If there’s one sure rule about private equity, it is that there are no rules about private equity! Venture capitalists will tell you that they have different investment philosophies than everyone else, they’ll tell you that they’re not venture capitalists, they’ll tell you that they focus on areas that everyone else ignores.
So, it should come as no surprise that mere days after I posted an article on angels filling the biotechnology funding gap, Business Week should put out an article touting VCs are ‘Biotech’s Unlikely New Pal‘. Truth be told, the investments described in this article aren’t anything new. They’re hybrid business models that combine modest revenue streams with long-term R&D plays.
These hybrid models have been seen before, and were generally abandoned by investors with deep pockets in favor of more mature companies with demonstrated prospects of delivering large returns.
While these hybrid models sound like an intelligent combination of cashflow-positive business units with high potential R&D endeavors, there are some serious drawbacks. Firstly, companies can ‘shift from one foot to the other’, alternately selling the praises of their cashflow business or R&D efforts to distract investors from the fact that neither option actually has any long-term potential. This was clearly demonstrated by firms simultaneously genome databases and internal drug delivery programs in the genome craze of the late 90s. Secondly, the burdens of running a cashflow-positive business can distract management and operations from the company’s real mission – to develop innovative new products leading to significant growth.