Financing The Transition From Ivory Tower To Industry Through Debt

Financing the transition from ivory tower to industry through debt
The relationship between medical biotechnology start-ups and commercial banks
Author:
J. J. Dikmans
Study programme:
MSc Entrepreneurship (joint degree)
University:
VU University Amsterdam | University of Amsterdam
Department:
Faculty of Economics and Business Administration
Student number:
2566791 | 11147628
Supervisor:
prof. dr. E. Masurel
Date:
July 1st, 2016
FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

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II

III
Do not let your fire go out, spark by irreplaceable spark in the hopeless swamps of the
not-quite, the not-yet, and the not-at-all. Do not let the hero in your soul perish in lonely
frustration for the life you deserved and have never been able to reach. The world you desire
can be won. It exists.. it is real.. it is possible.. it's yours (Rand, 1957).

IV
Contents
Acknowledgements
VII
Abstract
1.
Introduction
1.1
A unique breed
1.2
Definitions
2.
Theoretical framework
2.1
Life Cycle Theory
2.2
Biotechs Product Lifecycle
2.2.1
Treatments
2.2.2
Analytics and Tools
2.3
Biotechs Organizational Lifecycle
2.4
Biotechs Financial Lifecycle
11
2.5
Source of Finance
14
2.5.1
Venture Capital
14
2.5.1.1
The Venture Capitalists Perspective
14
2.5.1.2
The Biotech Entrepreneurs Perspective
15
2.5.1.3
Venture Capital and the financing gap(s)
16
2.6
Commercial Banks
16
2.6.1
The Financial Institutions Perspective: constraints
16
2.6.2
The Financial Institutions Perspective: removing constraints
17
2.6.2.1
Less Risky Investments
17
2.6.2.2
Diminishing Information Asymmetries
18
2.6.3
The Entrepreneurs Perspective on Debt
19
3.
Hypotheses
20
3.1
Product Development Milestones
20
3.2
Collateral
20
3.3
Analytics and Tools-Products
21
3.4
Information Asymmetries
21
3.5
Pecking Order Theory
22
4.
Methodology
23
4.1
Research Design
23
4.2
Operationalization
24

4.2.1
Operationalization variable sources of finance
24
4.2.2
Operationalization Hypothesis 1
24
4.2.3
25
4.2.4
25
4.2.5
25
4.2.6
25
4.3
Data Analysis
25
4.4
Quality of the Research: Validity, Reliability, Generalizability
27
5.
Findings
29
5.1
Sample descriptive
29
5.2
Product Development Milestones
29
5.3
Collateral
31
5.4
Analytics and Tools-Products
32
5.5
Information Asymmetries
33
5.6
Pecking Order Theory
35
5.7
Summary of Findings
37
6.
Discussion
38
6.1
Discussion of Findings
38
7.
Conclusion
41
7.1
Windup
41
7.2
Implications for Practice
41
7.3
Limitations
42
7.4
Directions for Future Research
42
References
44
Appendix
49

VI

VII
Acknowledgements
I would like to thank prof. dr. E. Masurel for his supervision, encouragement, and
suggestions. I am also grateful to Mr. S. Lohuis for giving me the opportunity to write my
masters thesis at Rabobank Amsterdam. Besides, I would like to thank all employees of
Rabobank whom Ive spoken to, as well as all other interviewees, for their sincerity,
enthusiasm, time, and input. Last but certainly not least, I want to thank both my parents for
supporting me all along the sometimes bumpy ride. Without all the abovementioned
persons this dissertation would not have been possible as is. Again, thank you.

VIII
Abstract
This dissertation casts light on financing biotechnology entrepreneurship in the Netherlands. In
particular, this research sets out to explore the elements that can facilitate the relationship between
biotechnology start-ups and commercial banks. The research is of importance as current studies on
financing biotechnology entrepreneurship primarily highlight the role of venture capital, yet a
comprehensive study on debt financing of biotechnology is missing; hence current research on
biotechnology-related entrepreneurial finance reflects an incomplete reality. Marrying insights from
biotechnology entrepreneurship with theory on entrepreneurial finance, five hypotheses are formed.
Subsequently these hypotheses are examined using a mixed method research design, i.e., quantitative
data supported by qualitative insights. The results are partially consistent with the literature-derived
hypotheses: expected findings include a correlation between biotechnology start-ups proprietorship of
tangible and fixed assets and sources of finance, and a relationship between product development
milestones and sources of finance. Yet opposing to expectations, the latter relationship only applies to
treatment products; not to analytics and tools products. A second finding opposing hypotheses is the
absence of a relationship between the type of biotechnology product and sources of finance, implying
that start-ups developing an analytics and tools-product are not more eligible for bank loans than their
treatment-counterparts. Third, as anticipated the potential for severe information asymmetries is
acknowledged; yet, opposing assumptions, actual information asymmetries are perceived to be absent.
Fourth, literature suggests a preference of debt over equity among biotechnology entrepreneurs.
Nonetheless, findings indicate, while acknowledging the perceived importance of input beyond
financial capital, a preference of debt over equity.
1. Introduction
1.1 A unique breed
Fifty years after Herbert Boyer, professor at the University of California, San Francisco, and
aspiring entrepreneur Robert Swanson gave rise to the biotechnology industry with the inception of
Genentech, the verdict is unambiguous: the business of biotechnology is neither as simple as policy
makers or venture capitalists wish it would be, nor as theoretically linear as academic researchers
would like to believe (Brannback et al., 2009). That is, pharmaceutical innovation is particularly
challenging (Fernandez et al., 2012), with the failure rates of R&D projects escalating, the costs of
R&D expanding, and the time taken to move from drug patent to market launch increasing (Pammolli
et al., 2011) (Hopkins, Crane, Nightingaley, & Baden-Fullerz, 2013). Welcome to the unforgiving
reality of commercially driven drug development.
Biotechnology has a disruptive nature. That is, until the early 1980s, the prevailing belief was
that no new company could compete with the pharmaceutical industry giants because of the enormous
costs of [...] research and development (Gassmann, Reepmeyer, and Zedwitz, 2004) (Khilji,
Mroczkowski, & Bernstein, 2006). Ever since, biotech start-ups have challenged this preponderant
conception of Big Pharma as inventors and creators of novel biotechnology products. Yet, in this
light the premise that obtaining sufficient capital resources for the initial financing of startup
companies is essential (Frank & Tscherning, 1999) seems to be an understatement for biotechnology
start-ups. That is, besides the normal financial requirements that any new company faces, a high tech
company needs additional money (Manigart & Struyf, 1997) to fund the lengthy and expensive path
from initial scientific discovery to marketable product (Hamilton, 2011).
Regarding start-ups securing external finance, academics and practitioners alike point with
optimism and overconfidence of a neophyte stock trader out to beat the market (Szulanski & Winter,
2002) in the direction of venture capital (Masako, 2004). Yet, commercial bank lending is often
overlooked; not surprisingly given commercial banks risk aversion (Jones & Macpherson, 2013) and
start-ups high risk of failure (Winton & Yerramilli, 2008). It is not unexpected then, that indicators
of bank lending to small firms are constant or even fall after 1977, whereas venture capital investment
is almost 100 times larger in 2001 than it was in 1977 (Masako, 2004).
Biotechnology start-ups characteristics, a caricature of ordinary start-ups, pose a particular
challenge to commercial bank lending. Consequently, existing studies on financing biotechnology
entrepreneurship highlight the role of venture capital whereas to my knowledge a comprehensive
study on debt financing of biotechnology is missing. Hence, this dissertation marrying insights from
biotechnology entrepreneurship with theory on entrepreneurial finance, specifically bank financing
reports on the relationship between biotechnology start-ups and commercial bank lending, through
explore the following puzzle: what elements can facilitate the biotechnology startup commercial
bank relationship? As this relationship has been left understudied, current available research on
biotechnology-related entrepreneurial finance reflects an incomplete reality. Hence the purpose of this
dissertation is an academic contribution concentrated on an analysis of the relationship between
biotechnology start-ups and identification of constraining elements within this relationship.
Abandoning the ivory tower, practical relevance is guaranteed through the realization of applicable
insights regarding the screening of biotechnology start-ups and means to lessen obstructs in the
commercial bank biotechnology start-up relationship.
1.2 Definitions
For the sake of a common understanding it is of importance that two concepts are welldefined. First, biotechnology: a group of techniques and technologies that apply the principles of
genetics, immunology and molecular, cellular, and structural biology to the discovery and
development of novel products (Audretsch, 2001). Stated differently: the term refers to the large and
growing array of scientific tools that use living cells and their molecules to make biological products
for many different industries. Human and animal health care, agriculture, forestry, environment, and
specialty chemicals are among the industries that have benefited most from biotechnology (Durai, Li,
Metkar, Pelayo, & Phillips, 2006). The cornerstone of dissertation is the first, i.e., human healthcare,
and does not include other industries due to a distinctive industry and product development
characteristics. Consequently, throughout this manuscript the term biotechnology refers exclusively to
medical biotechnology, alias red biotechnology. Second, start-up: a young, innovative venture in an
early phase of the organization life cycle, with a repeatable and scalable business model as well as
growth aspirations.
The remainder of the paper is structured as follows. In section two the theoretical framework
is covered, describing the literature on biotechnologys product, organizational, and financial life cycle
and covering venture capital and commercial bank lending. The hypotheses derived from the
theoretical framework are presented in section three. Section four presents the research methodology,
including research design, operationalization of hypotheses, data analysis, and quality of the research.
The findings of the empirical research are described in section five and the sixth section discusses
these empirical findings. Finally, section seven concludes provides implications for practice,
limitations, and directions for future research.
2. Theoretical Framework
2.1 Lifecycle Theory
Recognizing an organizations current developmental phase assists in strategic planning by
providing a basis for anticipating key requirements at various stages (Churchill & Lewis, 1987; Gupta
& Chin, 1994; Thain, 1969). Regarding the biotechnology industry in particular, key to
understanding the financing aspects of a biotechnology company is an understanding of its unique
growth path and the challenges faced (Ono, 2013). Accordingly, the development of the
biotechnology start-up will serve as this dissertation its point of departure; light will be shed on this
business phenomenon from a life cycle perspective. Life cycle theory, likening the appearance,
growth, and disappearance of firms [...] to the processes of birth, growth, and death of biological
organisms (Penrose, 1952), assumes that organizational development is characterized by regularities,
[occurring] in such a way that the organizations development processes lend themselves to
segmentation into stages or periods of time (Smith, Mitchell, and Summer, 1985) (Gupta & Chin,
1994).
Numerous models of organizational life cycles exist in the body of academic literature, with
the number of stages in the cycle ranging anywhere from three to ten stages (Gupta & Chin, 1994) and
authors underscoring diverse characteristics in each stage to explain organizational development
(Dodge, Fullerton, & Robbins, 1994). Yet, regardless of these disparities, consensus exists: the
typical progression of change events in a life-cycle model is a unitary sequence (it follows a single
sequence of stages or phases), which is cumulative (characteristics acquired in earlier stages are
retained in later stages) and conjunctive (the stages are related such that they derive from a common
underlying process) (Van De Ven & Poole, 1995). Still, while valuable in various respects, not all
frameworks are evenly appropriate for start-ups. First, various organizational life cycle frameworks
fail to capture the important early stages in a companys origin and growth (Churchill & Lewis,
1987). Second, organizational life cycle models commonly describe the size of a venture in terms of
sales, [ignoring] other factors such as [...] complexity of the product line and rate of change in
products or production technology (Churchill & Lewis, 1987).
Nonetheless, even small business-specific development cycles e.g., the five-phase small
business growth model by Churchill and Lewis (1987), consisting of foundation, survival, success,
expansion, and maturity; delineated in exhibit 9.1.1 in appendix 9.1 might be far from appropriate
for a biotechnology start-up. That is, the model can be criticized when we use [it] to explain the
evolution and progression of technology based industries such as biotechnology (Malik & Hine,
2011). Foremost, the model is criticized for being too general, i.e., applied to a large variety of
industries, ignoring the diversity among businesses. These antagonists pose that it is difficult to apply
a universal model to all types organizations. Typically recurrent cycles and patterns in organizations

are products of specific environments (Penrose, 1952; Henman, 1973) (Dodge et al., 1994). Due to
intra industry differences, e.g., biotechnologys heavy dependence on research and development
(Audretsch & Stephan, 1996) it would be incongruous to study the biotechnology industry like other
non-technology based industries [by means of an] unaltered stages of growth theory (Malik & Hine,
2011).
2.2 Biotechs Product Lifecycle
Biotechs diverting organizational lifecycle finds it origin in its product development pathway.
Consequently, for the sake of a comprehensive understanding, this section will shed light on biotechs
product lifecycle. The group of biotech products is varied, including a diverse group of treatments,
biologics, diagnostics, medical devices, clinical laboratory tests, and instruments (Shimasaki, 2014a).
For generalization purposes, the products are categorized into two groups, labeled treatments and
analytics and tools. It is to be noted that in practice the distinction is not always clear-cut;
convergence of technologies implies a borderland between the two categories, i.e., medical devices
that are an amalgamation of both treatments, and analytics and tools.
The path from initial scientific discovery to eventual commercialization as well as
development costs for both product distinct groups vary significantly. Whereas products in the
treatments category can require 8 to 15 years and cost $800 million to $1.2 billion, products in the
analytics and tools category can reach the market quicker and at lower average cost: generally 3 to 7
years and cost $25 to $50 million (Shimasaki, 2009).
2.2.1 Treatments. This product category contains therapeutics, biologics and vaccines
(including drug delivery and gene therapy), [...] all traditional small molecule therapeutics,
recombinant DNA produced drugs, and biologics, [and] vaccines, gene therapy, and any molecule
used to treat a disease or condition (Shimasaki, 2009). Irrespective of national origin, a
pharmaceutical products research and development pathway is organized into sequential phases,
including: discovery, preclinical development, clinical development (I, II, and III), and regulatory
authorization. The biotech treatments research and development pipeline is outlined in exhibit 2.2.1.
If the discovery phase yields a potential drug candidate, it progresses to the preclinical
development stage in which preliminary tests are performed on test animals or tissue cultures
(Grossmann, 2003). In Clinical phase I, drug candidates are tested on healthy human beings; the main
purpose is to study the human body's absorption. distribution, metabolism, and excretion patterns. In
clinical phases II and III, tests are performed on patients with a specific disease to assess the drug
candidates' efficacy and safety (Grossmann, 2003). The key difference between clinical phase II and
III is the number of patients the drug candidate is tested on; in the former phase this amounts to
several hundreds human test subjects, in the latter phase statistically reliable support re safety and
effectiveness is sought after by involving some thousand patients.
Exhibit 2.2.1. Pharmaceutical R&D pipeline (Grossmann, 2003: page 3).

