The notion of risk and profit associated to the entrepreneur
The notion of risk and uncertainty has been linked to the entrepreneurial function since its early days. The risk function can be attributed to both definitions of entrepreneurship (the agent responsible for firm creation and the agent of change). In the discussion over the entrepreneurial function, risk has been seen for a long time as part of the entrepreneurial function (Cantillon 1755b; Say 1803). However, in early theory, the entrepreneur was considered as taking financial risk while investing in his venture, and therefore confounded with the capitalist function. In some contemporary theories, such as in the Schumpeterian theory of entrepreneurship, the risk was considered to be borne by the capitalist function18, because they would experience the financial loss and thus be more affected than the entrepreneur if the innovative project were to fail.
A traditional characteristic that is attributed to the entrepreneur lies in his attitude towards risk. Some literature would therefore imply that the entrepreneur has a lower risk aversion than other agents in the economy. However, this proposition can be counterbalanced with many other variables and facts that can be found in entrepreneurship theories.
Firstly, some empirical studies have compared different categories of agents with entrepreneurs in terms of their risk aversion. Some empirical studies (Brockhaus 1980; Tucker III 1988; Palich & Ray Bagby 1995) show a positive relationship between entrepreneurs and gambling, while others found no significant evidence that entrepreneurs are more inclined towards risk taking. Thus evidence coming from empirical literature is somehow conflicting and therefore inconclusive on whether an entrepreneur is less risk averse than other agents. While developing this section we will therefore see that other explanations have emerged that can counterbalance the fact that the entrepreneur is different in terms of risk aversion, such as characteristics of his opportunity (i.e. risk inherent and expected profit related to the development of his opportunity) or asymmetry of information in favour of the entrepreneur.
The perception of risk can also differ among individuals. The first difference that can arise is the asymmetry of information. The entrepreneur, when discovering and assessing an opportunity, may have more information in terms of technology, market condition and the industry value chain to assess the opportunity. Therefore the decision of enterprise is less due to personality bias in risk bearing, than to the surplus of information held by the entrepreneur.
A second point must be mentioned regarding the notion of risk, which concerns the notion of probability. The notion of probability can be split into two types, the objective and the subjective probabilities. The objective probability occurs when all possible states of occurrence and their associated probabilities are known. The subjective probability stipulates that the future is unknown and that people take a subjective view in assessing the probability of different outcomes to an action (Miller 1977). In theories of entrepreneurship, in order justify the rationality of the agent and to explain why this agent rather than another exploits an opportunity, subjective probability is often introduced in relation to the concept of judgemental decision or optimism (Casson 2005; Shane & Venkataraman 2007). In Shane a d Ve kata a a s (2007) paper, the notion of optimism is intimately linked to the interpretation of the entrepreneur regarding the chances of success of his opportunity, and the chances are usually perceived as higher than in reality. For Casson (2005), the optimism differentiates the entrepreneur from other agents, since others are usually more pessimistic, which acts as a psychological barrier. The notion of optimism in this theory is based on the information available to the entrepreneur and his own interpretation of it. This notion is linked to the notion of decision making that is closely related to the notion of risk and uncertainty. The difference of available information between the entrepreneur and any other agent is that the entrepreneur has more information and so even though exploiting an opportunity is risky for him, it can appear more risky to other agents (for whom the action is uncertain). Literature on entrepreneurship and finance has differentiated between three notions of risk: risk, uncertainty, and u k o . K ight s (Knight 1921) contribution was focused on the discussion about the function of risk taking associated with the entrepreneur. In his book he differentiates the notion of uncertainty from the notion of risk. The notion of risk can be defined according to the literature (Knight 1921; Miller 1977) as when the possible outcomes over an action are known and probabilities over outcomes are also known. Uncertainty is defined as outcomes which are known but probability over outcomes is not known (true uncertainty and divergence of opinion). A third level can be added with the unknown, when the possible outcomes of action are not known (Gompers & Lerner 2001).
