I’ve always wondered why software VCs often also have a biotechnology start-ups investment arm (let’s not give out the VC names));. Frankly, I find it hardly understandable, for a number of sound reasons:

• No external synergies: software start-ups are founded by software developers; biotech companies are ran by medical doctors, healthcare engineers or biochemistry PhDs. By external synergies, I mean moving a good manager from a bad investee to a good investee with a bad manager.
• Distribution strategies are clearly different. Biotechnologies focus on R&D and go through big pharma corps for manufacturing and marketing. Software start-ups tend to try to master the whole value-chain, prepare to go international fast, and may sell directly to the end-customer via the Internet.
• Geographical clusters aren’t necessarily common. The following picture is very broad: in Europe, biotech players regroup in Cambridge (UK), Denmark & Switzerland. In the US, in Boston, Austin & Cincinnati. Software players in Europe are located in Paris, Munich & London, and in the US, in Palo Alto, San José, Seattle, Boston & New York. But since technology makes remote work very easy, it’s everyday harder to locate software clusters.
• Both markets have nothing in common, that’s a no brainer. So one VC has to chose in which industry (s)he’s going to specialize in.

Looking for explanations, I found two major ways to look at VCs doing both software and biotech players:

• There is too much money available for investing vs. too few entrepreneurs (at least in Europe). So, VC funds manage to raise a lot of money, too much money. And since there might not be enough deals in one industry (and the bigger, the more money they make), they start a new fund in another industry to diversify their portfolio. The way they may justify such a move is crystal clear: in case the software industry enters economic doldrums, biotechnologies play a defensive role and vice versa.
• This is the very best reason, although I still don’t find it quite satisfying, why VCs could invest both in software and biotechnologies: investment cycles are similar. Time periods may differ (obviously much longer in biotech), but in the end, in both industries, the time-to-market may get pretty long. In other words, between the idea and the product, between the invention and the innovation, you need a relatively long time to launch a market-ready device. And development time costs money: you need to pay software developers or researchers, you need to invest in computers and testing hardware, you need to pay for business development expenses, lawyers, accountants, etc. Bootstrapping in software is feasible (although very ambitious people will tend to raise early-stage money), but impossible in biotechs. In both cases, before you breakeven, you need to have enough cash to breath – and the lower the cash burn rate, the better. That’s what I call investment cycles, and they’re often similar in the businesses of software and biotech.

When all’s said and done, I’ve thought about it – as you can see, but I still don’t understand why VCs in one industry don’t start another VC brand to invest in another industry. And when I’ll become an entrepreneur, I will for sure not select an investor that doesn’t specialize in my industry, and my industry only.

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