Business Week’s puckish new Deal Flow “blog” on the world of venture investing has a savvy response to the question, “Why invest in biotech?” After all, drug discovery is a brutal business: it’s so hard to a drug approved, it costs a fortune, it takes forever, and there are endless dry holes. What VC would do that rather than, say, invest in a software company where there are no regulators, few dry holes, and you can create a credible company with $4-million in capital?
Well:
In [information] technology VCs can pretty much know if the technology will work, and hope is the market will be as big as due diligence suggests. In biotech, it takes a long, long time to know if the drug will work in humans and well enough to satisfy the FDA. But if you are making drugs to treat diseases like cancer or multiple sclerosis, there is so much upside potential for better treatment that the market is almost assured. You’re really just trading one risk for another.
Nicely put. Venture folks like to think in terms of managing risk, of which there are four main varieties: People, market, financial, and technical. Life sciences investments tend to be long on the technical risk and low(er) on the market risks; while IT investments tend to be lower on the technical risk, they are considerably higher on the market risk. At some level, IT versus biotech investing is about a trade-off of the risks with which you feel most comfortable..
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