As one of action plans in connection with new government’s economic agenda, ‘Creative Economy’, central government’s effort to boost a capital investment for venture and SME assuming to have potentials for growth expects to accelerate. In terms of the characteristic of venture/SME who might have a potential to create something new and growth while it is not feasible to foresee actual output at any time soon, capital investment on venture/SME seems to decline for years. According to the recent news, investments from venture capitals have substantially decreased while the number of venture firms kept increasing.
To reinvigorate VC investment activities in terms of raising up ventures who contain a significant potential for economic growth, creative structured financial investment need to be introduced. For example, there is an interesting study from MIT with respect to the investment of biotech industry. Among developed countries, United States makes a relentless effort to revive stem cell research and related biotechnology industry since the cloning controversy from years back. However, biotech investment is notoriously known as unpredictable outcome based on intense series of testing process with considerable amount of investment costs. So investment on biotech is not favorable at recent years. In order to revitalize biotech and related R&D effort, MIT(Massachusetts Institute of Technology) Professor Andrew W. Lo and his academic colleagues introduced the structured financing model for biotechnology: Biotech Megafunds. In terms of practicality, certain conditions are necessary to be preserved in advance. However, considering the fact that venture firm having a potential to create new drugs or sensational cure for cancers empowered by megafunds for the present and future human generations in terms of revitalizing venture/SME investment, it is believed that it is worthwhile to contemplate.
According to the study, R&D investment substantially decreased for years due to the higher risk and complexity of bio technology industry, which usually takes considerably long years to develop new items or drugs. So the study had learned that there is so call ‘funding gap (death valley)’ between initial R&D phase and final commercial phase. Due to the shortage of investment in the middle of R&D process, some of development ended up discontinue or ceased its entire processes. In order to connect the gap, the study suggested that certain investment vehicle, ‘R&D Megafund’, should be able to enclose investment practices of entire process of R&D. To do so, the study also proposed that structured financing model, which mixed equity with securitized debt.
Similar to MBS(Mortgage-Backed Security), Biotech Megafunds is necessary to issue RBOs(Research-Backed Obligations) via SPC(Special Purpose Company).
Fundamentally SPC should be able to structure its liabilities by rank, senior, junior debts backed by research value of invested capital along with equity. Of course, estimating the value of targeted research as a collateral need to be discussed when this structure is implemented. Theoretically portfolio investment shall mitigate the losses from investment in several targets at each processes rather than the loss from standalone investment. Therefore, it is believed that investors might be interested if this portfolio strategy would prove the fact that it lowers the risk of investment in all R&D process.
So far, the study seems to be proposed as an idea. Reportedly certain conditions need to be done before it is feasible to do so. However, it is definitely worthwhile to go over the idea because investments on ventures not only are known to be not only highly risky, but also require a considerable period of return. As suggested above, if well structured financing model should be able to attract more capital investment on venture/SME by mitigating the expected or unexpected risk in every way, the idea shall be well adopted and need to proceed with help of policy approach in order to reinforce necessity for venture/SME investment in terms of creative economy perspective.
By Jin Mok Kim