Researchable specificities of the entrepreneur
The above sub-sections have aimed at providing a better understanding of how to identify the entrepreneur and which of his characteristics may have an influence on his actions.
Fi stl , i theo , it is a gua le that the e t ep e eu is see as a supe age t ith exceptional characteristics to fulfil its function. In practice, depending on the technology used and industry target, there is not one entrepreneur who identifies and exploits opportunities and grows a firm successfully. This has been true for many high-tech firms such as Apple, intel or Google; each of these firms in their creation process, and later in their development process, have experienced a shared repartition of different tasks (marketing, managerial and technical), which has evolved over time. Thus, within this thesis, it will not be assumed that the entrepreneurial function is fulfilled by a single individual, but by a coalition that is not stable over time. Thus in none of the future chapters will the thesis try to identify a single person incarnating the entrepreneur; and when referring to the entrepreneurial notion it will consider the individual having leadership in the project (first in the scientific project, later in firm creation and then in the development process).
Secondly, the interdependence of risk and profit, from a theoretical point of view, is not straightforward in practice, especially in high-technologies. For risky investment, which is the case in the sector chosen for the study, risk bearing and profits are not always proportional. External early financing is required since those venture projects require high financing for completion. Thus in those cases, even if the risks borne by the entrepreneur seem greater, the availability of funds required guarantee the capitalist higher returns with mechanisms to limit risk, which are not accessible to the entrepreneur19. This discussion is particularly relevant for the decision of an entrepreneur in his choice of project, which determines his financing needs and therefore his choice of investment methods. These issues are especially discussed in Chapter 4, which deals partly with the relationship between capitalist and entrepreneur, as well as problems encountered during project development and control over the firm.
Thirdly, the experience of the entrepreneur can also be crucial for the survival and growth of his venture, and can therefore be a determinant for his actions. Since this work looks specifically at the biotechnology sector, the question of the experience needed to start a company on an innovative project is a central topic because many new ventures in the biotech sector are university spin-offs (Oakey 1995). Thus an academic wishing to identify and exploit an innovative opportunity is most likely to lack essential business and industrial experience. In our case, we therefore hypothesise that the founding team of a biotech venture influence their entrepreneurial action. This particular relationship is discussed in two of the analytical chapters. Chapter 6 focuses on the early process of firm independence from their parent organisation (here the university) by examining the fou di g tea a kg ou d, leade ship st u tu e a d so ial apital of the fi s fou de s. Chapte 5 examines the process that leads to strategy definition in a newly created organisation in parallel with the process of founding team formation. It particularly links the background of the leader of the founding team with the strategy chosen.
What is the impact of the environment on the entrepreneur and his actions?
The entrepreneurship theory has looked extensively at defining the internal determinants of the entrepreneurial action, but has given less attention to the external influence over the entrepreneurial action. Hence the action of the entrepreneur, as explained in the human agency theory, cannot be an autonomous agency because the environment can have an extensive influence over the entrepreneur and his actions. Literature in entrepreneurship, under various headings, has included the environmental presence in its theory or through the concept of opportunities (Kirzner 1978; Shane 2003). The concept of opportunity used in entrepreneurship theory usually embeds the notion of the changing environment, such as technological, socio-political, demographic and, regulatory change, which can lead to new opportunities of profit that the entrepreneur can take advantage of (Shane 2003, p.23). Other theories, such as Penrosian (1959) theories, internalise the different variables that enable him to make decisions and take actions. Among others20 , these variables include the environment, defined as ha ges external to the firm and lie beyond its o t ol , which is an important variable to consider in the possible action, or restriction of action that lies upon the entrepreneur (1959, p.4). External shocks (Casson 2005), investor behaviour (Gompers & Lerner 2001), and support organisations (such as incubators or other support organisations for ventures) are also a few other examples of the environmental factors that can impact firm behaviour and are discussed as separate matters in the entrepreneurship theories. The environment is an important influence over the entrepreneurial decisions and actions and thus also has an impact for the firm long term survival or evolution path. In order to build our understanding of how the environment may shape the entrepreneurial action, the section refers to a range of literature that includes evolutionary economics, systems of innovation literature and regional economics to complement the scattered contributions that are offered in the entrepreneurship literature. Recently, the entrepreneurship theory has focused on the financing issue relating to innovative entrepreneurship and especially the consequences of the risk-financing on firm development, this issue is exposed in following section.
