Financing Technology's Frontier: Decision-Making Models for Investors and Advisors / Edition 2

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An indispensable resource for anyone interested in the future of emerging technology industries Financing Technology's Frontier draws upon the experiences of today's most successful venture capitalists and entrepreneurs to provide investment professionals expert insight and powerful tools for identifying and capitalizing on the most promising high-tech and biotech opportunities. It also includes proven business models and many fascinating and instructive case studies that help entrepreneurs, CEOs and CFOs learn from the successes and setbacks of other companies in their sectors. Richard Shanley (New York, NY) is a partner in the Health Services and New Media division at Deloitte Touche Tohmatsu.

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Editorial Reviews

From the Publisher
“… a wealth of illustrative examples … should kickstart some fruitful thinking.” (Internet Works, May 2004)
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Product Details

  • ISBN-13: 9780471444329
  • Publisher: Wiley
  • Publication date: 10/31/2003
  • Series: Wiley Finance Series , #192
  • Edition description: REV
  • Edition number: 2
  • Pages: 272
  • Product dimensions: 6.22 (w) x 9.50 (h) x 0.97 (d)

Meet the Author

Richard P. Shanley is a Partner in Deloitte Touche Tohmatsu serving in the northeast region of their healthcare and life sciences industry practice. He has over twenty-seven years of diversified professional services experience, encompassing audits and public stock offerings for biotech, pharmaceutical, and high-tech companies. He has founded and led industry practice groups in both health sciences and new media, and is a recognized authority on financing for emerging growth companies.

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Read an Excerpt

Note: The Figures and/or Tables mentioned in this chapter do not appear on the web.

Chapter 1

Sharing the Excitement of Discovery


As mankind stands on the edge of a new millennium, it is interesting and informative to take a look backward and measure how far technology has advanced in the last thousand years, and understand why the pace of change has accelerated so rapidly in just the last 100 years.

A millennium ago, the most advanced practitioners of the art of healing lived in the Ottoman Empire. The skills of these medical practitioners were essentially derivative, in that their primary goal was to interpret and revive the medical knowledge developed by Hippocrates, Galen, and other physicians of the Greco-Roman era. Indeed, in the year 1000, western civilization knew less about medical science than its ancestors did 2000 years ago.

Throughout the Ottoman Empire, the most famous physician was Avicenna, a Persian, who wrote the million-word textbook, Canon of Medicine, which was considered to be the defining treatise on medicine until well into the seventeenth century.

A millennium ago, written language was reserved for society's elite. The printing press had not yet been invented, so the dissemination of information was a slow, painful process. For the average person, storytelling (either oral or through the visual arts) was the most common means to communi-cate ideas between villages or across the generations. To communicate across distances required the physical travel of a human being, which greatly limited the dissemination ofinformation.

By the turn of the twentieth century, the level of knowledge had increased tremendously. In medicine, vaccines were developed. Knowledge of germs as the source of infection was proven by Pasteur, and this led to the first attempts at preventive medicine and the development of theories of immunization. Also at this time, the specific microbes responsible for tuberculosis and cholera were discovered by Robert Koch in Germany.

In communication, voice transmission over phone lines had become available, which made possible verbal communication between people who were miles apart. King Kalakaua, sovereign of the small and remote kingdom of Hawai'i, was one of the first monarchs to install a phone line in his palace, allowing him remote communication with his staff. By 1878, the first commercial phone exchange was put into service in New Haven, Connecticut, and AT& T was born.

The other communication breakthrough that occurred at the end of the last century was the teletype or teleprinter. This technology was in wide-spread use for over 50 years, and only recently was rendered obsolete by computer printers and visual displays.

Within the last 10 to 15 years, the knowledge boundary has been pushed even further. In the field of medicine, biotech and genomics have revolutionized the industry, approaching disease from its source and not its symptoms side. Real cures are emerging, as science comes to understand causation at the genetic level.

In communications, we now communicate a wide variety of data instantly and globally. These transmissions include text, images, and sound, and enable users to access vast sources of information stored in databases, from remote locations.

But the high-tech and biotech industries are not solely functions of advances in science. These industries are actually defined by two spheres, of which science is only the first. The second sphere is business--the ability to introduce new products valued by customers into the marketplace.

Venture capitalists invest for the long term. I think, and most of my colleagues would agree, there is a great future in this area and a wealth of opportunity. The thing to remember is that the science moves on extremely fast, and the key question is how you harness the science into a viable business model.

Nicholas Galakatos, Ph. D.
Former Partner, Venrock Associates
(now Vice President, Millennium Pharmaceuticals, Inc.)

Like the underlying technology, the nature of business has changed dramatically over the last millennium. A thousand years ago, society was largely based on agriculture, and great wealth accrued to large landholders. Commerce was conducted predominately at the individual level, for example, a cobbler or a draftsman plied his trade to others in the same town. To conduct business usually required the physical presence of all parties, such as a farmer's market in the town square, which brought together all the farmers, their products, and the customers.

In the nineteenth century, the Industrial Revolution changed the scale of business dramatically. Manufacturing and production were performed by large factories, and in order to build these, the access to capital was critical. For the first time, large numbers of investors outside of the company itself were needed to build factories and realize economies of scale.

