My partner Alan Crane and I were talking recently about the differences between technology (IT, HW+SW in particular) and life sciences (LS) investing as driven by the inherent differences in the target markets. Two key points rose to the surface: market stability and cost of entry.
The target markets for LS companies, generally speaking, are the flora and fauna. They change very slowly. If you are developing a cure for cancer you can be confident that if you succeed in creating one, there will be a big market, even many years into the future, even if one of your competitors has beaten you to market by some years. In the high-tech world, markets are rarely stable over time. By the time you are ready to deliver your solution, it could be obsolete. Some examples: great client-server products that were made irrelevant by the Web, supercomputers whose target markets were overtaken by Linux clusters, etc.
To get in the life sciences business you need smart PhDs, labs with expensive equipment and bags of money for the IP attorneys. This is perhaps more true for biotech companies and less true for medical device companies. The closest example in high-tech is custom hardware, where you need some millions of tooling just to get started. Still, no match for the capital that a biotech startup needs. Software is on the other extreme where a cool kid can bootstrap the next killer Web 2.0 startup. Also, IP matters in LS much more so than in IT. LS is driven by the laws of physics, chemistry and biology. Solution sets are rather constrained and can be precisely described in detail, leading to strong patents that are difficult to get around. IT is virtual. Software creations are fundamentally unconstrained. Hardware is software in a different form and is only constrained by process capabilities. (Because of that, HW IP tends to be stronger than SW IP.)
The net result is that life science entrepreneurs and investors can make long-term bets and are willing to raise huge amounts of money in expectation of huge returns (for a platform biotech, an IPO is an investment round). Further, because of the strengths of LS IP, big pharma is willing to pony up big bucks for partnership agreements well ahead of drugs being ready for market. IT investing, due to the vagaries of market instability, weak IP protection and the threat of competition, increasingly requires a tightly managed approach to risk management with faster iteration between investment and the risk reduction / opportunity maximization it enables.
I wish more of my companies operated in stable markets with high costs of entry so that management can feel more comfortable making bigger bets. Alan wishes more of his companies took less time and money to exit and had more than a handful of big pharma players to do big deals with.