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Venture capitalists' selection process: the case of biotechnology proposals
Baeyens, Katleen Vanacker, Tom Manigart, Sophie
Baeyens, Katleen
Vanacker, Tom
Manigart, Sophie
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Publication Type
Working paper
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Supervisor
Publication Year
2005
Journal
Book
Publication Volume
Publication Issue
17
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Publication End page
Publication NUmber of pages
28
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Abstract
The paper analyses venture capitalists' selection process in biotechnology ventures. Biotech ventures operate in an extremely risky environment making this an interesting research setting. The majority of venture capitalists exclude certain biotech sectors ex-ante because of regulatory uncertainty, the long development process to a market ready product and the difficulty to understand the technology. The more thorough due diligence process focusses on financial, market and technology criteria. Management team capabilities are more important for later stage investors, whereas early stage investors expect to have an impact on the future recruiting of professional managers. Despite the higher risk of biotech investments, we find no evidence that VCs require higher hurdle rates or more complete contracts for these investments, compared to investments in other technology-based companies. The most important reason for not reaching an investment agreement is disagreement over valuation, due to large differences in risk perception between entrepeneurs and venture capitalists and the lack of a standard valuation tool for biotech projects. Keywords: venture capital, selection process, biotechnology
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Keywords
Corporate Finance, Mergers & Acquisitions