The entire biotech R&D process [is] one of the longest in all industries (Grossmann, 2003).
In exhibit 2.2.2 a framework of research and development phases and corresponding phase lengths is
outlined. Timeline estimates proposed by a variety of scholars (e.g., Shimasaki, 2014) differ slightly, a
disparity that could (partly) be attributed to biotech ventures [lack of] influence on the review period
required by regulatory authorities. Despite all efforts at international standardization, there are still
marked differences among countries in legal requirements for and in the process of drug application
review (Wellons & Ewing, 2007).
Exhibit 2.2.2. Pharmaceutical R&D pipeline (Grossmann, 2003: page 15).
The research and development pathway is characterized by a high-pitched level of uncertainty;

in any of these development phases, elaborate and expensive studies may fail to achieve their
endpoints, potentially leading to premature closure of the entire development program (Gruber,
2009). In addition to internal causes, Rajamaki (2008) notes that a biotechnology products lifecycle
can also face premature death due to challenges originating from market uncertainties.
2.2.2 Analytics and tools. This product category [refers] to in-vitro diagnostic tests, such as
rapid point-of-care tests for HIV [...], genetic tests that are run in a clinical laboratory, [and] medical
devices that support or improve human function, such as cardiac pacemakers, [and] platform assay
instruments used by research or clinical laboratories (Shimasaki, 2014). Similar to treatments, the
research and development pathway of analytics and tools is organized into sequential phases,
including: discovery research, proof of concept, prototype development, clinical validation, and
regulatory review (Shimasaki, 2009).
Literature on analytics and tools is few and far between. The extant literature identifies the
analytics and tools product category as one-off compared to treatments primarily in two ways: first, it
is expected to complete [the discovery] stage and subsequent ones much quicker (Shimasaki, 2009).
Second, the research and development pathway of analytics and tools includes a proof-of-concept
relatively early on; this is not necessarily a prototype but rather proof, that can be independently
verified, that the idea or concept would be valid in the real world (Shimasaki, 2009).
2.3 Biotechs Organizational Lifecycle
Now that the underlying product lifecycle has been reflected on, the biotech-specific
organizational lifecycle can be assessed. The literature review did not yield a single best-practice
organizational lifecycle of a biotechnology start-up. Acknowledging the importance of an industryspecific organizational life cycle, Malik and Hine (2011) outline a four-stage biotech organizational
life cycle, comprised of birth, growth, maturity, and decline or rebirth (exhibit 2.3.1). Compared to a
non-biotechnology organization, displayed by the blue line, a biotechnology organization has a
longer birth stage [...] and a steeper growth phase (Malik & Hine, 2011). In the phase following
maturity, a biotechnology organization may either decline, i.e., deteriorate to death, or experience a
rebirth (Malik & Hine, 2011; Poole & Van de Ven, 2004).
Exhibit 2.3.1. Biotech organizational life cycle (Malik & Hine, 2011: page 25).
Yet, while the second main point of critique on generic organizational lifecycles, i.e., the
application of a universal model to all types organizations, has been taken into consideration by Malik
and Hine (2011), the first point of critique has been neglected; the biotechnology-specific model has a
key shortcoming in that it can be criticized for being inappropriate for a start-up, as it [fails] to
capture the important early stages in a companys origin and growth (Churchill & Lewis, 1987). That
is, the framework crops Churchill and Lewis (1987) existence, survival, success, and takeoff phases,
into the birth and growth stages. Shimasaki (2014), on the other hand, does acknowledge the
importance of a start-ups early phases and proposes a biotechnology life cycle consisting of four main
phases: start-up, development, expansion, and decline. While still not deemed as the picture-perfect
biotechnology start-up lifecycle, this dissertations author does consider the model superior.
Consequently, this model will serve as this research its baseline, and the model will be
complemented with other scholars insights on biotechnology lifecycle models .
Phase 1: start-up | discovery research. The biotech life cycle starts with the scientific
discovery, typically originating from academic research (Tscherning, Frank, & Schnharting, 1999),
of (1) a new method of synthesizing a biological protein, (2) a new protein able to bind and alter the
function of a biological disease-related target, or (3) a wholly new biological target, that if
therapeutically manipulated, may result in satisfying an unmet clinical need (Dogramatzis, 2010). In
addition, for certain diseases, the diagnostics themselves are a breakthrough, as no adequate or
reliable means of diagnosis exists (Ono, 2013). Recognition of the scientific discoverys therapeutic
or diagnostic potential gives the impetus for an academia-to-industry leap, leading to [the
incorporation of] a new biotech start-up (Dogramatzis, 2010).
The acquisition of intellectual property rights in the form of a patent, securing the rights to the
scientific discovery, are of vital importance. That is, to have any chance of success, the underlying
idea must be protectable by a patent or series of patents; this intellectual property is the fundamental
asset of any biotech enterprise (S. Hall & Alastair, 2009). In addition, extant literature emphasized
the entrepreneurs importance: the absence of a strong visionary leader and/or poor strategy and poor
execution will result in the demise of a start-up before it has a chance to transition to the next
development stage (Shimasaki, 2014a).
In this first phase, funding is makeshift. [...]. The main source of finance is founders sweat
equity [...] and grant funding obtained from the university and government (Ono, 2013). In addition,
now that the biotech start-up has secured a patent, it might be capable of attracting its first follow-on
funding. Subsequently, healthcare biotechnology entrepreneurs [...] attract the research and
development talent needed (Dogramatzis, 2010). Some start-ups establish their own laboratory space;
yet others pursue the virtual biotech business model (Hamilton, 2011) where most of the activities
are contracted out to other organizations, including the laboratories of the [academic institutions]
(Shimasaki, 2014a).
Phase 2: development.
Phase 2a: early development | pre-clinical and clinical I. The fundamentals of the
organization are in place and the start-up will need to further develop the initial scientific discovery.
This phase also marks the start of scientific testing and clinical trials needed to achieve regulatory
authorization; a phase characterized by high risk and uncertainty as it is not uncommon for a
biopharmaceutical product candidate to fail during its clinical trial phase (Dogramatzis, 2010). The
path from initial scientific discovery to a marketable biotech product is lengthy; this is why a biotech
is said to have longer [development] stage than other industries (Malik & Hine, 2011).
The continuation of research and development efforts requires the securement of additional
financing, hence the major focus is on achieving critical product-development milestones using the
early capital raised (Shimasaki, 2014a). This phase marks the start-ups first significant round of
capital funding; [which] at this stage comes from several sources: venture capital, corporate sponsors,
government grants, and continued sweat equity (Ono, 2013).
The business grows and becomes a more complex organization, including employees and
development partners, including strategic alliances. Regarding the latter, Malik and Hine (2011) note
that strategic alliances at a early stages can enhance start-up firms learning capability, reputation and
vertical integration of resources along with legitimacy and hence longevity. In addition, a scientific
advisory board is established to ensure transparency; as the science has advanced in quantum leaps, it
has become increasingly difficult for management and the companys outside business advisors to
10
assess the technical progress of a project, to direct and focus research efforts toward marketable
products, or more importantly, to decide the critical point at which to abandon a line of research
(Ono, 2013).
Phase 2b: mid-stage development | clinical II. The mid-stage of drug development typically
refers to phase II clinical trials; however, late phase I or early phase III clinical trials are sometimes
also included (Hamilton, 2011). This phase is marked by continued organizational growth with
steady and consistent progress being made toward its corporate- and product-development objectives.
Major funding has been secured to advance product development to the next significant milestone, and
greater value is being attributed to the organization (Shimasaki, 2014a). Additional employees are
hired and internal functions are expanded; more of the capabilities and activities that the venture used
to outsource are being integrated into the organization. Preliminary meetings [...] with potential
partners and public relations are resulting in some recognition for the company (Shimasaki, 2014b).
Phase 2c: late-stage development | clinical III and regulatory review. Now that the ventures
drug candidate has successfully [completed] mid-stage trials, its value greatly increases, opening up
the possibility of an acquisition or IPO and a handsome return for investors (Hamilton, 2011).
Whereas companies who invested early development time in diagnostic products may begin to see
cash flow from the sale of these products beforehand (Ono, 2013), ventures developing just a
treatment product are capable of reaping the payoff only after successful product approval. Regarding
the latter, the biotechnology sector is subject to an intricate body of regulations. Consequently, besides
scientific expertise in the field of genetic engineering, successful navigation of this phase requires a
high level of proficiency in the respective regulatory disciplines (Wellons & Ewing, 2007).
The lengthy clinical trials and regulatory processes cause the ventures burn-rate to increase
(Shimasaki, 2014a) and hence by now the company has completed a second or third round of venture
capital financing and if market conditions permit, the company is contemplating an initial public
offering (Ono, 2013). In addition, corporate alliance deals structured as licensing transactions, codevelopment agreements, joint ventures, or sales and marketing alliances play an integral role in many
growth strategies for biopharmaceutical companies (Tsai & Erickson, 2006). This phase in the
biotechs life cycle culminates with launching the product into the market. Now that the organization
has an approved, marketable product, it gains increased attention from outside investors as well as
large pharmaceutical companies seeking to acquire promising innovative products.
Phase 3: expansion.
Phase 3a: early expansion. An organization in this stage has a marketable product; hence the
venture seeks to scale up production expand the market for its product. This is essential as new
products must capture significant portions of the market in their early years. There is no room for the
11
slow building of market acceptance and upgrading of existing product lines, as has been the
experience with computers and advanced medical equipment (Ono, 2013). This is why the biotech
start-ups growth phase is said to be steeper compared with those of other industries (Malik & Hine,
2011).
Phase 3b: late expansion and maturity. This stage encompasses production and sales [...] by
the maturing company or perhaps as the merged or acquired division of a larger, established entity
(Ono, 2013). Though the clinical trials have already been completed and the product is on the market,
business challenges persist as the company shepherds its products, builds its capital, and looks for the
next innovation, application or market (Wellons & Ewing, 2007). Specifically, large-scale
production issues (Ono, 2013) and non-domestic market entry are now a reality. This raises the need
for additional capital as well as corporate partnerships.
Phase 4: decline. The end of the maturity stage represents crossroad. Following years of
successful commercial presence, the biopharma may reach its peak sales, complete with strong R&D
and commercial portfolios, several foreign subsidiaries and a large global workforce (Dogramatzis,
2010). If the organization is capable of [preserving] its entrepreneurial spirit, (Churchill & Lewis,
1987), the organization will maintain its consistent stance and it will be a formidable force in the
market. If not, it may enter a [last] stage of sorts: ossification (Churchill & Lewis, 1987).
The underlying reasons for a venture taking a trip down mortality lane include successive
failures in the commercial arena, a potential product withdrawal due to unforeseen product side
effects, or a stagnating R&D portfolio (Dogramatzis, 2010). Specifically, first the company or its
products [may] have become irrelevant to the market or that products [may be] nearing the end of their
life cycle (Shimasaki, 2014a). The notion of an ending product lifecycle is rooted in limited-time
intellectual property rights; steering away from the ossification phase requires [extension] of [the
venture] its limited monopoly through additional product applications and new follow on products
(Wellons & Ewing, 2007). Second, side effects or dangers [may be] discovered in the course of [the
drug] its use (Wellons & Ewing, 2007), forcing the business to recall products and cease sales.
2.4 Biotechs Financial Lifecycle
Financial investment is sought by start-ups from internal as well as external sources and
includes three main categories: personal investments (savings, friends/relatives), debt finance (bank
loans and government guaranteed loans), equity finance (business angel and venture capital funds), or
a mix of all three (Jones & Macpherson, 2013). In investigating small and medium sized enterprise
financing, researchers generally adopt corporate finance-related theoretical approaches, especially
pecking-order (Ou and Haynes, 2006; Diamond, 1989; Mac an Bhaird and Lucey, 2010) and agency
theories (Chittenden et al., 1996; Michaelas et al., 1999), and to a lesser extent trade-off theory
12
(Sogorb Mira, 2005) (Bhaird & Lucey, 2011). Studies on SME financing adopting these approaches
are criticized for [viewing] firm financing as a static process, rather than a dynamic, ever-changing
progression. In general, these studies to not explicitly address how the stage in a firms lifecycle
influences capital structure (Bhaird & Lucey, 2011).
On the contrary, literature on capital structure theory acknowledges that entrepreneurial
financing choices evolve with the changing characteristics of their venture (Storey & Greene, 2010)
(Jones & Macpherson, 2013). That is, a firms funding requirements vary significantly over the
course of its lifecycle along with access to various sources of financing (Bhaird & Lucey, 2011). Yet,
there is a lack of scholars researching the sorts of financing employed at the various phases in the
organizational lifecycle (Hussain & Matlay, 2007).
Similar to the organizational lifecycle, the financial lifecycle outlines firm resourcing, i.e.,
sources of finance, across various development phases of the organization while [incorporating]
elements of trade-off, agency (Jensen and Meckling, 1976) and pecking order theories (Myers, 1984;
Myers and Majluf, 1984) (Bhaird & Lucey, 2011). Jones and Macpherson (2013) delineate a
financial lifecycle framework, outlined in exhibit 9.2.2 (appendix 9.2).
The commonly held view is that nascent and start-up firms have difficulty in accessing
external finance (Bhaird & Lucey, 2011). There are two key reasons the financing of early-stage
ventures is so problematic: uncertainty (B. Hall & Lerner, 2009; Jones & Macpherson, 2013) and
information asymmetries (Bhaird & Lucey, 2011; Huyghebaert & Van De Gucht, 2007; Jones &
Macpherson, 2013). The former is caused by insecurities regarding the viability of entrepreneurial
opportunities, including research and development insecurities (Hall & Lerner, 2009; Zhang, Soh, &
Wong, 2011); the latter arises when external resource providers dont possess the same intelligence
about the quality of an entrepreneurial opportunities as the entrepreneur(s).
An implication of the high levels of perceived uncertainty and information asymmetries is the
existence of funding gaps; these arise where businesses are unable to access finance that they could
use productively (Cressy 2002, OECD 2009) (Jones & Macpherson, 2013). In the early stage of a
venture this funding gap is also referred to as the valley of death, i.e., the gap between the technical
invention or market recognition of an idea and the efforts to commercialize it (Markham, 2002).
Consequently, in the early stage, entrepreneurs largely rely on interpersonal networks and resource
their businesses through financial bootstrapping methods (Jones & Macpherson, 2013), including
personal savings as well as funds from family, friends, and fools (Kotha & George, 2012).
In general, as a young ventures progresses from seed to start-up to early growth, the venture
becomes less reliant on personal funding: uncertainty and information asymmetries gradually drop and
the business starts to generate stable cash flows, which enhances the development of a record of
13
accomplishment useful for future access to [external] finance (Frank et al., 2010) (Jones &
Macpherson, 2013), and enables the organization to source investment finance [...] from retained
profits (Bhaird & Lucey, 2011). Yet, it is important to emphasize that SME financing cannot be
encompassed in a [...] universally applicable model (Gregory et al., 2005) (Bhaird & Lucey, 2011).
That is, the stage of the business is not the only determinant re financing patterns; finance strategies
for firms differ according to the type of entrepreneurial venture (Jones & Macpherson, 2013),
individual characteristics of the distinct venture, as well as the entrepreneur (e.g., growth aspirations
and risk propensity).
The financial lifecycle of a high-technology venture has distinct characteristics; a unique
feature of biotechnology is that biotechnology firms have no commercial product on which to draw
revenues for a substantial time period (Audretsch, 2001). An implication of the lengthy and capitalintensive path from initial scientific discovery to marketable product is that entrepreneurs rarely have
enough personal investment to fund expensive innovations (Jones & Macpherson, 2013), nor can
research and development be backed internally, i.e., financed from retained profits. Consequently, for
small, independent biotech companies with no marketed products, the only option is to fund R&D
using external sources of capital (Hamilton, 2011), implying that young biotech ventures are
dependent on external finance unlike any other type of start-up.
Compared with the generic financial lifecycle model, high-technology firms have a
substantially higher probability of acquiring external equity at a relatively early stage of venture
development (Jones & Macpherson, 2013). Backers of these high-risk investments generally include
angel investors, venture capitalists, institutional investors, as well as venture lending businesses
(Nofsinger & Wang, 2011). Nonetheless, access to these sources is still problematic for biotech
ventures. Characterized by an expensive and lengthy research and development process, as well as
high failure rates, investments in biotechnology are considered very high-risk investments; thus the
evaluation of success or whether to invest or not (Audretsch, 2001) is deemed complicated.
Problematizing access to external finance even more are the severe information asymmetries
associated with new technologies (Jones & Macpherson, 2013). That is, the underlying science is
typically so sophisticated that only genuine experts are capable of evaluating it. Coalescing the high
degree of uncertainty combined with asymmetric knowledge (Audretsch, 2001) with the notion that
perhaps the most important characteristic defining small business finance is information opacity
(Berger & Udell, 1998) (Bhaird & Lucey, 2011), it does not take a genius to envisage that many
early-stage biotech companies face a significant funding gap (Miller, 2009). Securing external
finance is a rather bumpy, especially in the transition from the first to the second stage (early stage
equity financing gap), when most business ideas fail and risks are too high even for venture capitalists
to assume (Papadimitriou & Mourdoukoutas, 2002). Similar to other industries, this is the gap
14
between early and follow-on financing. [...]. The companies suffering most from this funding gap are
in critical development phases, where product candidates have emerged but financial support for
proof-of-concept clinical studies is lacking. (Gruber, 2009).
Yet, a key dissimilarity of the biotechnology financial lifecycle compared with the generic
model is that biotech start-ups are plagued by another funding gap. Securing external financing is also
bumpy in the mid-stage development, referring to phase II clinical trials; however, late phase I or
early phase III clinical trials are sometimes also included (Hamilton, 2011). This second valley of
death is a reflection of the vast number of companies that are unable to raise the needed capital to
progress into the clinic (Miller, 2009). A thorough analysis of this second funding gap and the
rationale behind its existence is beyond the scope of this dissertation; nonetheless, in short the
reasoning is that the mid-stage of drug development is a particularly challenging time to raise capital
as there is minimal clinical data, yet mid-stage trials require large amounts of capital and have
relatively high attrition rates (Hamilton, 2011), an unattractive combination for investors. As the
biotech venture passes through the stages of the product lifecycle, it is de-risked [...]. In other words,
the probability of successful approval and commercialization of a drug goes up with each successful
clinical trial (Miller, 2009). An implication is that if a biotech product successfully progresses
through these mid-stage trials, its value skyrockets (Hamilton, 2011); pharmaceutical companies
typically pay biotech licensors a midpoint value of ~$220 million for Phase III drugs, compared with
only ~$65 million for drugs in Phase I clinical trials (Hall & Alastair, 2009).
2.5 Sources of Finance
It should be noted that this dissertation is not an exhaustive examination of all biotechs
potential financing strategies. Rather, it will highlight only two: first, the source of finance that
overshadows the financial lifecycle of a biotech start-up, i.e., venture capitalists (Champenois, Engel,
& Heneric, 2006), where venture capital is defined as independent, professionally managed,
dedicated pools of capital that focus on equity or equity-linked investments in privately held, high
growth companies (Gompers & Lerner, 2001); second, the financing strategy that is considered
unsuitable for high-tech entrepreneurs (Freel, 2007; Jones & Macpherson, 2013), also the lynchpin of
this study, i.e., commercial bank loans.
2.5.1 Venture capital.
2.5.1.1 The venture capitalists perspective. An implication of being categorized into high
risk-high return firms (Tan & Lim, 2007) (Malik & Hine, 2011) is that venture capital is one of the
few matching stratagems for biotech start-ups to source external finance (Champenois et al., 2006;
Van Auken, 2002). The reason venture capitalists are particularly suitable as equity financiers of
biotech start-ups is twofold. First, biotechs large capital requirements often exceed the capabilities of
15
other equity investors, including business angels (Ollig, 2001). On the contrary, venture capitalists
have superior financial capabilities, being able to realize greater equity investments (Jones &
Macpherson, 2013).
Second, aforementioned, a high-technology industry as biotech is characterized by weighty
information asymmetries. To overcome the problem of [information asymmetries], providers need a
lengthy due-diligence process to access relevant information about the entrepreneur, the firms
scientific knowledge and intellectual property rights (Jones & Macpherson, 2013) issues that the
venture capitalist is best in class at overcoming. That is, venture capitalists their raison detre [is
viewed] as their ability to reduce informational asymmetries (R. Amit, Glosten, & Muller, 1990),
enabled by their sectoral specialism (Amit, Brander, & Zott, 1998; Colombo, Grilli, & Verga, 2007;
Jones & Macpherson, 2013). Yet, emphasis should be placed on reduce in the preceding sentence,
i.e., information asymmetries cannot be eliminated entirely (Raphael Amit et al., 1998). In addition to
specialization, risk pooling and risk diversification are often recalled arguments to derive advantages
of [venture capitalists] over single investors (Chan, 1983; Amit et al., 1998) (Champenois et al.,
2006).
2.5.1.2 The biotech entrepreneurs perspective. Whereas venture capital not absolutely
necessary to facilitate high technology entrepreneurship, well-developed venture capital networks
provide tremendous incentives for entrepreneurship (Florida & Kenney, 1988) through active
interference with the biotech ventures management; the VCs leverage their experience and networks
as to support the biotech venture (Florida & Kenney, 1988; Repullo & Suarez, 2004).
Yet, simultaneously venture capitalists are also focal point of criticism and distrust; despite
providing much needed capital, there is a belief that VC money brings problems as well (Hamilton,
2011), including undervaluation, emphasis on fast exit routes, and strong management controls. Yet,
these tensions between the entrepreneur and the financier are considered somewhat natural; typically,
the outside money people are looking for speedy returns on investment. Inventors, on the other hand,
and particularly academic inventors, are often driven by an obligation to complete fully the necessary
research without shortcuts that could cause professional embarrassment (Wellons & Ewing, 2007).
Despite considered natural, tensions between the venture capitalist and the biotechnology
entrepreneur raise the desire for alternative forms of financing biotech drug development that rely to
a lesser extent on the issuance of dilutive equity [while] enabling companies to pursue a rational,
robust path to proof of concept (S. Hall & Alastair, 2009). Consequently, biotech ventures are
seeking unorthodox financing sources, or [structure] their company so as to keep the need for VC
money to a minimum [e.g., by focusing] on partnering with established biopharmaceutical firms early
on using licensing deals to support the capital needs of the start-up (Hamilton, 2011).
16
2.5.1.3 Venture capital and the financing gap(s). Venture capitalists conduct is in line with
the aforementioned concept of the early stage financing gap; the generally accepted notion is that
venture capitalists are reluctant to finance technology-based companies at a very early stage (Bottazzi
and Da Rin 2002) (Jones & Macpherson, 2013) and instead prefer investing after a Phase I trial has
yielded some clinical data (Miller, 2009). The conception of biotechs second funding gap, set at the
mid-stage development, is in line with venture capitalists comportment too; many venture capitalists
tend to concentrate on later development stages and avoid the highly risky pre-clinical to phase II
stages (Hamilton, 2011). Consequently, venture capitalists focus on late-stage ventures, i.e., biotech
start-ups with clinically advanced products (Champenois et al., 2006; Hall & Alastair, 2009).
Interestingly, at odds with the consensus of the existence of an early-stage financing gap in
biotech, Thomas and Wessel (2015) observe the presence of venture capitalists as early as during the
seed phase. Most of the Series A funding of new startups has gone toward early stage assets (drug
discovery, preclinical, and Phase 1), and this has increased over the past five years. Further, the
majority of the early stage financings went to discovery/preclinical (~75%) vs Phase 1 (Booth, 2015).
These findings are at odds with the often-heard difficulties associated with securing early-stage
financing, and in fact question the generally accepted perception of the existence of the early stage
valley of death as a scientific discovery makes the academia-to-industry leap. A potential
rationalization of these opposing verdicts is that Grubers (2009) findings are based on a study
conducted in Europe, whereas Thomas and Wesel (2015) their research is United States-based;
cultural alterations regarding entrepreneurship and private equity could explicate the observed
differences.
2.6 Commercial Banks
2.6.1 The financial institutions perspective: constraints. A second implication of
profound technological uncertainty [being] a key characteristic of biotechnology (Rajamaki, 2008)
and the lengthy development pathway is that debt is considered an inadequate financing strategy for
high-tech entrepreneurs. This notion is supported by empirical evidence indicating that hightechnology firms have a lower likelihood of being granted a loan compared to firms with a lower
research and development intensity (Freel, 2007). Whereas debt finance comes in multiple forms, the
main source of capital debt (in terms of the amount borrowed) for entrepreneurs is bank loans (Jones
& Macpherson, 2013). Consequently, commercial bank loans, the lynchpin of this dissertation, will be
the sole form of debt financing examined.
Commercial banks are geared towards risk-alleviating loans. At the other end of the spectrum
we find start-ups, for which debt financing is often unavailable or highly unattractive (Hamilton,
2011). That is, start-up loans are considered high-risk due to liabilities of newness, lack of prior
financial history, limited business experience and untested markets (Shane and Stuart 2002) (Jones &

