David S. Scharfstein

Edmund Cogswell Converse Professor of Finance and Banking

Harvard Business School

Contact Information:
Baker Library 239
Soldiers Field
Boston, MA 02163
Telephone: (617) 496-5067
Fax: (617) 496-5305
E-mail: dscharfstein@hbs.edu

Assistant: Peggy Moreland
Telephone: (617) 495-6882
E-mail: pmoreland@hbs.edu

List of Publications and Working Papers

Current Research

Biopharmaceutical Drug Development.  In this research project, we are seeking to understand the role that financial and organizational factors play in the complex and costly process of drug development.  Our work has already established important differences in the strategies and performance of early stage drug development companies and large pharmaceutical firms.  We want to extend this analysis to explore many other important questions including:

• The role of strategic alliances including the determinants of success

• The allocation of R&D effort in large pharmaceutical firms

• The role of stock market  mispricing on drug development

• The process by which biopharmaceutical firms are founded and the effect of founder backgrounds on their strategies and success

Venture Capital.  In this project, which is joint with several colleagues at Harvard Business School, we investigate a number of different topics:

• The determinants of venture capital performance

• The process by which new venture capital backed firms are started

• The valuation of venture capital deal terms

Recent Working Papers

Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs
This paper argues that a large component of success in entrepreneurship and venture capital can be attributed to skill.  We show that entrepreneurs with a track record of success are more likely to succeed than first time entrepreneurs and those who have previously failed.  Funding by more experienced venture capital firms enhances the change of success, but only for entrepreneurs without a successful track record.  Similarly, more experienced venture capitalists are able to identify and invest in first time entrepreneurs who are more likely to become serial entrepreneurs.  Investments by venture capitalists in successful serial entrepreneurs generate higher returns for their venture capital investors.  This finding provides further support for the role of skill in both entrepreneurship and venture capital..

Venture Capital Investment Cycles: The Impact of Public Markets
It is well documented that the venture capital industry is highly volatile and that much of this volatility is associated with shifting valuations and activity in public equity markets. This paper examines how changes in public market signals affected venture capital investing between 1975 and 1998. We find that venture capitalists with the most industry experience increase their investments the most when public market signals become more favorable. Their reaction to an increase is greater than the reaction of venture capital organizations with relatively little industry experience and those with considerable experience but in other industries. The increase in investment rates does not affect the success of these transactions adversely to a significant extent. These findings are consistent with the view that venture capitalists rationally respond to attractive investment opportunities signaled by public market shifts.   .

Organizational Scope and Investment: Evidence from the Drug Development Strategies and Performance of Biopharmaceutical Firms
This paper compares the clinical trial strategies and performance of large, established (“mature”) biopharmaceutical firms to those of smaller (“early stage”) firms that have not yet successfully developed a drug. We study a sample of 235 cancer drug candidates that entered clinical trials during the period 1990-2002 and were sponsored by public firms.  Early stage firms are more likely than mature firms to advance drug candidates from Phase I to Phase II clinical trials.  However, early stage firms have much less promising clinical results in their Phase II trials and their Phase II drug candidates are also less likely to advance to Phase III and to receive Food and Drug Administration approval.  This pattern is more pronounced for early stage firms with large cash reserves.  The evidence points to an agency problem between shareholders and managers of single-product early stage firms who are reluctant to abandon development of their only viable drug candidates. By contrast, the managers of mature firms with multiple products in development are more willing to drop unpromising drug candidates.  The findings appear to be consistent with the benefits of internal capital markets identified by Stein (1997).

Entrepreneurship in Equilibrium
This paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. Instead, failed entrepreneurs must seek other jobs in an imperfectly informed external labor market. While this is ex-post inefficient, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external) labor markets are thus particularly valuable, which favors intrapreneurship (entrepreneurship). We also show that there can be too little or too much entrepreneurial activity. There can be too much because entrepreneurs do not take into account their positive effect on the quality of the labor market. There can be too little because a high quality labor market is bad for entrepreneurial incentives.

Publications