What is Biotech Venture Capital?

Jim B.
Jim B.
Man climbing a rope
Man climbing a rope

Biotech venture capital refers to the process by which individuals or groups invest in start-up companies in the biotechnical industry. The industry is made up of those companies that use living organisms and the processes by which they live as a way to research and develop new products and services for the fields of medicine and technology. Venture capitalists target companies that are in the early stages of their existence and need capital to build their business. In return for their biotech venture capital investments, investors often get a say in the management of the companies in which they invest.

One of the fastest growing sectors of the market is the biotech industry. From simple applications like using the knowledge of how plants grow to grow new plants to complex techniques derived from molecular biology or genetic engineering, the field is extremely wide-ranging. As a result, new companies with novel ideas and technologies are starting up all the time. Biotech venture capital gives investors the opportunity to participate heavily in this industry.

Investors who wish to delve into biotech venture capital often do so by investing in a venture capital fund. This is a group that pools investments from multiple sources and seeks out new companies in the biotech industry. The fund is managed by professionals with expertise in finding companies that may be just starting out but have the potential for significant growth. Venture capital represents an important source of income for such burgeoning companies.

Depending on how much equity in the company the investment gains, the fund may have significant say in the direction of the company. This control may come in the form of influence over daily operations or even on the hiring of management personnel. For this reason, a company must weigh the downside of losing this control before it seeks out the benefits of biotech venture capital.

The downside for investors in biotech venture capital is the relative uncertainty surrounding these brand-new companies. Since it is a hugely competitive industry and many start-up companies fail to survive very long, investors have no guarantee that they'll see any return whatsoever on their capital. If they manage to get in on the ground floor of a company that breaks into a larger portion of the market, then investors have multiple ways of cashing in on this success. They might benefit from the resale of the company at a much higher price or from the company going public via an initial public offering.

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