The Art of Start: Management Theory in Biotech
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This document discusses management theories that can help entrepreneurs start new businesses. It summarizes five theories: 1) Signaling theory explains how entrepreneurs can signal quality to attract investors. 2) Agency theory describes how venture capitalists monitor founders to align interests. 3) Pecking order theory explains how startup funding costs increase with information problems. 4) Intellectual capital theory shows how human capital, relationships and reputation contribute to startup success. 5) Resource-based theory proposes that startups succeed by exploiting rare, valuable resources that are difficult to imitate.
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The Art of Start: Management Theory in Biotech
- 1. The Art of Start: ...with a Little Help from Management Theory Jan Rosier, Elan Chair of the Business of Biotechnology UCD Michael Smurfit Graduate School of Business & School of Biomolecular and Biomedical Science February 19th 2014
- 2. 1 What is a management theory? A management theory attempts to explain and predict social phenomena as they occur in organizations Management research is a systematic inquiry into social phenomena in organisations that increases our knowledge about organisations and the individuals in these organisations J Rosier – Elan Chair of the Business of Biotechnology 2
- 3. Examples of management theories Why are some people successful in making other people ‘follow’ them? Transformational theory J Rosier – Elan Chair of the Business of Biotechnology 3
- 4. Examples of management theories Do CEOs, and the decisions that they take, matter? Population ecology theory J Rosier – Elan Chair of the Business of Biotechnology 4
- 5. Examples of management theories How do firms grow? Theory of the growth of the firm J Rosier – Elan Chair of the Business of Biotechnology 5
- 6. Examples of management theories Why are some firms more productive? Stupiditybased theory of organisations J Rosier – Elan Chair of the Business of Biotechnology 6
- 7. 2. Why is theory useful? There is nothing more practical than a good theory Kurt Lewin (1890-1947) J Rosier – Elan Chair of the Business of Biotechnology 7
- 8. 2. Why is theory useful? Knowledge is constructed on cognitive structures and is used to understand – and increase your understanding – of the world around you Jean Piaget (1896-1980) J Rosier – Elan Chair of the Business of Biotechnology 8
- 9. 5 theories that will help you think about start-up’s J Rosier – Elan Chair of the Business of Biotechnology 9
- 10. 1 Signalling theory (Spence, 1973, 1974; Podolny, 1993, 2005): Signaling theory describes behavior when two parties have access to different information. The sender signals information, to its own benefit, and modifies the behavior of the receiver Young springbok Antidorcas marsupialis ‘stotting’ or ‘pronking’ J Rosier – Elan Chair of the Business of Biotechnology 10
- 11. 2 Agency theory (Principal – Agent theory) (Gompers & Lerner, 1999; Sahlman, 1990) A ‘principal’ (VC) monitors an ‘agent’ (biotech entrepreneur) to align their interests to create shareholder value under conditions of information asymmetry J Rosier – Elan Chair of the Business of Biotechnology 11
- 12. 3 Pecking Order theory (Corporate finance Roberts, 1991; Watson and Wilson, 2002): the cost of financing increases with asymmetric information J Rosier – Elan Chair of the Business of Biotechnology 12
- 13. 4 Intellectual Capital theory (Theoretical foundation in information economics – Understanding how human, structural, relational, reputational, and social capital contribute to the value and survival of the firm) J Rosier – Elan Chair of the Business of Biotechnology 13
- 14. 5 Resource Based theory (Barney and Clark, 2007): Why do some firms achieve better economic performance than others continuously? J Rosier – Elan Chair of the Business of Biotechnology 14
- 15. Theory 1 Signalling theory J Rosier – Elan Chair of the Business of Biotechnology 15
- 16. C S (p)E EUR J Rosier – Elan Chair of the Business of Biotechnology 16
- 17. IPO investment attraction ‘Bad’ companies ‘Good’ companies E Ownership of the company Leland and Pyle (1977) J Rosier – Elan Chair of the Business of Biotechnology 17
- 18. Odds of external investment attraction 3 (2,71) p.015 1 0 1 Business management expertise J Rosier – Elan Chair of the Business of Biotechnology 18
- 19. Odds of external investment attraction No impact 0 1 General technological expertise J Rosier – Elan Chair of the Business of Biotechnology 19
- 20. Odds of external investment attraction 4 (4,22) p.002 1 0 No PhD/ professor 1 Academic status PhD/ professor J Rosier – Elan Chair of the Business of Biotechnology 20
- 21. Venture survival 2 (2,2) p.04 1 0 1 Business management expertise J Rosier – Elan Chair of the Business of Biotechnology 21
- 22. Venture survival No impact 0 No PhD/ professor 1 Academic status PhD/ professor J Rosier – Elan Chair of the Business of Biotechnology 22
- 23. Theory 2 Agency theory J Rosier – Elan Chair of the Business of Biotechnology 23
- 24. A MORAL HAZARD SITUATION A ‘moral hazard’ occurs when an agent with more information to act has the intention to behave inappropriately from the perspective of the agent with less information J Rosier – Elan Chair of the Business of Biotechnology 24
- 25. ‘Any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly’ (Paul Krugman, Nobel Prize 2008) J Rosier – Elan Chair of the Business of Biotechnology 25
