The Financing Threshold Effect on Success and Failure of Biomedical and Pharmaceutical Start-Ups

Abstract

The theories of technological innovation are examined in the context of the formation and growth of biomedical and pharmaceutical firms. Analyses are based on detailed data gathered from 26 firms, founded between 1968 and 1975 in Massachusetts, supplemented by a three-member expert panel evaluation of the risk associated with use of each firm's products. A positive relationship was established between the level of technological sophistication of the firm and the risk associated with use of its products. Consequently, technological advancement of the firm has not necessarily resulted in high economic performance, in part because of the high demands put upon the firm's resources and time by the U.S. Food and Drug Administration approval process. The study indicates that the initial financial inputs have a threshold effect on subsequent economic performance of biomedical and pharmaceutical new firms. In the sample studied, unless these inputs reached the $850,000 to $1,000,000 mark (in 1970–1975 dollars), technological innovation was negatively mediated by the risk associated with the use of firm's products and by the FDA quality control procedures. Consequently, attempts at technological innovativeness are unfortunately detrimental to the economic performance of underfinanced new firms in the biomedical and pharmaceutical industry.