Going Public When You Can in Biotechnology

Scientist-entrepreneurs prominent in biotech and other high-technology industries view going public not as a cost-effective source of capital but as a cross between selling a now-proven innovation and winning a lottery. Unlike most empirical IPO analyses confined to those firms that go public, we study substantially all the non-public biotech firms founded up through 1989. The probability that one of these firms goes public in any given year increases with the quality of the firm's science base (use of recombinant DNA technology, number of articles by star scientists as or with firm employees, number of biotech patents), the percentage of eligible firms going public the year the firm was founded as a strategy indicator, recent biotech returns as an indicator of a hot market, and whether or how many rounds of venture capital has been obtained. The same key factors increase the expected proceeds raised from IPOs, but the quality of the firm's science base plays a more dominant role. All firms going public try to look like the next Genentech, but only those with the strong science base necessary for success attract large investments.