17
Macpherson, 2013). Aforementioned, compared to other industries early-stage high-technology

ventures risk is perceived even higher due to severe information asymmetries (Bhaird & Lucey, 2011;
Huyghebaert & Van De Gucht, 2007; Jones & Macpherson, 2013) and uncertainty related to research
and development; both tend to be greatest at the beginning of a research program or project (Hall &
Lerner, 2009). Besides information asymmetries and uncertainty, lack of sufficient collateral value
(Carpenter and Petersen, 2002) (Champenois et al., 2006) confounds the provision of financial
resources. Consequently, the allocation of commercial bank loans depends on the readiness of the
financial institutions (private commercial banks, saving banks, and credit co-operatives) to take over
fully or partly the default risk (Champenois et al., 2006).
In addition to uncertainty and information asymmetries, there is another mismatch between
commercial bank lending and high-technology start-ups. First, at an early stage, banks generally
provide only small amounts of capital (Huyghebaert & Van De Gucht, 2007). Yet, biotechnologys
research and development process requires large investments early on. Second, banks typically finance
early-stage ventures with short-term debt, in an attempt to retain more control over the firm and its
investment decisions. [...]. [These] short-term loans put [...] pressure on entrepreneurs to pay-off debts
from internally generated cash (Jones & Macpherson, 2013). Yet, due to biotechs lengthy research
and development path these financial resources are required over a long period of time (Champenois
et al., 2006), i.e., the start-up wont generate cash for years (Wellons & Ewing, 2007) and thus it wont
be able to pay-off the short-term loans.
2.6.2 The financial institutions perspective: removing constraints. Prima facie there are
two ways to make debt a more suitable financing strategy for biotechnology start-ups: first,
diminishing information asymmetries between the entrepreneur and the bank employee; and second,
getting out of the ivory tower, pursuing less risky investments.
2.6.2.1 Less risky investments.
Development stages and milestones. With decisions under risk, decision makers know all
possible outcomes and the possibility of each one of them; with decisions under uncertainty, neither
the number of possible outcomes nor the probability distribution is known (Rasmussen & Srheim,
2012) and entrepreneurial endeavor takes place under the latter category (Knight, 1921). As
delineated in section 2.2, the biotechnology product development cycles consist of stages; and the
most direct method to alleviate risk is to invest in later development stages (Hamilton, 2011). The
alleviation of risk is reflected in biotechnology start-ups valuation, e.g., legacy pharmaceutical
companies typically pay biotech licensors a midpoint value of ~$220 million for Phase III drugs,
compared with only ~$65 million for drugs in Phase I clinical trials (S. Hall & Alastair, 2009).
Related to the product development stages is the concept of product development milestones; within
these [product development] stages there are value-enhancing steps called product development

