Moving Beyond the Valley of Death: Regulation and Venture Capital Investments in Early-Stage Biopharmaceutical Firms

64 Pages Posted: 7 Jan 2019 Last revised: 16 Oct 2019

See all articles by Yujin Kim

Yujin Kim

ShanghaiTech University - School of Entrepreneurship and Management

Chirantan Chatterjee

Indian Institute of Management, Ahmedabad

Matthew John Higgins

University of Utah - Department of Entrepreneurship & Strategy; National Bureau of Economic Research (NBER); Max Planck Institute for Innovation and Competition

Multiple version iconThere are 2 versions of this paper

Date Written: Ocotober 2018

Abstract

Venture capitalists (VCs) traditionally invest in risky, early-stage innovations. Recent research suggests, however, that VCs may be herding into less risky, later-stage projects. Such a shift can create funding gaps for early-stage firms. Can regulation reverse this trend by providing information that may reduce the risk of early-stage investments? Using the regulatory setting of the European Union and the passage of the Orphan Drug Act (EU-ODA), we examine this question in the biopharmaceutical industry. We provide causal evidence that VCs are more likely to invest in early-stage biopharmaceutical firms operating in sub-fields disproportionately affected by EU-ODA. We also find that the level of syndication declined for early-stage investments and exit performance improved. Importantly, the shift towards early-stage investment did not lead to any higher proportion of bankruptcies. Collectively, our results suggest that the information provided by EU-ODA helped alleviate information asymmetries faced by VCs investing in early-stage biopharmaceutical firms. We conclude by discussing implications for entrepreneurial finance and innovation policy.

Keywords: venture capital, biopharmaceutical, investment, valley of death, regulation

JEL Classification: G24,L51,L65

Suggested Citation

Kim, Yujin and Chatterjee, Chirantan and Higgins, Matthew John, Moving Beyond the Valley of Death: Regulation and Venture Capital Investments in Early-Stage Biopharmaceutical Firms (Ocotober 2018). ShanghaiTech SEM Working Paper No. 2019-001; Georgia Tech Scheller College of Business Research Paper No. 19-02. Available at SSRN: https://ssrn.com/abstract=3309496 or http://dx.doi.org/10.2139/ssrn.3309496

Yujin Kim (Contact Author)

ShanghaiTech University - School of Entrepreneurship and Management ( email )

100 Haike Rd
Pudong Xinqu, Shanghai
China

Chirantan Chatterjee

Indian Institute of Management, Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

HOME PAGE: http://https://www.iima.ac.in/web/faculty/faculty-profiles/chirantan-chatterjee

Matthew John Higgins

University of Utah - Department of Entrepreneurship & Strategy ( email )

1655 East Campus Center Dr.
Salt Lake City, UT 84112
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Max Planck Institute for Innovation and Competition ( email )

Marstallplatz 1
Munich, Bayern 80539
Germany

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