Keywords: venture capital, biotechnology, portfolio strategy, portfolio diversification, risk, specialisation, multiple case study, life sciences
How do venture capitalists spread risk by diversification within specialised life science portfolios?
Venture Capitalists (VC) invest large amounts of money in risky start-up firms. In order to keep their investment risks low, they carefully select their portfolio companies and systematically spread risks portfolio companies are well studied, little is known about how VCs diversify their portfolios, in particular when dedicated to one industry. We introduce a framework for analysis of dedicated life science portfolios. By applying it to seven portfolios and drawing on additional interview data, we find that VCs invest more in risky drug development companies and less in medical technology, diagnostics and service/supply firms when their portfolio also contains non-life science firms. A higher portion of drug development firms correlate with more diversification within this sub-portfolio among different therapeutic markets and lead compound technologies. We conclude that specialisation within one industry on certain technologies or markets does not contribute to VCs' risk reduction.