18
milestones [i.e.,] measurable accomplishments that incrementally move a product closer to

commercialization and incrementally reduce development risk (Shimasaki, 2009) and consequently
product development milestones are often seen as the Holy Grail for a startup venture, in that they
validate the young company (Tscherning et al., 1999). An overview of product development
milestones of both treatments and analytics and tools is listed in appendix 9.4.
Collateral. The very nature of entrepreneurship prevents start-ups and their financiers from
writing complete contracts that specify the obligations for all relevant conceivable future
contingencies (Audretsch & Lehman, 2004). Combined with biotechnologys low odds for success
i.e., a 20 percent likelihood for a compound to advance from initiation of phase 1 trials to market
approval (Tsai & Erickson, 2006) this implies a clear urge among financiers to compensate or
control the risk of losing their investments.
A commonly-used method to mitigate the negative effects of [information asymmetries]
(Raphael Amit et al., 1998) is the use of collateral to secure bank loans. This risk-control mechanism
implies that the creditor receives the control rights over the firm and its assets [...] when the project
fails or the credit is not repaid within a certain time (Audretsch & Lehman, 2004). Not particularly
surprisingly then, is empirical evidence indicating a positive relationship between collateral and risk:
riskier than average firms tend to borrow on a secured basis, the average secured loan tends to be
riskier than the average unsecured loan, and banks which make a higher fraction of unsecured loans
tend to have riskier portfolios (Berger & Udell, 1990).
Yet it is to be noted that entrepreneurs start-ups often lack assets (R. Amit et al., 1990).
Second, not any asset is qualified to secure a bank loan, as banks are suspicious of intangibles, things
that cant be touched or seen and of items with short or passing lives. So banks are likely to ask as the
basis for security tangible (rather than intangible) and fixed (rather than current) assets (Cressy,
2007). Consequently the biotechnology start-up with the virtual business model, implying the
absence of tangible and fixed assets, might not possess qualified assets. Nonetheless the absence of
assets is impermanent, as at some point in time virtual companies grow and may need dedicated
laboratory and office space in order to continue their pace of progress toward product development
(Shimasaki, 2014a).
2.6.2.2 Diminishing information asymmetries. Failure to communicate effectively with
potential investors means that entrepreneurs face the risks of funders misinterpreting the information
(Jones & Macpherson, 2013). In turn, the consequent asymmetric information can lead to debt
infeasibility and preferred equity usage (Trester, 1998). This implies a second strategy to make bank
loans a more suitable financing strategy for biotechnology start-ups: a [reduction of] the degree of
asymmetric information (Shane, 2008). This notion supported by (Bhaird & Lucey, 2011),
19
concluding that firms acquire increased access to financing options, especially debt financing, as
information asymmetries dissipate over time.
2.6.3 The entrepreneurs perspective on debt. There can be vastly different ties, values,
and benefits that come with each investor who puts that dollar into the company (Shimasaki, 2014a)
concerning debt and equity, the tradeoff is between (dilution of) ownership and managerial input;
i.e., with bank finance, the entrepreneur keeps full control of the firm and has efficient incentives to
exert effort; with venture capital finance [...] the entrepreneur benefits from the VC's managerial input
but must surrender partial ownership of the venture (de Bettignies & Brander, 2007). Regarding the
entrepreneurs choice of finance, the pecking order hypothesis posited by Myers and Majluf (1984)
predicts that information asymmetry between managers and investors creates a preference ranking
over financing sources; beginning with internal funds, followed by debt, and then equity (Leary &
Roberts, 2010).
In light of the question whether the preference of debt over equity also exists among
biotechnology start-ups, it is suggested that the pecking order hypothesis may not be fully followed
by the biotechnology small firms (Ullah, Abbas, & Akbar, 2010). First, it is insinuated that banks
are incapable of adequately financing innovative firms, especially high-tech start-ups. Rather, venture
capital has proved to be a superior form of finance in innovative industries (Audretsch & Lehman,
2004). Second, entrepreneurs employ different levels of risk-taking, which has implications for their
willingness to take on debt (Jones & Macpherson, 2013). Biotechnologys substantial level of
research and development uncertainty (i.e., likelihood of failure) and lengthy development process are
potentially troublesome regarding repayments of the loan, consequently increasing risk associated with
debt financing.
20
3. Hypotheses
3.1 Product Development Milestones
One of the key reasons the financing of early-stage ventures is so problematic is uncertainty
(B. Hall & Lerner, 2009; Jones & Macpherson, 2013), caused by insecurities regarding the viability of
entrepreneurial opportunities as a result of research and development insecurities (Hall & Lerner,
2009; Zhang, Soh, & Wong, 2011). That is, in any of [biotechnologys] development phases,
elaborate and expensive studies may fail to achieve their endpoints, potentially leading to premature
closure of the entire development program (Gruber, 2009). As the biotech venture passes through the
stages of the product lifecycle, it is de-risked [...]. In other words, [uncertainty gradually drops and]
the probability of successful approval and commercialization of a drug goes up (Miller, 2009).
Yet, unless the risk-returns of the investment can be accurately evaluated [...], resourceproviders are at risk of losing their investments (Shane and Stuart 2002) (Jones & Macpherson,
2013). A compatible method to evaluate research and development risk is through product
development milestones; within [product development] stages there are value-enhancing steps called
product development milestones [i.e.,] measurable accomplishments that incrementally move a
product closer to commercialization and incrementally reduce development risk (Shimasaki, 2009)
and consequently product development milestones are often seen as the Holy Grail for a startup
venture, in that they validate the young company (Tscherning et al., 1999). Hence:
H1:
Product development milestones are related to sources of finance
3.2 Collateral
The high levels of research and development uncertainty associated with biotechnology startups imply a clear urge among financiers to compensate or control the risk of losing their investments;
a commonly-used method is the use of collateral to secure bank loans, implying that the creditor
receives the control rights over the firm and its assets [...] when the project fails or the credit is not
repaid within a certain time (Audretsch & Lehman, 2004). Not particularly surprisingly then, is
empirical evidence indicating a positive relationship between collateral and risk (Berger & Udell,
1990).
Yet, not all assets are qualified to secure bank loans, as banks are suspicious of intangibles,
things that cant be touched or seen and of items with short or passing lives. So banks are likely to ask
as the basis for security tangible (rather than intangible) and fixed (rather than current) assets (Cressy,
2007). Whereas some biotechnology start-ups establish their own laboratory space, others pursue the
virtual biotech business model (Hamilton, 2011) where most of the activities are contracted out to
other organizations (Shimasaki, 2014a), i.e., implying the absence of asset qualified as collateral.
21
Nonetheless the absence of tangible and fixed assets is impermanent, as at some point in time virtual
companies grow and may need dedicated laboratory and office space in order to continue their pace of
progress toward product development (Shimasaki, 2014a). Thus:
H2:
Biotechnology start-ups proprietorship of tangible and fixed assets is related to sources of

finance
3.3 Analytics and Tools-Products

Severe mismatches between commercial bank lending and high-technology start-ups exists.
First, at an early stage, banks generally provide only small amounts of capital (Huyghebaert & Van De
Gucht, 2007) whereas biotechs research and development process requires large investments early on.
Second, banks typically finance early-stage ventures with short-term debt [...]. [These] short-term
loans put [...] pressure on entrepreneurs to pay-off debts from internally generated cash (Jones &
Macpherson, 2013). Yet, due to biotechs lengthy research and development path these financial
resources are required over a long period of time (Champenois et al., 2006), i.e., the start-up wont
generate cash for years (Wellons & Ewing, 2007) and thus it wont be able to pay-off the short-term
loans.
Yet, research and development timeline and associated costs of the analytics and tools-class of
biotechnology products vary from those associated with the treatments-class, being more favorable
from the perspective of commercial bank lending. First, it is expected to complete [the discovery]
stage and subsequent ones much quicker (Shimasaki, 2009) and at lower average costs. Second, the
research and development pathway of analytics and tools includes a proof-of-concept relatively early
on; this is not necessarily a prototype but rather proof, that can be independently verified, that the
idea or concept would be valid in the real world (Shimasaki, 2009). Consequently:
H3:
Biotechnology start-ups developing an analytics and tools-product are more eligible for bank
loans compared to those start-ups developing a treatment-product.
3.4 Information Asymmetries

Besides uncertainty, one of the key reasons the financing of early-stage ventures is so
problematic is information asymmetries (Bhaird & Lucey, 2011; Huyghebaert & Van De Gucht, 2007;
Jones & Macpherson, 2013). These asymmetries arise when external resource providers dont possess
the same intelligence about the quality of an entrepreneurial opportunities as the entrepreneurs.
Specifically, entrepreneurs possess more information about their own abilities and the prospects of
their ideas than external resource-providers (Jones & Macpherson, 2013). Information asymmetries
are especially weighty in a high-tech industry as biotechnology, where the underlying science is
typically so sophisticated that only genuine experts are capable of evaluating it.
22
Opposed to venture capitalists, whose raison detre [is viewed] as their ability to reduce the
cost of informational asymmetries (R. Amit, Glosten, & Muller, 1990), commercial banks generally
lack sectoral specialism, i.e., sector-specific selection and monitoring abilities, to reduce the severe
information asymmetries. Failure to communicate effectively with potential investors means that
entrepreneurs face the risks of funders misinterpreting the information (Jones & Macpherson, 2013).
In turn, the consequent asymmetric information can lead to debt infeasibility and preferred equity
usage (Trester, 1998). Hence:
H4:
Information asymmetries obstruct communication between biotechnology entrepreneurs and

commercial bank employees.
3.5 Pecking Order Theory

The tradeoff between debt and equity primarily concerns (dilution of) ownership and
managerial input. The biotechnology industrys principal source of external finance, venture capital,
[provides] tremendous incentives for entrepreneurship (Florida & Kenney, 1988) through active
interference with the biotech ventures management (Repullo & Suarez, 2004). Yet, venture capitalists
are also focal point of criticism and distrust; including undervaluation, emphasis on fast exit routes,
and strong management controls.
Pecking order theory posits that information asymmetry between managers and investors
creates a preference ranking over financing sources; beginning with internal funds, followed by debt,
and then equity (Leary & Roberts, 2010). Nonetheless, it is suggested that the pecking order
hypothesis may not be fully followed by the biotechnology small firms (Ullah, Abbas, & Akbar,
2010). First, it is insinuated that banks are incapable of adequately financing innovative firms,
especially high-tech start-ups. Rather, venture capital has proved to be a superior form of finance in
innovative industries (Audretsch & Lehman, 2004). Second, biotechnologys substantial likelihood of
failure and lengthy development process are potentially troublesome regarding repayments of the loan,
increasing risk associated with debt financing; thus entrepreneurs employing a depressed level of risktaking are possibly not alacritous to take on debt (Jones & Macpherson, 2013). Thus:
H5:
Biotechnology entrepreneurs have a preference for equity over debt.
23
4. Methodology
4.1 Research Design
The developmental state of the field of bank financing of biotechnology entrepreneurship can
be labeled as intermediate; intermediate theory research draws from prior work -often from separate
bodies of literature- to propose new constructs and/or provisional theoretical relationships
(Edmondson & Mcmanus, 2007). In particular, this dissertation marries insights from biotechnology
entrepreneurship with theory on entrepreneurial finance, specifically bank financing, to propose
provisional explanatory means to enhance the biotechnology entrepreneur-commercial bank
relationship.
In case theory is in an intermediary phase of development, a blend of both qualitative and
quantitative research is frequently applied; consequently the empirical research of this dissertation will
be mixed method. Research situated in intermediate theory [includes] initial tests of hypotheses
enabled by prior theory (e.g., Edmondson, 1999) and focused exploration that generates theoretical
propositions as output (e.g., Eisenhardt, 1989b). The latter may include very preliminary quantitative
analysis to reinforce the logic underlying the qualitatively induced propositions (Edmondson &
Mcmanus, 2007). A chief advantage of a mixed method approach is that analysis of both qualitative
and quantitative data increases confidence that the researchers explanations of the phenomena are
more plausible than alternative interpretations; [and] the combination of qualitative data to help
elaborate a phenomenon and quantitative data to provide preliminary tests of relationships can
promote both insight and rigor (e.g., Jick, 1979; Yauch & Steudel, 2003) (Edmondson & Mcmanus,
2007)
A three-month in-house research internship at the Small and Medium Sized Enterprisedepartment at Rabobank Amsterdam comprises the qualitative part of this dissertation. This
ethnography-like study consists of exploratory investigations in the form of informal, unstructured
interviews with both internal and external players. The former category refers to Rabobank employees
at different levels all throughout the organization; the latter category refers to current and potential
business clients, partners (e.g., universities and government institutions) and other venture financiers
(e.g., venture capitalists).
The quantitative part of this study is conducted through self-administered online surveys. The
survey consists of 26 questions, ranging from general information about the venture to hypothesisspecific intelligence, and includes a variety of types of questions: both open-ended and closed
questions; the latter includes single- (i.e., dichotomous and scaled) and multiple answers questions.
The entire questionnaire can be found in appendix 9.3. The population consists of small and mediumsized medical biotechnology ventures in the Netherlands. A complete list of the entire population, i.e.,
24
all ventures that fit within the aforementioned definition, was compiled through a variety of sources,
including: university technology transfer offices executives, biotechnology clusters (e.g., Leiden Bio
Science Park and other regional BioCentre initiatives), and online resources (e.g., Dutch Life Science
Database, HollandBio, and LinkedIn). The search yielded a total population of 127 ventures; the
thorough search gives the author impetus to believe this number is a close approximation of the actual
population size. At first, all ventures were sent an email with a brief introduction about the research
and a link to the survey; later on the ventures were approached through follow-on telephone calls and
reminder emails. In total, 32 ventures completely filled out the survey, representing 25.2 percent of the
entire population.
4.2 Operationalization
4.2.1 Operationalization of the variable sources of finance
The variable sources of finance obtained has been reorganized into two categories: other
sources and bank loans. These categories are associated with a certain degree of risk, i.e., other
sources is associated with medium to high risk, and bank loans with low risk. The categories are
cumulative. The first category includes personal finance; family, friends and fools; bootstrapping
methods; crowdfunding; government/grant funding; business angels; and venture capital. The second
category includes bank loans per se, and potentially sources of finance of the preceding category,
other sources. The rationale supporting this cumulative categorization is the entrepreneurship
phenomenon stacked funding, implying that start-ups source financial capital from multiple sources;
here it is assumed that a predetermined cycle [is followed] that starts with friends and family (Baker
& Welter, 2015), proceeding to more formal and risk averse sources, e.g., commercial bank lending.
4.2.2 Operationalization hypothesis 1
Hypothesis 1 (i.e., product development milestones are related to sources of finance) is
operationalized through the variables product development milestones (survey questions 11-12) and
sources of finance obtained (survey question 15). The former variable has been classified into two
categories: advanced and under developed. Treatment and analytics and tools milestones are
considered advanced as soon as products have reached the milestone completion of phase II clinical
studies and completion of clinical validation studies, respectively. Regarding the latter variable, i.e.,
sources of finance obtained, the categorization as denoted in the preceding section, 4.2.1, has been
employed. The hypothesis will be accepted/rejected based on tests regarding the relationship between
the variable product development milestones and the variable sources of finance; the product
categories will be tested individually.
25