- 26. VC S E R&D knowledge EUR J Rosier – Elan Chair of the Business of Biotechnology 26
- 27. ! R&D scientists: self-monitoring and enterprising agents 27
- 28. 1 R&D scientists can take directions that affect the direction of the whole company R&D CEO ‘...single individuals can sometimes take initiatives that affect the direction of the entire company’ Grove, 1996; Burgelman et al., 2004; Christensen and Diehl, 1997 28
- 29. 2 R&D scientists are autonomous and independent knowledge workers CEO R&D ‘A knowledge worker in life science R&D is a selfmonitoring and enterprising agent, basically outside of the full control of management’ Alvesson, 2004; Florida, 2002; Marks, 2011 29
- 30. 3 R&D scientists see further CEO R&D Market Possibilities Styhre, 2009 30
- 31. 4 R&D scientists have knowledge that CEOs have difficulty to imagine CEO R&D ‘R&D did not feel their top managers were capable to see the full implications of the new tools and techniques’ Styhre, 2009 31
- 32. VC’s will interfere with the USO as predicted by agency theory... i. Affirmative covenants ii. Negative covenants iii.Non-compete clauses iv.Board representation v. Special voting rights vi.Dismiss management clause vii.Monitoring devices viii.Bad leaver clause ix.Stand still x. Force an exit because of .... moral hazard J Rosier – Elan Chair of the Business of Biotechnology 32
- 33. Theory 3 Pecking order theory J Rosier – Elan Chair of the Business of Biotechnology 33
- 34. COST OF CAPITAL SOURCE OF CAPITAL INFORMATION ASYMMETRY Entrepreneur Internal funding Friends, family and fools Banks Venture capital J Rosier – Elan Chair of the Business of Biotechnology 34
- 35. Theory 4 Intellectual capital theory J Rosier – Elan Chair of the Business of Biotechnology 35
- 36. Relational capital Social capital Structural capital Intellectual Capital (leading to IP) Human capital SUCCESS Reputational capital J Rosier – Elan Chair of the Business of Biotechnology 36
- 37. EU Relational capital Structural capital Intellectual Capital (leading to IP) Human capital R Social capital SUCCESS Reputational capital J Rosier – Elan Chair of the Business of Biotechnology 37
- 38. EU Relational capital Structural capital Intellectual Capital (leading to IP) Human capital Reputational capital R Social capital l a u ct ty lle vi te ra In g SUCCESS J Rosier – Elan Chair of the Business of Biotechnology 38
- 39. EU Reputational capital l a u ct ty T lle vi S TI te ra N n g IE I C R A T S SUCCESS t of is t sc a he ie s nt ta va is r lu t? e Structural capital Intellectual Capital (leading to IP) Human capital R Social capital S W ha Relational capital J Rosier – Elan Chair of the Business of Biotechnology 39
- 40. EU R For each article written by a starscientist, as or with a firm as employee, additional funds of an average of 1.1 million $ are obtained (Darby and Zucker, 2002) l a u ct ty T lle vi S TI te ra N n g IE I C R A T S SUCCESS S J Rosier – Elan Chair of the Business of Biotechnology 40
- 41. The Matthew effect in start-up management ‘For all those who have, more will be given and they will have an abundance; but from those who have nothing even what they have will be taken away’ (Matthew 25,29) 41
- 42. Theory 5 Resource based theory J Rosier – Elan Chair of the Business of Biotechnology 42
- 43. Why do some firms continuously achieve better economic performance than others? J Rosier – Elan Chair of the Business of Biotechnology 43
- 44. Biotech question: Why are some biotech/pharma firms more effective in developing new patentable drugs than others? (Henderson and Cockburn, 1994) Answer: it is caused by their ‘architectural competence’: the ability to facilitate cooperation among the different scientific disciplines required to develop patentable drugs J Rosier – Elan Chair of the Business of Biotechnology 44
- 45. If a firm has resources that are: • valuable, • rare, and • costly to imitate, and… • the firm is organized to exploit these resources, That are combined into capabilities then the firm can expect to enjoy a sustained competitive advantage. J Rosier – Elan Chair of the Business of Biotechnology 45
- 46. The Question of Value • in theory: Does the resource enable the firm to exploit an external opportunity? • in practice: does the resource result in a continued flow of new ideas? J Rosier – Elan Chair of the Business of Biotechnology 46
- 47. The Question of Rarity • if a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits) • a resource must be rare enough that perfect competition has not set in J Rosier – Elan Chair of the Business of Biotechnology 47
- 48. The Question of Imitability • the temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a cost disadvantage in imitating the resource » intangible resources are usually more costly to imitate than tangible resources J Rosier – Elan Chair of the Business of Biotechnology 48
- 49. The Question of Organization • a firm’s structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firm’s resources • Examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. J Rosier – Elan Chair of the Business of Biotechnology 49
- 50. RECIPE FOR SUSTAINED ADVANTAGE Valuable? Yes Yes Yes Yes Disadvantage Below normal Normal Temporary Advantage Above normal Sustained Advantage Above normal No Yes Economic Implications No Yes Competitive Implications Parity No Exploited by Organization? No Rare? Costly to Imitate? Yes SUCCESFULL USO J Rosier – Elan Chair of the Business of Biotechnology 50
- 51. CONCLUSION 123 4 5 Signalling theory Agency theory Pecking Intellectual Resource order capital based theory theory theory J Rosier – Elan Chair of the Business of Biotechnology 51