CHANGING ROLE AND SCOPE OF VENTURE CAPITAL


(65 percent), contract research and joint venture were $578 million (15
percent), RDLPs accounted for $558 million (14 percent), and grants to
universities or research institutes made up $260 million (6 percent). Prod-
uct license agreements totalled only $14 million, or less than 1 percent.


CORPORATE AND INSTITUTIONAL
VENTURE CAPITAL

 To finance their research and development efforts, the new biotechnol-
ogy firms have called on a wide array of funding mechanisms. Among the
most important of these have been investments from venture capital firms
(institutional venture capital) and from established companies interested
in biotechnology (corporate venture capital). The investments from the
latter have generally taken two forms: equity investments and joint ven-
tures. Equity investments, in which established companies buy portions of
new biotechnology firms, have enabled the former to keep abreast of de-
velopments in the field, perhaps to gauge the best time to enter the field
themselves. Joint ventures, in contrast, usually involve a more active com-
bination of R&D contracts and product licensing agreements. Under the
terms of these agreements, an established firm often handles the regulatory
approval, manufacturing, and marketing of a product after the small firm
has done the initial development. The small firm receives royalties from
the sale of the product and usually retains the patent on the products
(Schoemaker, 1986).


INITIAL PUBLIC OFFERINGS

 Another major source of funding for the new biotechnology firms has
 been the stock market. In the early 1980s, several start-up biotechnology
 firms set Wall Street records when they first went public. In 1980, Genen-
 tech's stock underwent the most rapid price increase in the market's his-
 tory, climbing from $35 to $89 per share in its first 20 minutes of trading. A
 few months later, Cetus raised the then-largest amount of money with an
 initial public offering-$110 million (Schoemaker, 1986). Disillusion then
 set in as results did not match optimistic predictions. Recently, sentiment
 has improved dramatically. Since October 1985, the biotechnology share
 index, made up of 60 publicly-quoted companies, has risen 75 percent.
 This has more than made up ground lost during the years of disenchant-
 ment (Economist, 1986).