Hypothesis 2 (i.e., biotechnology start-ups proprietorship of tangible and fixed assets is
related to sources of finance) is operationalized through the variables assets (survey question 23) and
sources of finance obtained (survey question 15). Regarding the variable assets, answers have been
merged: the four answers to this inquiry implying the presence of fixed and tangible assets were
merged into a single answer category (i.e., assets yes) thus making the variable assets dichotomous,
indicating the presence or absence of assets. Regarding the variable sources of finance obtained, the
categorization as denoted in section 4.2.1 has been employed. The hypothesis will be accepted/rejected
based on tests considering the relationship between these two variables.
Hypothesis 3 (i.e., biotechnology start-ups developing an analytics and tools-product are
more eligible for bank loans compared to those start-ups developing a treatment-product) is
operationalized through the variables product category (survey question 8) and sources of finance
obtained (survey question 15). Regarding the variable sources of finance obtained, section, 4.2.1s
categorization has been employed. The hypothesis will be accepted/rejected based on tests regarding
the relationship between these two variables.
Hypothesis 4 (i.e., information asymmetries obstruct communication between biotechnology
entrepreneurs and commercial bank employees) is operationalized through the variables profession
(survey question 3), financial knowledge (survey question 18), and scientific knowledge (survey
question 20). The hypothesis will be accepted/rejected based on sample; the test will distinguish
between information asymmetries on the side of the entrepreneur and on the side of the external
financier.
Hypothesis 5 (i.e., biotechnology entrepreneurs have a preference for equity over debt) is
operationalized through the variables financiers input (survey question 24) and debt preference
(survey question 25). The hypothesis will be accepted/rejected based on sample parameters (e.g.,
mean, standard deviation).
4.3 Data analysis
The data collected from the 32 respondents was analyzed using SPSS. To ensure the findings
are based on valid data, first the data set was thoroughly cleaned, i.e., checked for outliers and
incorrect responses. Regarding the former, the data contains some outliers as a result of measurement
26
variability, including a venture not headquartered in the Netherlands and four ventures established
more than 10 years ago, arguably not strictly meeting the start-up definition as delineated in section
1.2. Yet, these outliers are not an experimental error; thus, bearing in mind the finite sample size and
as not to decrease the sample even further, these outliers have not been removed from the data set.
Regarding the latter, the data set contains several incorrect responses related to the product categories
(i.e., treatment, analytics and tools, and both treatments and analytics and tools). That is,
respondents filled out inquiries regarding a product category that their venture is not involved with
(e.g., where a respondent indicated to be developing only a treatment product, but subsequently did
indicate to have reached a product development phase associated with analytics and tools). These
incorrect responses were cleaned using if [...] then [...]-rules executed through the SPSS Syntax
function, bringing clean versions of these variables to life.
To accept or reject the hypotheses summed up in section 3, this dissertation relies for the
greater part on Chi-Square Tests (Field, 2013). Whereas Chi-Square proved to be quite robust even
with very small samples, (Roscoe & Byars, 2016) working with a relatively small sample does pose
an issue regarding one of the requirements for appropriate use of the Chi-Square test, i.e., a minimum
expected count of 5. That is, incorporating a variable related to bank financing, a financing method
considered highly unusual among biotechnology start-ups, into an already finite sample of
Netherlands-based biotechnology start-ups, makes it difficult to comply with the minimum expected
count. In a response to this handicap, a few have abandoned the use of chi-square, many have
manipulated their data to satisfy the restriction, and some have simply ignored the problem (Roscoe
& Byars, 2016). This dissertation builds on an amalgamation of the latter two. That is, conceding to
the minimum expected count criterion, questions answers have been merged to decrease answers with
a low count; these include survey questions related to age, product lifecycle and development
milestones, sources of finance, and collateral; exact amalgamations are detailed at each of the
applicable hypotheses in the preceding section 4.2.
Yet, despite these efforts, the rate of cells not complying with minimum expected count of 5
remains considerable. Nonetheless this doesnt pose a significant issue per se; the restriction appears
to be an arbitrary one based more upon tradition than either mathematical or empirical evidence [and
evidence] suggests that the common recommendations with respect to minimum expected frequencies
are ultra-conservative and should be relaxed; [consequently] some investigators could be content with
less restrictive limits (Roscoe & Byars, 2016). A consequence of the non-compliance with the
minimum expected count in several instances is that, while the insinuation is correct, significance
levels could potentially be distorted. Yet, this doesnt pose an issue for this dissertation per se: the
mixed method research design as employed by this research its overall purpose [...] is that qualitative
data helps explain or build upon initial quantitative results (Creswell, Plano Clark, et al., 2003). For
example, this design is well suited to a study in which a researcher needs qualitative data to explain

27
significant (or nonsignificant) results (Morse, 1991) (Creswell & Clark, 2007). Consequently,
qualitatively-induced insights allow the author to elaborate on and thereby compensate for flaws in
the hard data.
4.4 Quality of the research: validity, reliability, and generalizability
Consideration must be given not only to the results of the study but also the rigor of the
research, [referring] to the extent to which the researchers worked to enhance the quality of the
studies. In quantitative research, this is achieved through measurement of the validity and reliability
(Heale & Twycross, 2015). The latter implies that the indicator consistently comes up with the same
measurement. [...]. Unreliability can stem from many sources. Poor question wording may cause a
respondent to understand the question differently on different occasions (De Vaus, 2001). The survey
was entirely in English and includes biotechnology and entrepreneurial finance-specific concepts;
consequently, to minimize chances of wrongful interpretation, survey questions were formulated in
plain English, using short sentences, at a basic level, while avoiding jargon as much as possible.
Likewise, asking questions about which people have no opinion, have insufficient information, or
require too precise an answer can lead to unreliable data (De Vaus, 2001). Consequently, the survey
contained notions asking respondents to skip question requiring specific expertise or knowledge, if the
respondent did not possess expertise or knowledge in the respective field, and scale questions included
indifferent as an answer. An implication of the setup of the survey (i.e., the finite presence equaltype questions forming a scale) is that a quantifiable estimate of reliability (i.e., internal consistency)
through Cronbachs alpha is not applicable.
The other quality criterion, validity, defined as the extent to which a concept is accurately
measured (Heale & Twycross, 2015), is fortified in terms of content as well as construct validity.
Regarding the former, a subset of content validity is face validity, where experts are asked their
opinion about whether an instrument measures the concept intended (Heale & Twycross, 2015). To
ensure this, the survey upon which the empirical section if this dissertation has been compiled and
fine-tuned based on insights gained through expert interviews with actors within the field of medical
biotechnology entrepreneurship. Regarding the latter type of validity, evidence that can be used to
demonstrate a research instrument has construct validity [is] homogeneity, meaning that the
instrument measures one construct (Heale & Twycross, 2015). In line with this notion, the
dissertations survey questions have been designed in such a way as to only measure a single
construct.
Another form of validity, external validity the degree to which inferences from a study can
be generalized has been a valued standard for decades (Polit & Beck, 2010). In light of
generalization of research findings it should be noted that the reality is that researchers are usually far
from the ideal [sample size] and will have to work with much smaller samples instead. For a variety of

28
reasons, such as budget, time, or ethical constraints, it may not be possible to gather a large sample. In
some fields of science, [...] sample sizes are small by definition (Rost, 1991) (De Winter, 2013). This
notion holds true in case of this dissertation; written in the short timespan of three months and focused
on biotechnology start-ups in the Netherlands, a population small by definition, the sample, while
representing one-quarter of the entire population, is finite in absolute size. According to the law of
large numbers, a larger sample size implies that confidence intervals are narrower and that more
reliable conclusions can be reached (De Winter, 2013). Consequently one should bear in mind this
dissertations finite sample size while engaging in statistical generalization, i.e., inferring results from
sample to population; making an inference about the unobserved based on the observed (Polit &
Beck, 2010).
Yet, first it should be noted that this dissertations research design, mixed methods research
[...] appears to hold promise for generalizability, [having the ability to] promote confidence in
generalizability in the classic sense (Polit & Beck, 2010). Second, when we give proper weight to
local conditions, any generalization is a working hypothesis, not a conclusion (Cronbach, 1975) and
generalizability should be discussed not as an absolute but as something that exists on a continuum;
[...] the usual question of whether the results of a study can be generalized to other people or settings
should perhaps be replaced with a question of relativity: how much can we generalize the results of the
study? (Polit & Beck, 2010).
29
5. Findings field research

5.1 Sample descriptive
Frequency tables are listed in appendix 9.5. The sample consists of 32 biotechnology businesses, of
which 31 are headquartered in the Netherlands. Of the survey respondents, 20 indicated that their
position within the venture is related to both science and business; 12 indicated that their position
within the venture is strictly related to business; there were no respondents with a position related
exclusively to science. Half, i.e., 50 percent, of the respondents indicated that their venture has been
incorporated five years or less; two ventures have been in business for over 11 years. The bulk of the
ventures has been established by two founders; no venture has been established by more than 5
founders. Including founders of the venture who are still with the firm, approximately half (53.1
percent) of the ventures in the sample currently has five employees or less; 9.4 percent of the ventures
has more than 30 employees.
The majority of the ventures product portfolios contain including products still under
development more than 1 product: 43.8 percent of the ventures has a product portfolio consisting of
two to three products; 31.3 percent four or more products. The majority (56.3 percent) of surveyed
biotechnology ventures product(s) developed or under development can be categorized as
treatment products; analytics and tools product category represents 31.3 percent; and 12.5 percent of
the ventures has developed, or is developing, both one or more treatment product(s) and one or more
analytics and tools product(s). Of the ventures with a treatment product in their product portfolio, 90.9
percent is categorized as high risk (i.e., in the clinical 2 product lifecycle phase or a preceding phase);
of the ventures with an analytics and tools product in their portfolio, 50 percent is classified as high
risk (i.e., in the clinical validation phase or a prior phase).
Respondents were asked to denote the sources obtained. As aforesaid, rather than treating all
sources of finance as distinct, sources have been merged to decrease answers with a low count,
conceding to the minimum expected count criterion. The majority of the surveyed ventures, 59.4
percent, has not secured venture capital nor bank loans; 25 percent has obtained venture capital and
possibly other sources of finance, yet no bank loans. Of the surveyed ventures, 12.5 percent has
secured both venture capital and bank loans and 3.1 percent of the ventures has secured a bank loan
and possibly other sources of finance, yet no venture capital. Only the latter two categories contain
bank loans, bringing the cumulative percentage of businesses that has secured bank finance to 15.6
percent.
Aforesaid, product development milestones (see appendix 9.4) were categorized into two
categories, underdeveloped and advanced (see section 4.2.2). Of both the ventures developing a

30
treatment product and those developing an analytics and tools product, the majority is classified as
underdeveloped: 77.3 and 57.1 percent, respectively. Subsequently, two separate Chi-Square Tests
were conducted for the product categories to examine a potential relationship between the
classifications of product development milestones and the classifications of sources of finance (see
section 4.2.1).
Based on statistical tests employing the categorization of sources of finance listed in section
4.2.1, the asymptotic significance (2 sided) for the treatment category and the analytics and tools
are 0.006 and 0.707, respectively. Accordingly, at a 0.05 significance level the relationship between
treatment product development milestones and sources of finance is significant whereas the
relationship between analytics and tools product development milestones and sources of finance is
not significant. The statistically significant results in exhibit 5.2.1 (Chi-Square Test treatment
development milestones and sources of finance) indicate that there is indeed a relationship between
product development milestones and sources of finance. Specifically, between underdeveloped
product development milestones and other sources of finance sources of finance associated with high
levels of risk, as posited in section 4.2.1 on one hand, as well as between advanced product
development milestones and banks a risk averse source of finance, as stated in section 4.2.1 on the
other hand, the results indicate a correlation.
Source of
finance
Other sources of finance

Banks
Total
Count
%
Count
%
Count
%
Product development milestones

Advanced
Underdeveloped
3
17
60,0%
100,0%
2
0
40,0%
0,0%
5
17
100,0%
100,0%
Value df Asymptotic Significance (2-sided)

Pearson Chi-Square
7.480a 1
0,006
Likelihood Ratio
6,674 1
0,010
Linear-by-Linear Association
7,140 1
0,008
N of Valid Cases
22
a. 3 cells (75%) have expected count less than 5. The minimum expected count is .45.
Exhibit 5.2.1. Chi-Square Test treatment development milestones and sources of finance
Total
20
90,9%
2
9,1%
22
100,0%
Source of
finance
Other sources of finance

Banks
Total
Count
%
Count
%
Count
%
Product development milestones

Advanced
Underdeveloped
5
6
83,3%
75,0%
1
2
17,7%
25,0%
6
8
100,0%
100,0%
31
Total
11
78,6%
3
21,4%
14
100,0%

