So why do investors hand out money to unprofitable biotech startups?
Seems like a bad idea, right?
If you’re an investor, you’re well aware that biopharma research requires a massive amount of upfront cash for research and development with no guarantee that there will even be a working product at the end of the road. Even if you focus the best scientific minds you can find on solving some aspect of a disease, there’s still no guarantee that you’ll succeed. An amazing company with brilliant executives doing stellar science based on well-founded hypotheses still may not end up producing a safe and effective therapy. That’s just the nature of science.
It’s not that any member in these companies *messed up* to make their drug-in-progress fail, it’s just that the problem they’re working on isn’t one that humanity has conquered yet, and it’s going to take more time and energy to solve.
This represents a very different type of risk for investors in biopharma than those who invest in, say, software. When investing in a software company (especially one that’s not profitable yet), investors take on “business risk” — for example, that customers may not like or use the software the way the company hopes — but there’s no doubt that the software in question can be created. In contrast, biopharma investors get very familiar with “technical risk” — the risk that it may not even be possible for the product that the company envisions to even exist.
Listen to Jason Kelly, CEO of Ginkgo Biopharma, discuss technical risk versus business risk [OPTIONAL]:
So why do investors take this kind of risk? For the promise of returns.