March 3, 2010

Australian biotechnology start-ups are more successful at developing their product pipelines when they ignore the accountant and rely on market judgement, according to University of Queensland (UQ) research.

John Steen, from the UQ School of Business, led a study of more than 300 Australian biotechnology companies, linking their investment decision-making with innovation output.

He reportedly found companies who improved their innovation output had invested in new products without calculating the value of the project upfront.

"Our data was incredibly robust and no matter how we analysed it, we came up with the same results – accountants kill innovation," Steen says.

"The more you plan and try and put a dollar value on what a new project could be worth, the less success you will have when you're trying to invest in fast moving Research & Development,” he says. 

Investment decisions based on ‘real options reasoning’ or managerial judgement proved more successful than the traditional ‘net present value’ (NPV) analysis, which was used by the majority of companies to provide detailed statements of revenues, costs and capital expenditures to determine investment choices.

Traditional due diligence and budgeting proved ineffective tools for companies when used to assess investment opportunities regarding new technologies for new markets.

Steen recommends start-ups rely on deep market knowledge and intuition when investing in new innovations and products.

"It's better not to take a rigid and conventional planning approach to innovation investment," he says.

"Companies who budgeted and planned their investments based on projected market valuations tended to commit to rich scenarios and were anchored to a pre-conceived means of achieving pre-determined enterprise value.

"The companies who were successfully developing new products were those who were diligent with seed funding, accepted uncertainty and took a risk."