Pearson Chi-Square
0.141a 1
0,707
Likelihood Ratio
0,144 1
0,704
0,131 1
0,717
N of Valid Cases
14
a. 3 cells (75%) have expected count less than 5. The minimum expected count is 1.29.
Exhibit 5.2.2. Chi-Square Test analytics and tools development milestones and sources of finance
Qualitatively induced insights suggest the appropriateness of a relationship between risk
averse sources of finance and advanced product development milestones. Managing Director Business
Banking at Rabobank Amsterdam argues that start-ups by their very nature force the commercial bank
to let go of the standard criteria used in loan application processes; instead, financial institutions need
to embrace criteria specifically geared toward start-ups and their respective industries, reducing
research and development uncertainty through evaluation and validation of the young biotechnology
venture. Second, Managing Director Business Banking at Rabobank Amsterdam expresses a
preference for staged financing among risk averse financiers. Product development milestones are
well-suited for this; as an incremental milestone is satisfied, research and development risk is
incrementally reduced and refinancing of the biotechnology start-up by the commercial bank can
occur. Director Cluster Development of Leiden Bio Science Park does warn for differing burdens of
proof among scientists, entrepreneurs, and external financiers; perceptions of success potentially
differ significantly.
Based on quantitative evidence supported by qualitatively induced insights, the author
concludes: hypothesis 1 product development milestones are related to sources of finance is
accepted for the treatment product category, but rejected for the analytics and tools product
category.
5.3 Collateral
As denoted in section 4.2.3, the variable assets has been merged into two categories. Of the
surveyed ventures, 56,3 percent has no tangible and fixed assets that can potentially be used as
security for a bank loan, i.e., no inventory, equipment, facilities, or land, whereas 43,8 percent does

32
possess such assets. A Chi-Square Test was conducted to test for a relationship between the presence
or absence of assets and the four classifications of sources of financing the venture has secured, as
denoted in section 4.2.1. Based on statistical tests employing the foregoing categorization of sources
of finance (section 4.2.1), the asymptotic significance (2 sided) is 0,006. Accordingly, at a 0.05
significance level the relationship between assets and sources of finance is significant. The statistically
significant results in Exhibit 5.3.1 (Chi-Square Test assets and sources of finance) show a robust
correlation between bank financing and the presence of tangible and fixed assets.
Assets
No
Source of Other sources of finance Count
finance
%
Banks
Count
%
Total
Count
%
18
100,0%
0
0,0%
18
100,0%
Yes
Total
9
64,3%
5
37,5%
14
100,0%
27
84,4%
5
15,6%
32
100,0%

Pearson Chi-Square
7.619a 1
0,006
Likelihood Ratio
9,488 1
0,002
7,381 1
0,007
N of Valid Cases
32
a. 2 cells (50.0%) have expected count less than 5. The minimum expected count is 2.19.
Exhibit 5.3.1. Chi-Square Test assets and sources of finance

Qualitative acumens support these findings; Investment Manager Life Sciences at Mibiton in
fact provides loans up to 350,000 for start-ups in the life science industries specifically for the
acquisition of equipment. Yet, at Rabobank Amsterdam both Account Manager Business Banking and
Manager Small and Medium Sized Enterprises raise a notion of caution as not all types of assets are
equally worthy to serve as collateral. Consequently, quantitative evidence maintained by qualitatively
induced insights leads the author to conclude: hypothesis 2 biotechnology start-ups proprietorship
of tangible and fixed assets is related to sources of finance is accepted.
5.4 Analytics and tools products
Respondents were asked to indicate the types of biotechnology product their ventures product
portfolio contains, treatments, analytics and tools, or both, including products still under
development. Regarding the latter, all inquiries were related to the ventures most developed product.
Next, in order to assess whether one biotechnology product category is more eligible for bank loans
than another, i.e., to assess the existence of correlation between the product category and source of
financing secured (section 4.2.1) a Chi-Square Test was conducted. The crosstab in exhibit 5.4.1
33
(Crosstab and Chi-Square Test product category and financing) shows an asymptotic significance (2
sided) of 0.274. Accordingly, at the 0.05 significance level the relationship between the product
category and sources of finance is not significant.
Product category
Source of
finance
Total
Other sources of fince Count

%
Bank loans
Count
%
Count
%
Treatments
16
88,9%
2
11,1%
18
100,0%
Analytics and
tools
7
70,0%
3
30,0%
10
100,0%
Both
treatments,
and analytics
and tools
4
100,0%
0
0,0%
4
100,0%
Total
27
84.4%
5
15,6%
32
100,0%

Pearson Chi-Square
2,586a 2
0,274
Likelihood Ratio
2,962 2
0,227
0,016 1
0,898
N of Valid Cases
32
a. 4 cells (66.7%) have expected count less than 5. The minimum expected count is .63.
Exhibit 5.4.1. Crosstab and Chi-Square Test product category and financing
Qualitative insights point in the same direction: Investment Manager Proof of Concept and
Director Technology Transfer Office at University Medical Center Rotterdam both posit that
regardless of the type of product developed, any individual biotechnology start-up is in fact a bubble
up until the clinical validation has been satisfied. The quantitative findings supported by qualitative
insights lead the author to conclude that hypothesis 3 biotechnology start-ups developing an
analytics and tools-product are more eligible for bank loans compared to those start-ups developing
a treatment-product is rejected.
5.5 Information asymmetries
Aforementioned, of the survey respondents, 20 indicated that their position within the venture
is related to both science and business; 12 indicated that their position within the venture is strictly
related to business; there were no respondents with a position related exclusively to science. The
majority (50 percent) of the survey respondents possess proficient knowledge and expertise in the
field of venture financing; followed by basic knowledge and expertise (40.6 percent) and no
knowledge at all (9.4 percent), suggesting the nonexistence of information asymmetries on the side of
the entrepreneur. Regarding the existence of information asymmetries on the side of the external
financier, a majority of 38.7 percent the respondents to some extent disagrees (i.e., somewhat
34
disagree or strongly disagree) whereas 32.3 percent to some extent agrees (i.e., agree or strongly
agree) and 28.1 percent is indifferent; this insinuates the absence of information asymmetries on the
side of the external financier.
Expertise in the field of venture financing
Frequency
Valid
Not at all
Basic expertise/knowledge
Proficient knowledge/expertise
Total
3
13
16
32
Percent
9,4
40,6
50,0
100,0
Valid Percent
9,4
40,6
50,0
100,0
Cumulative
Percent
9,4
50,0
100,0
Exhibit 5.5.1. Frequency table entrepreneurs financial expertise

Communication with external financiers considered as troublesome
Frequency
Valid
Missing
Total
Strongly agree
Somewhat agree
Neither agree nor disagree
Somewhat disagree
Strongly disagree
Total
-99
5
5
9
5
7
31
1
32
Percent
Valid Percent
15,6
16,1
15,6
16,1
28,1
29,0
15,6
16,1
21,9
22,6
96,9
100,0
3,1
100,0
Cumulative
Percent
16,1
32,3
61,3
77,4
100,0
Exhibit 5.5.2. Frequency table troublesome communication with external financier

The survey contained an open question regarding information asymmetries. Among
respondents consensus exists regarding the potential for information asymmetries; respondents posit
that the development of a novel therapy requires broader scientific knowledge to adequately evaluate
the opportunity, yet generic external financiers are neither trained nor experienced to adequately
grasp novel scientific concepts and tend to adhere to existing dogmas, giving rise to the potential for
ill-understood projects. The potential for information asymmetries is acknowledged by interviewees
related (e.g., Senior Account Manager MediciDesk and Managing Director Business Banking) an
unrelated (e.g., Director Cluster Development of Leiden Bio Science Park, Investment Manager Proof
of Concept and Director Technology Transfer Office at University Medical Center Rotterdam) to
Rabobank Amsterdam. Nonetheless, despite the vast potential for information asymmetries, actual
perceived levels of information asymmetries are little. Respondents insinuate improved
communication e.g., more frequent communication, learning-by-doing, and improvement of the
data package and the presentation of the proposition, both content and format and outsourcing of
communication by external financiers e.g., relying on scientifically well-informed experts as
35
potential rationalizations. Consequently, based on quantitative evidence supported by qualitatively

induced insights, the author concludes: hypothesis 4 information asymmetries obstruct
communication between biotechnology entrepreneurs and commercial bank employees is for the
greater part rejected.
5.6 Pecking order theory
Respondents were asked (1) to express their stance regarding whether external financiers
input should be limited to financial resources or not, i.e., whether external financiers should contribute
more than just capital, e.g., have external financiers also contribute to the business in terms of
knowledge and expertise (e.g., managerial or scientific) and provide access to networks; and (2)
whether debt financing has a preference over equity financing, given that debt is non-dilutive (i.e., no
loss of ownership), whereas equity requires the business owners to give up part of their ownership yet
often does bring more than just financial capital, e.g., expertise, network access, et cetera.
Regarding the conception that external financiers should contribute more than merely financial
capital, the bulk of the respondents (75.0 percent) to some extent agrees (i.e., agree or strongly
agree), followed by 21.9 percent of respondents that states to be indifferent and 3.1 percent that
somewhat disagrees; no respondents indicated to strongly disagree. The mean rating is 1.91
(standard deviation 0.856) on a five-point scale, 1 being strongly agree. Vis--vis the notion of a
preference of debt over equity, the majority of the respondents (56.3 percent) to some extent agrees
(i.e., somewhat agree or agree), whereas 34.4 percent to some extent disagrees (i.e., somewhat
disagree or disagree); 9.4 percent of the respondent are indifferent. The mean rating is 3.19
(standard deviation 1.469) on a five-point scale, 5 being agree.
External financiers should contribute more than capital
Frequency
Percent
Valid Percent Cumulative Percent
Valid Strongly agree
12
37,5
37,5
37,5
Somewhat agree
12
37,5
37,5
75,0
7
21,9
21,9
96,9
Somewhat disagree
1
3,1
3,1
100,0
Total
32
100,0
100,0
Exhibit 5.6.1. Frequency table contribution external financiers
36
I would prefer to finance my venture with debt compared with equity

Frequency
Percent
Valid Percent Cumulative Percent
Valid Disagree
7
21,9
21,9
21,9
Somewhat disagree
4
12,5
12,5
34,4
3
9,4
9,4
43,8
Somewhat agree
12
37,5
37,5
81,3
Agree
6
18,8
18,8
100,0
Total
32
100,0
100,0
Exhibit 5.6.2. Frequency table debt preference

University-related interviewees (e.g., Director Cluster Development of Leiden Bio Science
Park) suggest the desire among biotechnology entrepreneurs for alternatives to the dominant source of
external finance in the biotechnology sector, i.e., venture capitalists, as these players are often
associated with turbulent financial capital, whereas especially scientists yearn for more calm capital
as provided by commercial banks. Yet, simultaneously qualitatively induced insights are unequivocal:
commercial banks traditional service portfolio, if not actually rocked to its foundations, is certainly
called in question. That is, virtually all interviewees argue in favor of a more qualitative role for
commercial banks, including business expertise and access to networks. Chief Financial Officer at
Rockstart contends that at the end of the day financial capital isnt most important; inexperienced
entrepreneurs run into business development-related issues (e.g., (Churchill & Lewis, 1987))
management crises) and banks have the potential to assist entrepreneurs in overcoming them by means
of knowledge, network, tools, peer-to-peer mentoring, et cetera. Recapitulated, quantitative evidence
maintained by qualitatively induced insights leads the author to conclude: hypothesis 5
biotechnology entrepreneurs have a preference for equity over debt is for the greater part rejected.
37
5.7 Summary of Findings

Hypothesis
Outcome
1. Product development milestones are related to sources of
Accepted for treatment products;
finance.
Rejected analytics and tools
2. Biotechnology start-ups proprietorship of tangible and fixed
Accepted
assets is related to sources of finance

3. Biotechnology start-ups developing an analytics and tools-
Rejected
product are more eligible for bank loans compared to those

start-ups developing a treatment-product.
4. Information asymmetries obstruct communication between
For the greater part rejected
biotechnology entrepreneurs and commercial bank employees.

5. Biotechnology entrepreneurs have a preference for equity
over debt.
For the greater part rejected
38
6. Discussion
6.1 Discussion of Findings
H1: product development milestones. Interestingly, empirical findings support literaturederived hypothesis 1 product development milestones are related to sources of finance only
partially, i.e., only for the treatment product category. Yet, whereas surprising at first sight, the
operationalization as delineated in section 4.2.2 might rationalize this partial support. That is, product
development milestones for the two distinct product categories were classified as either under
developed or advanced. The partition line between under developed and advanced development
milestones for the treatment product category i.e., treatment milestones are considered under
developed until completion of phase I; and considered advanced from completion of phase II clinical
studies onwards is based on scholars notion of the highly risky pre-clinical to phase II stages
(Hamilton, 2011) and supported by empirical evidence finding that companies typically pay biotech
licensors a midpoint value of ~$220 million for Phase III drugs, compared with only ~$65 million for
drugs in Phase I clinical trials (S. Hall & Alastair, 2009). Yet, literature on analytics and tools is few
and far between as stated in section 2.2.2 and doesnt propose a similar clear-cut partition line for the
analytics and tools product category. Rather, it is merely stated that the research and development
pathway of analytics and tools includes a proof-of-concept relatively early on; this is not necessarily
a prototype but rather proof, that can be independently verified, that the idea or concept would be valid
in the real world (Shimasaki, 2009). Consequently, in an attempt to equate it to the former category,
the author assumed the partition at the analytics and tools-milestone completion of clinical validation
studies, whereas in reality the partition might not be as clear-cut as is the case with the treatment
product category.
H2: collateral. Hypothesis 2 biotechnology start-ups proprietorship of tangible and fixed
assets is related to sources of finance is supported by empirical findings; the statistically significant
results show a robust correlation between (1) bank financing and the presence of tangible and fixed
assets, and (2) other sources of financing and the absence of tangible and fixed assets. These findings
are in line literature-derived implications, theorizing a positive relation between risk and collateral.
Of the surveyed ventures, a majority of 56,3 percent has no tangible and fixed assets that can
potentially be used as security for a bank loan, i.e., no inventory, equipment, facilities, or land. Yet,
current literature conjectures that a virtual company business model is not a permanent or long-term
business model choice for companies (Shimasaki, 2014a). A conceivable justification lies in the
existence of the funding gap(s) as stated in section 2.5.1.3. That is, as a consequence of the shortfall in
financial capital, biotechnology start-ups need to delay further capital requirements for as long as
possible (Hamilton, 2011), forcing biotechnology start-ups to stick to the virtual business model for a
prolonged period of time.