The notion of time in the entrepreneurial action
The entrepreneurial action, in opposition with the previous components described (i.e. the agent and the environment), unfolds over a period of time, which is often referred to as a process. Therefore, this section introduces the notion of time. The entrepreneurial action cannot be studied in a static manner, and so many contributions have focused on the entrepreneurial process with regards to both firm creation and opportunity exploitation.
The notion of time is attractive for studying evolution patterns, but its use has to be carefully considered. Some studies, such as the literature on firm life cycles (Whetten 1987; Phelps et al. 2007; Quinn & Cameron 1983) compares the life of a firm to the any living organism going through the various stages such as birth, youth, growth, decline and death. In this literature the question has risen about quantifying time for each stage. Some managerial literature (Phelps et al. 2007) on life cycles has analysed the life-cycle issue of the firm in order to make it fit to a creation time frame, by putting a quantitative timeframe on the evolutionary process. However, this view has been heavily criticised since the amount of time taken in each stage is specific to the firm, market opportunities and other components. This is especially true since different firms evolving in different sectors may have different technological or regulatory constraints when starting up a firm. An example is the contrast between two high-technology sectors, the software industry and the human health biotech sector (Oakey 1995). In the software sector, the product development process can be arguably less constraining than in the Biotech-human health related pharmaceutical sector. The software sector can be characterised with a low requirement for capital, equipment and so barriers to entry into the market is relatively low compared to other industries, and finally there is a potential for early revenues (ibid.). By contrast, biotechnology firms who target their products to the human health pharmaceutical industry are much more constrained in development costs and time since the regulation in that industry force the firm to a constraining testing of their products, which takes time and raises the costs of the product. Thus in our case we will not try to quantify the amount of time of each phase but rather try to find some relative sequence between the identified stages.
The notion of time is seen as a relative feature and has to be fully integrated in our framework of study. The evolution of the innovation and creation process must be described and the three components have to be understood in a dynamic manner. As we have already emphasised, the agent considered as entrepreneur can evolve over time, since this function can be fulfilled by more than one individual over time due to the capabilities needed at each stage of the entrepreneurial action (aim of Chapter 5). In addition, different organisations and institutions can have a different role when entrepreneurs are developing their action, such as the parent organisation having a strong role at the spin-off stage (aim of Chapter 6) or other organisations such as the local environment or financing institutions (aim of Chapter 4) having various influences at different stages of the company life. The entrepreneurial function and the environment is therefore seen in our study in a dynamic manner through the study of the actions, which are usually represented as processes and include firm creation or development of innovative projects (this is the developed in the next section). Therefore, the interaction of the different components identified by the human agency theory are here seen as a central pillar in our framework, and thus the interaction of the three components exposed in Figure 1.1 should be studied as an evolving process, as showed in Figure 1.2.
How should the innovating organisation be understood
Outside the focus of organisational processes from the firm creation, some contributions in the entrepreneurship literature have also discussed the early firm development by starting their stages before firm creation. An early contribution (Carter et al. 1996) identified four stages of creation; first the intention to create the organisation, then the assemblage of resources, then developing an organisational boundary (creation) and then exchanges of resources across the boundaries (sales). These stages are similar to the ones identified by Garsney (1998). A later contribution by Shane (2003) in his search for a framework development for a theory of entrepreneurship introduced a central component, which is the concept of opportunity. Shane also put forward his stage event framework, which is much further developed than earlier stage model since the argument is made throughout his book on entrepreneurship. He constructed his theory around the main stages with the identification and decision to exploit an opportunity and then the response of firm creation with a resource acquisition, and next an organising process before performance. This model is shown below (Figure 1.5).
