The impact of firmspecific capabilities on the amount of capital raised in an initial public offering: Evidence from the biotechnology industry

Abstract Going “public” has a magical sound to most entrepreneurial managers. By going public the firm increases its legitimacy in the business community, improves access to debt financing, and creates a means of exit for major shareholders. However, by far the most important reason for going public is to infuse a significant amount of investment capital into the firm. It is well documented that small businesses frequently fail because of insufficient funding and heavy debt loads. Issuing an initial public offering (IPO) allows entrepreneurial firms to overcome these pitfalls. Clearly, if access to capital is the major goal of going public, then the success of an offering is measured by the amount of capital raised by the firm. This study presents a model of the total amount of capital raised by a firm through an IPO. The explanatory variables include several indicators of the scientific capabilities of the firm including the location of the firm, the quality of the research staff, the number of products under development, the number of patents held by the firm, and the firm's prior spending on research and development (R&D). The model is empirically tested on a sample of 92 biotechnology IPOs. The results provide strong support for the hypothesized positive relationship between the total amount of capital raised by a firm's IPO and the scientific capabilities of the firm. Our results have important implications for entrepreneurs. First, an entrepreneur needs to develop and send credible signals indicating the value of the firm's intangible assets to the market. Second, the market values as deep a product pipeline as possible given a firm's resource constraints. Third, choice of location is a key strategic decision that should not be overlooked. Fourth, the market values firm-specific capabilities and will increase the capital it is willing to invest in a firm accordingly. Finally, the amount of capital a firm raises in its IPO can be influenced by entrepreneurial managers' strategic decisions.

[1]  David L. Deeds,et al.  Strategic alliances and the rate of new product development: An empirical study of entrepreneurial biotechnology firms , 1996 .

[2]  Hayne E. Leland,et al.  INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION , 1977 .

[3]  Nathan Rosenberg,et al.  Why are Americans Such Poor Imitators , 1988 .

[4]  F. Scherer,et al.  Industrial Market Structure and Economic Performance. , 1971 .

[5]  David E. Terpstra,et al.  Entrepreneurial Start-up and Growth: A Classification of Problems , 1993 .

[6]  G. Pisano.  Knowledge Integration and the Locus of Learning: An Empirical Analysis , 1994 .

[7]  Richard B. Carter,et al.  Acquisition of Capital by Small Business , 1989 .

[8]  M. Hannan,et al.  The Population Ecology of Organizations , 1977, American Journal of Sociology.

[9]  E. Mansfield.  Research and innovation in the modern corporation , 1972 .

[10]  Samuel B. Graves,et al.  Innovative productivity and returns to scale in the pharmaceutical industry , 1993 .

[11]  Stephen A. Ross,et al.  The determination of financial structure: the incentive-signalling approach , 1977 .

[12]  E. Mansfield.  The speed and cost of industrial innovation in Japan and the United States: external vs. internal technology , 1988 .

[13]  Harry Rothman,et al.  An experiment in science mapping for research planning , 1986 .

[14]  Brett Trueman.  The Relationship between the Level of Capital Expenditures and Firm Value , 1986, Journal of Financial and Quantitative Analysis.

[15]  Jay R. Ritter,et al.  The "Hot Issue" Market of 1980 , 1984 .

[16]  K. Andrews.  The Concept of Corporate Strategy , 1971 .

[17]  Robert A. Peterson,et al.  Perceived Causes of Small Business Failures: A Research Note , 1983 .

[18]  Robert Heinkel,et al.  Signaling and the Valuation of Unseasoned New Issues , 1982 .

[19]  D. Sutton,et al.  Initial Public Offerings: A Strategic Planner for Raising Equity Capital , 1988 .

[20]  George A. Akerlof.  The Market for “Lemons”: Quality Uncertainty and the Market Mechanism , 1970 .

[21]  The market valuation of initial public offerings in Hong Kong , 1993 .

[22]  M. Peck,et al.  Inventions in the Postwar American Aluminum Industry , 1962 .

[23]  P. David,et al.  Toward a new economics of science , 1994 .

[24]  Henry G. Grabowski,et al.  A New Look at the Returns and Risks to Pharmaceutical R&D , 1990 .

[25]  Howard E. Aldrich,et al.  Organizations and Environments , 1979 .

[26]  Roger G. Ibbotson,et al.  "Hot Issue" Markets , 1975 .

[27]  Francis Narin,et al.  Bibliometric analysis of U.S. pharmaceutical industry research performance , 1988 .

[28]  Alfred S. Eichner.  Toward a new economics , 1985 .

[29]  B. C. Griffith,et al.  The Structure of Scientific Literatures I: Identifying and Graphing Specialties , 1974 .

[30]  E. Garfield,et al.  Citation indexes for science. , 1956, Science.

[31]  William S. Comanor,et al.  Research and Technical Change in the Pharmaceutical Industry , 1965 .

[32]  Alice M. Sapienza,et al.  R&D collaboration as a global competitive tactic —Biotechnology and the ethical pharmaceutical industry , 1989 .

[33]  C. van der Eerden,et al.  The use of science and technology indicators in strategic planning , 1991 .

[34]  J. T. Wallmark,et al.  Measurement of output from university research: a case study , 1988 .

[35]  John M. Vernon,et al.  Technical Change and Firm Size: The Pharmaceutical Industry , 1974 .

[36]  Dennis E. Logue,et al.  Foundations of Finance. , 1977 .

[37]  Daniel A. Levinthal,et al.  ABSORPTIVE CAPACITY: A NEW PERSPECTIVE ON LEARNING AND INNOVATION , 1990 .

[38]  AnnaLee Saxenian,et al.  Regional Networks and the Resurgence of Silicon Valley , 1990 .

[39]  Sheridan Titman,et al.  Information quality and the valuation of new issues , 1986 .

[40]  Peter Vinkler,et al.  Management system for a scientific research institute based on the assessment of scientific publications , 1986 .

[41]  P. Krugman.  Geography and Trade , 1992 .