39
H3: analytics and tools-products. Hypothesis 3 biotechnology start-ups developing an

analytics and tools-product are more eligible for bank loans compared to those start-ups developing a
treatment-product is not supported by empirical findings. This opposes literature-derived
implications: as denoted in section 2.6 two severe mismatches between commercial bank lending and
high-tech start-ups include the amount of capital provided (i.e., at an early stage, banks generally
provide only small amounts of capital [Huyghebaert & Van De Gucht, 2007]) and the timespan (i.e.,
banks typically finance early-stage ventures with short-term debt [Jones & Macpherson, 2013]). The
analytics and tools product category amends to these mismatches in that research and development is
conducted in a shorter timespan; validation milestones are reached earlier on; and development costs
are lower (Shimasaki, 2009). Yet, whereas the analytics and tools category is more moderate
compared to its counterpart, the development time of 3 to 7 years and associated costs of $25 to $50
million are still dazing, and research and development uncertainty remains considerate. Consequently,
prospective rationalization of the unexpected findings is that analytics and tools-products
characteristics are still considered too extreme for commercial bank lending. As noted in section 5.4,
qualitative insights support distrust in the superiority of analytics and tools products over treatments
regarding commercial bank lending, positing that regardless of the type of product developed, any
individual biotechnology start-up is in fact a bubble up until the clinical validation has been satisfied.
H4: information asymmetries. Qualitatively-induced insights posit the potential for
information asymmetries in the relationship between biotechnology start-ups and external financiers;
respondents posit that the development of a novel therapy requires broader scientific knowledge to
adequately evaluate the opportunity, yet generic external financiers are neither trained nor
experienced to adequately grasp novel scientific concepts and tend to adhere to existing dogmas,
giving rise to the potential for ill-understood projects. Nonetheless, empirical findings imply a
perceived nonexistence of information asymmetries on the side of the entrepreneur as well as on the
side of the external financier. Consequently, hypothesis 4 information asymmetries obstruct
communication between biotechnology entrepreneurs and commercial bank employees is for the
greater part rejected.
The potential rationale behind this unanticipated finding is twofold. First, the unpredicted
findings might be attributable to the research itself, i.e., as mentioned in section 5.5 there were no
respondents with a position related exclusively to science, whereas these respondents in particular
were expected to denote perceived existence of information asymmetries due increased potential for
lesser business, managerial, and financial expertise. Second, the unexpected findings might at least
in part be explained by the presence of scientific advisory boards as denoted in section 2.3, whose
prime emphasis is to reduce science-business information asymmetries, and as suggested by
qualitatively-induced insights, improved communication e.g., more frequent communication,
learning-by-doing, and improvement of the data package and the presentation of the proposition, both

40
content and format and outsourcing of communication by external financiers e.g., relying on
scientifically well-informed experts as potential rationalizations.
H5: pecking order theory. Hypothesis 5 Biotechnology entrepreneurs have a preference for
equity over debt is for the greater part rejected as quantitatively-induced findings imply that
biotechnology entrepreneurs have a preference of debt over equity; yet, simultaneously the
quantitative-induced findings implying that entrepreneurs prefer external financiers who provide more
than merely financial capital.
The rationale behind these findings is straightforward: entrepreneurs, in line with pecking
order theory, in fact do prefer debt over equity. This preference is probably attributable to a retention
of ownership, as suggested by the literature (section 2.6.3) as well as a desire among biotechnology
entrepreneurs for alternatives to turbulent venture capital, as implied by both literature and empirical,
qualitatively-induced insights. Yet, simultaneously the majority of biotechnology entrepreneurs do
acknowledge the importance of input from external financiers in addition to financial capital, e.g.,
managerial input and access to networks; this literature-derived notion is supported by empirical
insights, both quantitative and qualitative.
41
7. Conclusion
7.1 Windup
Current studies on financing biotechnology entrepreneurship primarily highlight the role of
venture capital, yet a comprehensive study on debt financing of biotechnology is missing; hence
current research on biotechnology-related entrepreneurial finance reflects an incomplete reality.
Consequently this research set out to explore the following puzzle: what elements can facilitate the
biotechnology startup commercial bank relationship?
Marrying insights from biotechnology entrepreneurship with theory on entrepreneurial
finance, five hypotheses were formed; subsequently these hypotheses were examined using a mixed
method research design, i.e., quantitative data supported by qualitative insights.
Expected findings in this dissertation include a correlation between biotechnology start-ups
proprietorship of tangible and fixed assets and sources of finance; in particular between bank financing
and the presence of tangible and fixed assets; and a relationship between product development
milestones and sources of finance; specifically a robust relationship between advanced product
development milestones and banks, a risk averse source of finance. Yet opposing to expectations, the
latter relationship only applies to treatment product; not to analytics and tools products. A second
finding opposing hypotheses is the absence of a relationship between the type of biotechnology
product (i.e., treatments, analytics and tools, or both) and sources of finance, implying that start-ups
developing an analytics and tools-product are not more eligible for bank loans than their treatmentcounterparts. Third, as anticipated the potential for severe information asymmetries is acknowledged;
yet, opposing assumptions, actual information asymmetries are perceived to be absent. Fourth,
literature is inconclusive regarding the existence of a pecking order among (biotechnology)
entrepreneurs, favoring debt over equity financing; yet an evaluation of scholars notions points in the
direction of a preference of debt over equity. Nonetheless, this dissertation finds that, while
acknowledging the perceived importance of input beyond financial capital, biotechnology
entrepreneurs in fact do prefer debt over equity.
Concluding, the preference of debt over equity accentuates the potential for the biotechnology
startup commercial bank relationship. Elements that can facilitate this relationship include tangible
and fixed assets as collateral and treatment product development milestones; an element that has the
potential to constrain this relationship is information asymmetries.
7.2 Implications for Practice
This dissertations findings offer multiple valuable implications for practice, i.e., Small and
Medium Sized Enterprise-departments at commercial banks in the Netherlands. First and foremost, a
42
demand exists among biotechnology entrepreneurs for debt financing in the form of commercial bank
loans; a demand implying the worthiness of biotechnology start-ups as a focus area of the commercial
banks in the Netherlands. Yet, it is implied that those commercial banks do extend their service
portfolio beyond mere financing, e.g., include a network function. Second, whereas the study implies
the absence of information asymmetries, it does acknowledge the potential for these information
asymmetries. Hence, commercial banks should remain cautious en emphasize on keeping information
asymmetries to a bare minimum; the study suggests the latter can be accomplished through interaction
with entrepreneurs with a business-related position and specialization (i.e., gaining sector specific
expertise) of bank employees. Third, whereas information asymmetries appear to be absent, research
and development uncertainty is inherent to the biotechnology sector. Yet, the study implies that the
negative effects of research and development uncertainty cannot be mitigated by concentrating on
analytics and tools products rather than treatment products; hence there is no need for commercial
banks to prioritize one product category over another. Fourth and fifth, the negative effects of research
and development uncertainty can in fact be alleviated through the use of tangible and fixed assets as
collateral, and, usage of product development milestones related to the treatment product category
in the loan application process; this implies a need for commercial banks to incorporate these
features into their lending practices.
7.3 Limitations
This dissertation has two main limitations. First is the studys sample size. That is, working
with a sample small by definition, i.e., medical biotechnology start-ups headquartered in the
Netherlands, and bound to time constraints, the sample size on which empirical findings are based is
finite; this potentially threatens external validity, i.e., the degree to which inferences from a study can
be generalized (Polit & Beck, 2010). Consequently the finite sample size should be kept in mind
while engaging in statistical generalization, i.e., inferring results from sample to population. This
limitation is comprehensively explicated and placed in perspective in the preceding section 4.4.
Second, incorporating a variable related to bank financing, a financing method considered highly
unusual among biotechnology start-ups, into an already finite sample of Netherlands-based
biotechnology start-ups, problematizes compliance with the minimum expected count criterion.
Consequently, in those instances not complying with the minimum expected count, the insinuation is
correct, yet significance levels could potentially be distorted. This limitation is thoroughly elucidated
and relativized in the preceding section 4.3.
7.4 Directions for Future Research
The first direction for future research set by this dissertation would be a replication of the
empirical research, set out on a larger scale, as to tackle the key limitation of this study, i.e., the finite
sample size and consequent limitations regarding generalization. Second, this dissertations findings

43
imply a (1) preference of debt over equity while emphasizing the importance add-on services and (2)
the absence of information asymmetries, despite an acknowledged potential for severe information
asymmetries. Hence, interesting avenues for future research include (1) the identification of specific
services sought after by biotechnology start-ups and (2) the underlying factors causing the absence of
information asymmetries in the relationship between the biotechnology entrepreneur and the external
financier. Both avenues have significant potential in terms of further enhancing our understanding of
the relationship between the commercial bank and biotechnology start-ups.
44
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9. Appendix
9.1 Growth stages
Exhibit 9.1.1. Growth phases (Churchill & Lewis, 1987: page 4).
9.2 Financial lifecycle
Exhibit 9.2.2. financing strategies along the venture lifecycle (Jones & Macpherson, 2013: page 115).
50
9.3 Questionnaire
1. Company name.
- [Open question]
2. My venture is headquartered in the Netherlands
- Yes
- No
3.
-
My position within the venture is related to

Science
Business
Both business and science
4. How many years ago was your venture established? Year of establishment is the year the
business was registered with the chamber of commerce.
- Venture hasnt been registered with the chamber of commerce yet
- [11 options ranging from 1 - 11 years]
- More than 11 years ago
5. Number of initial founders of the venture
- [6 options ranging from 1 - 6 founders]
- More than 6 founders
6. Current number of employees. Include founders of the venture who are still with the firm.
- [30 options ranging from 1 - 30 employees]
- More than 30 employees
7. How many different biotechnology products does your venture's product portfolio contain?
Include products that are still in the research and development, or regulatory approval phase.
- 1 product
- 2-3 products
- 4 or more products
8. Biotechnology products are categorized into two groups: treatments and analytics and
tools.
(I) Treatments include therapeutics, biologics and vaccines (including drug delivery and gene
therapy). This category encompasses all traditional small molecule therapeutics, recombinant
DNA produced drugs, and biologics. [...]. This category also includes vaccines, gene therapy,
and any molecule used to treat a disease or condition (Shimasaki, 2009). (II) Analytics and
tools include In-Vitro Diagnostic Tests, such as rapid point-of-care tests for HIV [...], genetic
tests that are run in a clinical laboratory as a testing service such as genetic tests for gene
expression and personalized medicine testing, [and] medical devices that support or improve
human function, such as cardiac pacemakers, [...] or platform assay instruments used by
research or clinical laboratories (Shimasaki, 2014).
51
What kind of product(s) is your venture developing, or has your venture developed?
-
Treatments
Analytics and tools
Both treatments, and analytics and tools
9. Which stage of the treatment product lifecycle is currently applicable to your venture?
If your venture is developing multiple treatment products, please fill out this question
regarding the most developed product; If your venture is not developing, or has not developed,
a treatment product, please leave this question open.
Discovery research
Preclinical development
Clinical 1
Clinical 2
Clinical 3
Regulatory approval
Commercial launch
10. Which stage of the analytics and tools product lifecycle is applicable to your venture? If your
venture is developing multiple analytics and tools products, please fill out this question
regarding the most developed product.
(If your venture is developing multiple analytics and tools products, please fill out this
question regarding the most developed product; If your venture is not developing, or has not
developed, an analytics and tools product, please leave this question open).
Discovery research
Feasibility
Design optimization
Clinical validation
Regulatory approval
Commercial launch
11. If you are developing a product in the treatment category, which product development
milestones have you achieved? Multiple answers possible.
If your venture is not developing, or has not developed, a treatment product, please leave this
question open.
Securing patent(s)
Establishing Scientific Advisory Board
Completing proof-of-concept experiments successfully
Determining mechanism-of-action for the pound or biologic
Improving the compound's efficacy
Successfully selecting a lead compound
Successfully completing animal studies
Entering into agreements or collaborations with well-respected companies or
organizations, and/or forming partnerships or strategic alliances with credible partners
Filing for new drug investigation application (or equivalent) with the government authority
Out-licensing the patent/product to a pharmaceutical company

-
52
Successfully completing phase I clinical studies

Successfully completing phase II clinical studies
Successfully completing phase III clinical studies
Obtaining government authority approval for new treatment
12. If you are developing a product in the analytics and tools category, which product
development milestones have you achieved? Multiple answers possible.
If your venture is not developing, or has not developed, an analytics and tools product, please
leave this question open.
-
Securing patent(s)
Establishing Scientific Advisory Board
Demonstrating feasibility and prototype production of the product
Completing pilot clinical testing of the prototype or final product
Entering into agreements or collaborations with well-respected companies or organizations,
and/or forming partnerships or strategic alliances with credible partners
Completing clinical validation studies
External clinical studies that validate in-house clinical data
Filing for government authority approval
Obtaining government authority approval
13. Is your venture currently generating revenue, derived from other sources than your main
product? In case your answer is 'no,' please skip the next question.
- Yes
- No
14. If yes, from which source(s) other than your main product is your business deriving revenue?
Multiple answers possible.
- Sale of side product(s)
- Out-licensing of technology, intellectual property, et cetera
- Fees paid by other parties' for usage of your venture's facilities (e.g,. laboratory, equipment, et
cetera)
- Other
15.
-
Which sources of financing has your business obtained? Multiple answers possible.
Personal finance
Family, friends and fools
Bootstrapping methods
Crowdfunding
Government/grant funding
Business angels
Venture capitalists
Non-financial corporations (i.e., pharmaceutical ventures)
Internal funding (i.e., funding through revenue)
Bank loans
Initial Public Offering
Other
16. If your venture has received a bank loan, when has this loan been obtained and how has this
deal been structured? (E.g., amount of the loan, percentage that loan represents of total
53
external finance secured, (personal) liability, securities granted to the bank (collateral), interest
rate, time length of the loan, et cetera).
[Open question]
17. Of the sources of finance obtained, which source has brought in the largest sum of capital so
far? Only one answer possible.
- Personal finance
- Family, friends and fools
- Bootstrapping methods
- Crowdfunding
- Government/grant funding
- Business angels
- Venture capitalists
- Non-financial corporations (i.e., pharmaceutical ventures)
- Internal funding (i.e., funding through revenue)
- Bank loans
- Initial Public Offering
- Other
18. Do you have expertise/knowledge in the field of venture financing?
[3 point scale]
- Not at all
- Basic expertise/knowledge
- Proficient knowledge/expertise
19. The commonly held view is that nascent and start-up firms have difficulty in obtaining
external finance. Do you agree with this statement? If you have no experience with external
financing, please leave this question open.
[5 point scale]
- Strongly agree
- Somewhat agree
- Neither agree nor disagree
- Somewhat disagree
- Strongly disagree
20. Do or did you consider communication with external financier(s) to be troublesome, caused by
the external financiers lack of (scientific) knowledge about your business? If you have no
experience with external financiers, please leave this question open.
[5 point scale]
- Strongly agree
- Somewhat agree
- Somewhat disagree
- Strongly disagree
21. If you did experience communication with external financiers to be (somewhat) problematic,
how was this issue solved?
- [Open question].
54
22. Has your venture been acquired by another company?

