Do Birds of a Feather Flock together? The Financing of UK Software and Biotechnology Firms at the Earlier Stages of Business Development

Abstract

This paper explores the funding issues at the early stages of development of small biotechnology and software firms in the UK. The paper reviews theory and evidence on firms in these two sectors and presents empirical evidence for the UK derived from an extensive on-line questionnaire survey. The sample consists of 41 small biotechnology firms and 42 software firms representing a sub-sample of a larger sample of 133 high technology small firms (HTSFs) or technology-based small firms (TBSFs). As a subgroup of Small and Medium-sized Enterprises (SMEs), HTSFs face a number of obstacles to their business development. Finance is believed to be one of the main problems particularly at the early stages of their development. HTSFs encounter financing problems mainly because of their embryonic nature, young age, lack of collateral, lack of business skills, lack of market presence, high technical area and other factors. The main findings from this study suggest that entrepreneurs in the biotechnology sector reported higher academic qualifications than the other group. The founders of software firms are younger than the biotechnology firms. Firms in both groups have grown in terms of full-time employees. In terms of funding problems, software firms reports more funding problems than the biotechnology firms. Software firms are fastest growing firms and goes through the early stages of development quickly than the biotechnology group. With regards to the sources of funding the evidence shows that biotechnology small firms mainly use venture capital finance whilst the main source of funding for the software firms is personal savings and bank finance. However, biotechnology small firms report difficulties in securing equity finance. Software firms seem to be constraining their growth by the demand side financial constraints. The two groups of HTSFs in this study suggest that high technology small firms may have particular needs for finance and that these may change as they develop through early stages of business development. The paper present evidence on these issues and suggest differences in the experience of biotechnology and software firms in terms of financing.