Drugs and Deals: Understanding Biopharmaceutical Venture Capital Performance and Behavior

Abstract

Venture capital plays a critical role in funding the production of life sciences innovation and life-saving therapies in young biopharmaceutical companies. However, many venture capital investors perceive investments in biopharmaceutical companies as risky and unattractive, leading to less capital being allocated towards them. Biopharmaceutical venture capital performance has been sparsely studied in the academic literature, with limited empirical evidence on this underperformance and strategies to mitigate it. I analyze a dataset from Preqin of recent venture capital funds and deals to find that biopharmaceutical funds underperform information technology and diversified healthcare funds. However, their returns are on par with those of diversified funds, suggesting investor concerns around biopharmaceutical investments may be overstated. I also find that the realized returns of biopharmaceutical funds are significantly lower than the interim returns, implying pre-liquidation valuations may be inflated. Additionally, my analysis reveals that biopharmaceutical funds participate in fewer deals, have larger funds, co-invest more, contribute more per deal, and prefer early-stage and mid-stage investments. I design a Monte Carlo simulation for biopharmaceutical investing which reveals that higher returns are correlated with more deals, smaller funds, more co-investing, less deal contributions, and a preference for early-stage and mid-stage investments. This discrepancy between current biopharmaceutical venture capital strategy and optimal strategy may indicate that venture capital investors can improve their returns by modifying their strategy, encouraging further investment in the sector.