The Role of the Venture Capitalist

Abstract

Venture capitalists (VCs) are independent investors who are an important source of risk capital and also nonfinancial support to companies developing applications of novel technologies. Venture capitalists were first attracted into lengthy, uncertain ‘biotechnology’ commercialization projects in the US in the 1970s. At that time novel genetic engineering and hybridoma techniques were heralded as the basis of revolutionary new products for many industries. The leading firms in those industries lacked these technical capabilities and were initially uninterested in them. Academic scientists, with support from venture capitalists, moved to seize the opportunities. They founded companies to exploit the potential of these technologies. This led to the growth of the Biotechnology industry. Governments of other industrialized countries, seeing biotechnology as a major source of economic development, moved to encourage similar developments. Some of the companies, notably Genentech and Amgen, developed successful products and have grown into large, profitable companies. However, many more have failed and the investment in them has been lost. Some applications, for example genetically modified (GM) crops, have been technically successful but have excited serious public concerns, which have led to legal and other barriers to development. These various sources of failure have been costly for investors and have led to a reduction of interest in ventures that are perceived to be very risky. Nevertheless, venture capital of various types, formal and informal, is still an important contributor of financial and nonfinancial resources for the development of applications of life science technologies in entrepreneurial small firms. Scientists who wish to commercialize their technologies should ensure that the intellectual property is secured, and should prepare a credible business plan for the development project. The earliest stages can often win support from public economic development funds, and the founders' Institution may also provide some help. Informal VCs known as Business Angels also provide early stage funds, business expertise, and introductions. Formal venture capital and partnerships with large industrial firms are the most likely source of follow-on finance, and they are also potential providers of complementary expertise, of different types. Although there is no certainty of obtaining investment, there is a substantial amount of support available to take forward good commercial projects.