While many industry-changing technology companies like Yahoo! and Facebook were born in college dorm rooms, start-ups in the biotech field have a hard time making it big from such modest beginnings. Because launching a new drug to fight, say, metastatic breast cancer requires substantial funding, scientific talent and the know-how to get through arduous development hurdles, entrepreneurial biotech firms face a long, capital-intensive road to get from great idea to product approval and, ultimately, onto the market.
For that reason, forming alliances with prestigious, deep-pocketed pharmaceutical companies, research organizations, universities or other established biotech companies is essential for young biotech firms. These alliances open doors to funding, licensing, development, distribution and marketing opportunities and can lead to earlier initial public offerings. But how do start-up companies attract the attention of well-established industry leaders? The answer may lie in the status and background of young firms’ top managers, finds Professor Jerry Kim.
Kim, along with coresearcher Monica Higgins of Harvard, wanted to expand on existing research — which showed that forming alliances helps young biotech firms succeed — by determining what actually leads to biotechs forging these valuable partnerships. “We honed in on the idea that maybe, because it is difficult to gauge the status of young biotech firms, potential financial partners look at the career backgrounds of the start-up’s management team as a way to assess whether the company has value,” Kim says.
The extent to which the backgrounds of firms’ top-tier managers (such as the CEO, COO and top scientific officer) help attract the attention of prestigious alliance partners has roots in the concept of homophily, the principle that organizations seek out partners that are similar along various dimensions because shared traits make it easier to trust and understand one another. Kim and Higgins proposed that both the status and the prior roles of a young firm’s senior managers provide important sources of homophily that can facilitate alliances.
Looking at the career histories of 3,200 top managers from public biotech firms as well as a data set of alliances among pharmaceutical firms, biotech companies and universities, the researchers separated the alliances into three types: upstream (alliances with research organizations and universities), downstream (alliances with pharmaceutical companies) and horizontal (alliances with other biotech firms). They found that for both downstream and horizontal alliances, the greater the number of upper-level managers with affiliations, the greater the rate at which the firms were able to form alliances.
“If a young biotech company is trying to form a downstream alliance with a firm such as Merck or Pfizer, then it helps if someone on its top management team has affiliations to a downstream player,” Kim explains. “Although having a horizontal or upstream affiliation also helps boost the firm’s overall status and likelihood of forming an alliance, it is particularly beneficial if you have a match.”
Surprisingly, firms whose top managers held upstream affiliations actually had a harder time striking up an alliance with other upstream organizations, a particularly important fact because many biotech firms are spawned from scientific work done at a university or research organization. “Essentially, once you establish a tie or you come from a certain school of thought or research, you have locked yourself into that stream,” Kim says. “If you build your biotech based on research done at Columbia, you’re probably not going to be able to partner with Harvard or Stanford later on.
“This is a striking result given that having a top-tier executive who came from Merck didn’t prevent biotechs from getting downstream alliances with Pfizer or other competing firms, for example,” he adds. Indeed, such role-based homophily helped biotech firms seeking downstream and horizontal alliances. Established firms are more open to partnering with young firms that have upper-level managers who have worked in similar jobs at other comparable companies because a comfort level exists among people who understand one another’s roles and “speak the same language,” Kim explains.
Established firms also look to status-based homophily when choosing companies to partner with. “A company like Merck does not want to partner with a firm whose management team comes from unknown companies,” Kim says. For that reason, biotech firms should focus not only on their technology and products but also on the people running their organization.
“The key message from this research,” Kim says, “is that who you put on your top management team has a big impact on getting these crucial alliances. Attracting people with the right prestige and career background is extremely important.”
Jerry Kim is assistant professor of management at Columbia Business School.