process; biotechnology; valuation.

DOI: 10.1504/IJTM.2006.009446

International Journal of Technology Management, 2006 Vol.34 No.1/2, pp.28 - 46

Published online: 03 Apr 2006 *

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