Once again, the size and nature of business is changing. In order to compete successfully, companies must be lean and nimble, able to respond quickly to changing market conditions. Sheer size alone does not guarantee a sustainable competitive advantage, and neither do traditional economies of scale. Instead, knowledge and information are seen as the key resources for companies that allow them to provide value to their customers. Finally, it is no longer necessary to establish physical locations for the conduct of commerce. With Internet technology, companies establish virtual marketplaces from which they sell their goods on a worldwide basis.

These changes--in the world of business as well as the world of science--are the driving force behind opportunities in the high-tech and biotech industries.


The most interesting aspect is to think about the nature of innovation in the drug industry. What exactly does it take to have the kind of scientific breakthrough necessary to create a new drug, one with significant therapeutic value?

In short, it takes entrepreneurial spirit and scientific insight.

You can array data that is common knowledge across the industry and ask ten scientists, "Is there a drug in there or not?" Nine will tell you no, and one person will say yes. Maybe that one person is wrong, and maybe that one person just found a breakthrough. It happens all the time. That intangible element of insight makes all the difference in our industry.

Judy Lewent
Chief Financial Officer
Merck & Co.

High-tech and biotech companies operate in separate industries with vastly different products, and yet they share important similarities. These similarities stem from a common goal, namely to capitalize on scientific insight and create products valued by customers. Some of the characteristics common to both high-tech and biotech companies include the following elements.

Success in the medical, communication, or any other technology-driven field requires a steady flow of innovative products. To create these new products, high-tech and biotech companies are extremely research intensive. For example, in 1996, the Biotechnology Industry Organization (BIO) reported that the average biotech company spends approximately $71,000 per employee on research and development, while the average for all U. S. industries is about $7,600 per employee.

The structure of the company must be compatible with this research-driven nature of the business. According to Gabriel Schmergel, president and CEO of Genetics Institute, Inc., "Innovation thrives better when decentralized. The truly innovative people tend to migrate away from large organizations, whether academic or industry, and move to smaller ones. That is where true innovation is taking place."

High-tech and biotech companies tend to be smaller with fewer employees, and disparate functions exist side-by-side rather than in the different departments found at larger corporations. The aim is to be able to translate ideas quickly into action. Technological change is rapid, and the company must be able to keep pace.

The working environment of high-tech and biotech companies tends to attract people who are motivated by an intellectual curiosity and drive. It is common for high-tech and biotech companies to offer their employees stock options, which provide a strong incentive for performance and create an intense, personal stake for the employees in the company. Stock options also are valuable because they help the company conserve its cash.


Perhaps the most important characteristic shared by high-tech and biotech companies is the long lead time required before products are sold and revenues recognized from research projects. To finance this research and product development can take hundreds of millions of dollars, and there is no guarantee of ultimate success. For example, in the biotech industry, on average it costs $359 million and takes ten years to bring a drug to market. Once there, seven out of ten products fail to return the cost of the company's capital.

CEOs of high-tech and biotech companies are under tremendous pressure to continually raise financing from a variety of sources. Unfortunately, as the high-tech and biotech industries have matured, investors have become more pragmatic and cautious about the companies they back financially.

Merck invests approximately $1 billion per year in research, which has given us extraordinary insight into the risky nature and high cost of pharmaceutical research. We know that scientists will probe an idea they feel has merit for as long as they possibly can, which is great. You get advocates, you get champions, and you never say die. The challenge from the point of view of the finance department is to put parameters around that curiosity and determine what is and what is not productive.

Judy Lewent
Chief Financial Officer
Merck & Co.

The high-tech and biotech CEO faces many barriers in the attempt to raise money, and once raised, additional problems arise in trying to control costs and manage the "burn rate." This book describes the ways high-tech and biotech CEOs might overcome those barriers and problems.

The book begins with an overall discussion of business growth models that encourage others to invest. Succeeding chapters provide insight on how financing is obtained from venture capitalists, the public markets, and corporate partners. Case studies and observations from technology company CEOs are used to demonstrate how key ideas are applied in practice. The book ends with a discussion of tax-and equity-based compensation strategies that can be effective in helping companies conserve their cash as they strive to move their new technologies from concept to reality.


The type of funding to seek depends on the company's stage of development and how the company will use the financing. Only a few of the various financing sources are appropriate for a given business at each stage of its development. Exhibit 1-1 outlines the different sources of financing available throughout a company's life cycle. Many of these financing alternatives are discussed in the chapters of this book. Of course, since each company is different, so is its business and financial situation. The information contained in this book is intended as a guideline only. Any decision to seek and accept financing from a specific source should be made only after consulting with legal and financial advisors.

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Table of Contents




About the Author.

Chapter 1. Sharing the Excitement of Discovery.

Chapter 2. Growth Models that Encourage Investment.

Chapter 3. Where to Find Capital—Part I: Venture Capital.

Chapter 4. Where to Find Capital—Part II: Public Markets and Private Placements.

Chapter 5. Creative and Alternative Financing Strategies.

Chapter 6. Strategic Alliances and Corporate Partnerships.

Chapter 7. Mergers and Acquisitions.

Chapter 8. Profiles of Corporate Partnerships.

Chapter 9. Tax Planning Strategies.

Chapter 10. How to Attract and Retain Quality Employees and Management Teams.

Chapter 11. Corporate Governance in a Post-Enron World.

Chapter 12. Biotechnology Beyond the U.S. Borders.

Chapter 13. Technology’s Future—The View from the Frontier.



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