The scientific revolution behind the emergence of the technology
The biotechnology sector is not new per se, since humanity has been using techniques relating to life science in many applications since the Stone Age. If we consider the definition of biotechnology as the use of living organisms or biological processes in a productive way then biotechnology activities can be traced as early as the Stone Age with the use of enzymes, bacteria and fungi in fermentation processes, or even with the first use of agriculture through the selection and breeding of plants and animals. The technology emerged long before the scientific understanding of these living organisms. However, scientific advances due to breakthrough occurring in the 20th century relating to how living organisms work, have given rise to a set of new techniques and opened new possibilities in the manipulation of living organisms. The scientific paradigm behind the development of biotechnology has been driven by the fundamental question of What is life (Morange 2003), and has been marked by the characterisation and understanding of genes (firstly through their roles and then through biochemical characterisation). This section exposes the scientific evolution behind the development of genetics.
During the 20th century, scientific advances have experienced a great leap in the explanation of hu a life th ough the u de standing of the functioning of genes. The interest in genes as an object of study arose in the late 19th century with attempts to understand heredity and the specific characteristics of living organisms (Morange 2000). The work of Mendel on the observed heredity of plant hybridisation through inheritance of traits, from which are derived the Mendel Laws of inheritance, would later become central in genetic science. Later research from Morgan in 1910 advanced the understanding on genetics, by showing that genes were carried on chromosomes and are the basis of heredity (Fagot-Largeault et al. 2007). The subsequent research in the genetics field was oriented towards the characterisation of the chemical form of what constitute a gene (whether they were proteins or nucleic acids). In 1952, Chase and Hershey proved that genes were made of nucleic acids (DNA) (ibid.). This result was already shown by Avery in 1944, but the experiment of chase and Ensley was a much clearer demonstration of it (Morange 2007). The final and most influential scientific breakthrough was to come with the discovery of the structure of DNA. This discovery is attributed to Watson and Crick and was published in April 1953, from which they were rewarded a Nobel Prize in 1962 (Cavazzana-Calvo & Debiais 2011). However, historians have also acknowledged the role of Franklin and Wilkins who worked on the X-Ray diffraction imaging that gave a clear picture of the double helix structure of DNA. While Franklin was the one able to produce the best picture the DNA structure, the discovery was attributed to Watson and Crick because their paper was the one that was able to link the specific structure of DNA with the auto-replication characteristic of the gene.
Scientific development from the early biological discovery
The aim of this section is to give a global overview of important disciplines that shape the health care advances and especially the pharmaceutical and related industries today. The list of disciplines and methods is not exhaustive.
The advances made on the tools to observe and interact with human genes have given rise to different disciplines and complementary technologies that have furthered the understanding of the functions of genes and proteins. The scale of information generated by the understanding of the human genome is phenomenal, and so calls for complex systems of data management. This section will therefore go through the common sciences developed following the human genome project, which are genomics, proteomics and bioinformatics for the management of the data generated.
Table of contents :
Chapter 1: Theoretial akgroud: Etrepreeurial role i the fir’s early life stages19
