FINANCING INNOVATION IN BIO-PHARMA: A SECTORAL SYSTEMS APPROACH

The literature on the financing of innovative projects follows two trends: onecontemplates that either the prospective fundees or the potential funders use theirpreferences to choose the other party out of a range of theoretical possibilities; theother refers to project owners or investors that actively look for an “opportunity” andtry to talk the other party into entering the funding relationship. These views,however, cannot explain several facts such as: why projects rejected by some fundersare accepted by others, why IPOs and markets are not attractive to all players or whythat changes over time and across settings, how can State funds support a sectoracross regions, or how players’ and setting features and time affect funding criteria.A critique of these explanations sees three main shortcomings: lack of balance (i.e.,one party’s initiative prevails), bias (i.e., criteria of the domineering party prevail),and disembeddedness (i.e., milieu factors and changes over time are ignored). Wethink that an analysis supported by a sectoral approach may contribute to build amore articulate, integral insight about the funding of innovation.The bio-pharmaceutical sector was chosen because it exhibits amazing complexityrelated to the heterogeneity embodied by a multifaceted network of players (e.g.,universities, companies, potential financiers, regulation bodies), to the nature anddevelopment path of innovative projects, and to the competitive/collaborativeinteractions framed in a particular setting. Hence, a qualitative approach based on thecase study of the sector is the choice for this study. Case data are collected throughsemi-structured interviews with thirty participants that have played different roles inorganisations of the bio-pharmaceutical sector or are highly experienced VCpractitioners.Our findings allow us to propose an enhanced characterisation of innovationfinancing by showing that: i) Investors’ understanding of a sector is essential forfunding decisions and can be updated through networking; ii) Networks facilitatefirms-funders contact, coordination among funders, enhancement of financiers’knowledge about the sector, and venture owners’ knowledge of track record andpotential benefits of investors; iii) Interactions involve other actors in different rolesand support network-based learning; iv) Funding decisions are impacted by thegeographic availability of sources/mechanisms of finance and by their readiness tofund specific venture stages; v) Investors’ specificities matter; vi) Trends of changeimpact the availability of funding sources/mechanisms since they imply a reorganisationof the relations and interactions among players in the sector.Therefore, we propose a systemic analytic explanation where the strategy of funders(generalist or dedicated), therefore their role in a particular setting, is essentiallydefined in relation to the structure and dynamics of their knowledge consolidationsystem; then, we derive a number of implications for firm managers, investors, andpolicy-makers. Finally, the main limitations of this work and some further questionsfor future research are stated.