- Yes
- No
23. Does your venture have tangible and fixed assets that can potentially be used as security for a
bank loan? (e.g., inventory, equipment, facilities, or land)
- No
- Yes, 0 - 50.000
- Yes, 50.000 - 250.000
- Yes, 250.000 - 500.000
- Yes, 500.000 +
24. Opinion: "External financiers should contribute more than just capital; these financiers should
also contribute to the business in terms of knowledge and expertise (e.g., managerial or
scientific) and provide access to networks."
Do you agree with the following statement: External financiers' input should not be limited to
financial resource.
[5 point scale]
- Strongly agree
- Somewhat agree
- Somewhat disagree
- Strongly disagree
25. Debt is non-dilutive (i.e., no loss of ownership), whereas equity, for example from a venture
capitalist, requires the business owners to give up part of their ownership. Yet, equity can
bring more than just financial capital; the investor often also contributes in terms of expertise,
network access, et cetera.
Do you agree with the following statement: I would prefer to finance my venture with debt
compared with equity
[5 point scale]
Disagree
Somewhat disagree
Somewhat agree
Agree
26. Other than a banks prime financial services (i.e., current account, credit card, and bank loan),
which of the following services offered by commercial banks do you utilize? Multiple answers
possible.
- Insurance
- Leasing of plant, property, and/or equipment
- Knowledge, expertise, and/or sparring partner
- Network access
- Other
55

For a Treatment, examples of value-enhancing, risk-reducing milestones include the following:
Licensing the core technology from the owing intuition

Licensing additional patents that provide freedom-to-operate in that field
Securing new issued patents with required claims
Establishing a top-notch Scientific Advisory Board
Determining mechanism-of-action for the compound or biologic
Improving the compounds efficacy through structure-function relationships
Successfully selecting a lead compound
Successfully completing animal studies without any safety, efficacy, dosing, or delivery
concerns
Publishing results in top-tier peer-reviewed journals
Winning Phase I and Phase II SBIR grants
Entering into a service agreement with a well-respected company or organization
Forming a partnership or strategic alliance with a credible marketing partner Successful filing
of an Investigational New Drug (IND) application with the FDA Licensing the product to a
pharmaceutical company
Completing Phase I Clinical Studies with successful results
Completing Phase II Clinical Studies with successful results
Completing Phase III Clinical Studies with successful results
Filing an New Drug Application (NDA) or Biologic License Application (BLA) with the FDA
Obtaining FDA approval
For Analytics and Tools, examples of value-enhancing, risk-reducing milestones include the
following:
Licensing the core technology from the owning institution

Licensing additional patents that provide freedom-to-operate in that field Securing new issued
patents with required claims
Establishing a top-notch Scientific Advisory Board
Demonstrating feasibility and prototype production of the product Completing pilot clinical
testing of the prototype or final product Publishing results in top-tier peer-reviewed journals
Winning Phase I and Phase II SBIR grants
Entering into a service agreement with another entity or organization
Forming a partnership or strategic alliance with a market partner
Completing clinical validation studies demonstrating efficacy or improved sensitivity and
specificity over a gold standard
External clinical studies that validate in-house clinical data
Filing a 510(k) or a Pre-Market Approval (PMA) with the FDA 613
Obtaining FDA marketing clearance or a PMA (Shimasaki, 2009).
56
9.5 Frequency Tables

Q2. My venture is headquartered in the Netherlands
Valid
Frequency
31
1
32
Yes
No
Total
Percent
96,9
3,1
100,0
Valid
Percent
96,9
3,1
100,0
Cumulative
Percent
96,9
100,0
Q3. My position within the venture is related to
Valid
Business
Both
business and
science
Total
Frequency
12
20
Percent
37,5
62,5
Valid
Percent
37,5
62,5
32
100,0
100,0
Cumulative
Percent
37,5
100,0
Q4 (I). How many years ago was your venture established?
3
4
2
4
3
2
2
3
4
1
2
2
Percent
9,4
12,5
6,3
12,5
9,4
6,3
6,3
9,4
12,5
3,1
6,3
6,3
Valid
Percent
9,4
12,5
6,3
12,5
9,4
6,3
6,3
9,4
12,5
3,1
6,3
6,3
32
100,0
100,0
Frequency
16
Percent
50,0
Valid
Percent
50,0
Cumulative
Percent
50,0
16
50,0
50,0
100,0
32
100,0
100,0
Frequency
Valid
1 year ago
2 years ago
3 years ago
4 years ago
5 years ago
6 years ago
7 years ago
8 years ago
9 years ago
10 years ago
11 years ago
More than 11
years ago
Total
Cumulative
Percent
9,4
21,9
28,1
40,6
50,0
56,3
62,5
71,9
84,4
87,5
93,8
100,0
Q4 (II). Age
Valid
5 years or
less
More than 5
years
Total
57
Q5. Number of initial founders of the venture

Frequency
Valid
1 founder
2 founders
3 founders
4 founders
5 founders
Total
7
14
7
3
1
32
Percent
21,9
43,8
21,9
9,4
3,1
100,0
Valid
Percent
21,9
43,8
21,9
9,4
3,1
100,0
Cumulative
Percent
21,9
65,6
87,5
96,9
100,0
Q6. Current number of employees (Including founders)
1
2
2
6
6
1
5
2
1
2
1
3
Percent
3,1
6,3
6,3
18,8
18,8
3,1
15,6
6,3
3,1
6,3
3,1
9,4
Valid
Percent
3,1
6,3
6,3
18,8
18,8
3,1
15,6
6,3
3,1
6,3
3,1
9,4
32
100,0
100,0
Frequency
Valid
1 employee
2 employees
3 employees
4 employees
5 employees
6 employees
7 employees
13 employees
15 employees
20 employees
28 employees
More than 30
employees
Total
Cumulative
Percent
3,1
9,4
15,6
34,4
53,1
56,3
71,9
78,1
81,3
87,5
90,6
100,0
Q7. How many different biotechnology products does your venture's product portfolio
contain?
Frequency
Valid
1 product
2-3 products
4 or more products
Total
8
14
10
32
Percent
25,0
43,8
31,3
100,0
Valid
Percent
25,0
43,8
31,3
100,0
Cumulative
Percent
25,0
68,8
100,0
Cumulative
Percent
56,3
87,5
100,0
Q8. Product category
Valid
Treatments
Analytics and tools
Both treatments,
and analytics and
tools
Total
Frequency
18
10
4
Percent
56,3
31,3
12,5
Valid
Percent
56,3
31,3
12,5
32
100,0
100,0
58
Q11. Treatment milestones

Frequency
Valid
Advanced
Under developed
Total
Not applicable
Missing
Total
Percent
15,6
53,1
68,8
31,3
100,0
5
17
22
10
32
Valid
Percent
22,7
77,3
100,0
Cumulative
Percent
22,7
100,0
Valid
Percent
42,9
57,1
100,0
Cumulative
Percent
42,9
100,0
Q12. Analytics milestones

Frequency
Valid
Advanced
Under developed
Total
Not applicable
Missing
Total
Percent
18,8
25,0
43,8
56,3
100,0
6
8
14
18
32
Q13. Generating revenue, derived from other sources than main product?
Valid
Frequency
14
18
32
Yes
No
Total
Valid
Percent
43,8
56,3
100,0
Percent
43,8
56,3
100,0
Cumulative
Percent
43,8
100,0
Q15 (I). Financing
Valid
Valid
Other financing than

venture capitalist and
bank loans
Venture capitalist and
not bank loans
Bank loans and not
venture capitalist
Both
Total

Percent
59,4
Valid
Percent
59,4
Cumulative
Percent
59,4
25,0
25,0
84,4
3,1
3,1
87,5
4
32
12,5
100,0
12,5
100,0
100,0

Q15
(II). Financing
Frequency
27
5
32
Other
Bank loans
Total

Frequency
19
Percent
84,4
15,6
100,0

Valid
Percent
Cumulative
Percent
84,4
100,0
15,6
100,0

59
Q18. Expertise/knowledge in the field of venture financing?

Frequency
Valid
Not at all
Basic expertise/knowledge
Proficient knowledge/expertise
Total
3
13
16
32
Percent
9,4
40,6
50,0
100,0
Valid
Percent
9,4
40,6
50,0
100,0
Cumulative
Percent
9,4
50,0
100,0
Q19. Nascent and start-up firms have difficulty in obtaining external finance
Valid
Strongly agree
Somewhat agree
Somewhat disagree
Strongly disagree
Total
Frequency
17
9
3
2
1
32
Percent
53,1
28,1
9,4
6,3
3,1
100,0
Valid
Percent
53,1
28,1
9,4
6,3
3,1
100,0
Cumulative
Percent
53,1
81,3
90,6
96,9
100,0
Q20. Communication with external financiers considered as troublesome

Frequency
Valid
Missing
Total
Valid
Strongly agree
Somewhat agree
Somewhat disagree
Strongly disagree
Total
-99
Yes
No
Total
5
5
9
5
7
31
1
32
Percent
15,6
15,6
28,1
15,6
21,9
96,9
3,1
100,0
Valid
Percent
16,1
16,1
29,0
16,1
22,6
100,0
Q22. Has your venture been acquired by another company?

Valid
Frequency
Percent
Percent
1
3,1
3,1
31
96,9
96,9
32
100,0
100,0
Cumulative
Percent
16,1
32,3
61,3
77,4
100,0
Cumulative
Percent
3,1
100,0
60
Q23 (I). Tangible and fixed assets
Valid
No
Yes, 0 - 50.000
Yes, 50.000 - 250.000
Yes, 250.000 - 500.000
Yes, 500.000 +
Total
Frequency
18
4
5
4
1
32
Percent
56,3
12,5
15,6
12,5
3,1
100,0
Valid
Percent
56,3
12,5
15,6
12,5
3,1
100,0
Cumulative
Percent
56,3
68,8
84,4
96,9
100,0
Valid
Percent
56,3
43,8
100,0
Cumulative
Percent
56,3
100,0
Q23 (II). Assets
Valid
Valid
Valid
No
Yes
Total
Frequency
18
14
32
Percent
56,3
43,8
100,0
Q24. External financiers should contribute more than capital

Valid
Frequency
Percent
Percent
Strongly agree
12
37,5
37,5
Somewhat agree
12
37,5
37,5
7
21,9
21,9
Somewhat disagree
1
3,1
3,1
Total
32
100,0
100,0
Cumulative
Percent
37,5
75,0
96,9
100,0
Q25. I would prefer to finance my venture with debt compared with equity
Valid
Cumulative
Frequency
Percent
Percent
Percent
Disagree
7
21,9
21,9
21,9
Somewhat disagree
4
12,5
12,5
34,4
3
9,4
9,4
43,8
Somewhat agree
12
37,5
37,5
81,3
Agree
6
18,8
18,8
100,0
Total
32
100,0
100,0

Financing The Transition From Ivory Tower To Industry Through Debt

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Financing The Transition From Ivory Tower To Industry Through Debt

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Financing the transition from ivory tower to industry through debt

The relationship between medical biotechnology start-ups and commercial banks

MSc Entrepreneurship (joint degree)

VU University Amsterdam | University of Amsterdam

Faculty of Economics and Business Administration

prof. dr. E. Masurel

July 1st, 2016

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

Life Cycle Theory

Biotechs Product Lifecycle

Analytics and Tools

Biotechs Organizational Lifecycle

Biotechs Financial Lifecycle

The Venture Capitalists Perspective

The Biotech Entrepreneurs Perspective

Venture Capital and the financing gap(s)

The Financial Institutions Perspective: constraints

The Financial Institutions Perspective: removing constraints

Less Risky Investments

Diminishing Information Asymmetries

The Entrepreneurs Perspective on Debt

Product Development Milestones

Analytics and Tools-Products

Pecking Order Theory

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

Operationalization variable sources of finance

Quality of the Research: Validity, Reliability, Generalizability

Product Development Milestones

Analytics and Tools-Products

Pecking Order Theory

Implications for Practice

Directions for Future Research

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

Exhibit 2.2.1. Pharmaceutical R&D pipeline (Grossmann, 2003: page 3).

Exhibit 2.2.2. Pharmaceutical R&D pipeline (Grossmann, 2003: page 15).

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

The research and development pathway is characterized by a high-pitched level of uncertainty;

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

Macpherson, 2013). Aforementioned, compared to other industries early-stage high-technology

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

milestones [i.e.,] measurable accomplishments that incrementally move a product closer to

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

FROM IVORY TOWER TO INDUSTRY THROUGH DEBT

Product development milestones are related to sources of finance