2. Entrepreneurship, what definition?
2.1. Division between two conceptions of entrepreneurship
2.1.1. Organising agent through firm creation
2.1.2. Agent bringing change
2.1.3. The contemporary literature on entrepreneurship
126.96.36.199. A variety of disciplines
188.8.131.52. A variety of levels of analyses
2.2. What definition of entrepreneurship should be in use here?
3. Agency and entrepreneurship
4. Who is the entrepreneur?
4.1. The haateistis of a etepeeu: is the etepeeu a Ueesh?
4.2. The entrepreneurial function: is it always embodied in one person?
4.3. The notion of risk and profit associated to the entrepreneur
4.4. Researchable specificities of the entrepreneur
5. What is the impact of the environment on the entrepreneur and his actions?
5.2. Other Institutions
5.3. Colusio o the fis environment
6. How can the entrepreneurial action be observed?
6.1. The notion of time in the entrepreneurial action
6.2. A stage view of the firm early life
6.2.1. Organisational models
6.2.2. How should the innovating organisation be understood
6.3. Researchable characteristics of the entrepreneurial action
Chapter 2: The Biotechnology sector: Disentangling inputs and outputs
2. General context and definition
3. From sciences to technologies
3.1. The scientific revolution behind the emergence of the technology
3.2. Scientific development from the early biological discovery
3.2.3. Technologies emerging from the fusion of biology and computer advances
3.2.4. Towards an integrated view of these technologies: the study of systems biology
3.2.5. Stem cells and cell biology
4. Outputs: the consequences on red biotechnology related industries
4.1. Biotechnology in the health sector: overview and definitions
4.2. The pharmaceutical industry
4.2.1. New drugs
4.2.4. Derived industries: Nutraceuticals and cosmeceuticals
184.108.40.206. Functional foods & nutraceuticals
Chapter 3: Empirical background
2.1. Research Design
2.1.1. Case study design
220.127.116.11. Research objectives
18.104.22.168. Strategy of research: why opt for a case study research
22.214.171.124. Research design: What type of case study research?
2.1.2. The case selection
2.2. Fieldwork and collection of data
2.2.1. Data collection
126.96.36.199. Epets iteies
188.8.131.52. Etepeeus iteies
3. Cases overview
3.1. Alsace Biovalley: An overview
3.1.1. Policy initiative
184.108.40.206. The emergence of a trinational cluster
220.127.116.11. The French historical industry and regional policy
18.104.22.168. The Birth of Alsace BioValley as a convergence of the two initiatives
3.1.2. Institutional support of technology transfer
3.1.3. Financial support available for start-ups
3.1.4. The Research Community
22.214.171.124. The Strasbourg region
126.96.36.199. The Basel Region
3.1.5. The research network in the Strasbourg region
188.8.131.52. Cluster overview
184.108.40.206. Publication activities
3.2. Overview of firms interviewed
3.3. Firm presentations
3.3.1. University spin-offs
3.3.2. Start-ups spi-offs
3.3.3. Large firm spin-off
3.4. Synthesis of the chapter
4. Concluding comments
Chapter 4: Financial partnering and business model: an interdependent choice
2. Business goals: from the exploitation decision to entry business model
3. The etepeeus ie o the usiess odel
4. The financier-entrepreneur relationship
5.1. Research design
5.2. Data Gathering
5.3. Data Analysis and operationalisation of the concepts
6. Business model choice: personal experience or regional learning
6.1. Brief history of success and failure of previous generation of start-ups in the cluster
6.2. Business model influences of new firms
6.2.1. Choice of their business model and financing choice and constraints
220.127.116.11. Product model
18.104.22.168. Hybrid or service only models
22.214.171.124. Remarks on financing solutions
6.2.2. Direct and indirect experience
7. Synthesis of the results and discussion
Chapter 5: Etrepreeur’s akgroud ad start-ups strategy
2. Theoretical background
2.1. Specificities and constraints of the organising process
2.2. The etepeeus pefeees
3.1. Research design
3.2. Data Gathering
3.3. Data Analysis and operationalisation of the concepts
4. Detailed analysis of the case studies
4.1. Initial defiitio of the fis stateg at eatio
4.1.1. Scientists preferences
4.1.2. Business or industrial managers preferences
4.2. Coseuees of eogeous shoks o the otiuit of the fis stateg
5. Synthesis of the results and discussion
Chapter 6: From science to industry: the involvement of university in academic spin-off formation
2. Theoretical background
2.1. The evolving role of universities
2.2. Public research constraint vs. private research constraint
2.3. Towards a model of university spin-off creation
3.1. Research design
3.2. Data Gathering
3.3. Data Analysis and operationalisation of the concepts
4. Detailed analysis of the case studies
4.1. Phase I : Research Project to Creation
4.2. Phase II : Firm creation to firm independence (incubation phase)
4.3. Phase III : Firm taking its own R&D path
5. Synthesis of the results and discussion
6. Summary and Conclusions