4) Spread your risks.
Bio tech investors need to recognize that the odds are stacked against them from the get go. While that doesn’t necessarily mean you will lose, the odds of winning depend on carefully placing your bets and maintaining an adequate book.
You really can’t adequately play unless you’re willing to put at least $5,000 on the table and be comfortable with the idea you may lose 90% of it before one of the choices you make pays off.
Michael Milken of Drexel Burnham Lambert famously used to use this strategy back in the late 1980s with junk bonds. He’d buy 100 of them knowing full well that 98% would blow up and that the 1-2% that hit would hit so big he could laugh all the way to the bank.
His compensation was more than $1 billion in a four year period — a new record at the time according to the NY Times.
It’s worth noting that he had only four losing months in 17 years spent trading.
Today he’s heavily involved in medical research presumably for the same reasons we are…because they hold great promise.
5) Look for the Jolly Roger
Recent venture capitalist estimates suggest that life sciences investments may fall to only $2.5 billion in 2012. This is because many VC funding sources have been burned over the past few years.
Instead of crying me a river, you can use that to your advantage.
VC firms are like a bunch of modern pirates in that they go where the money is. That’s why you want to figure out where they’ve hoisted the financial equivalent of a “Jolly Roger.”
Right now buyouts are hot. Limited partners — a.k.a venture capitalists — won’t take on new investments unless they see a path to liquidity in five years or less. That includes a buyout by a major pharma or tech company or a licensing deal from one of the same.
In other words, VC firms want to identify their exit strategy before they take a stake and put up the funding.
It only stands to reason that if you can tie a specific VC to the areas in which you are interested in and even more specifically to a particular company then you’ve got a good shot at a picking a winner.
As for IPOs, they are not the magic ticket they used to be. In the wake of the botched Facebook (NASDAQ:FB) IPO, the public has only learned to distrust the process.
At the end of the day though, for all its difficulties, investing in biotech can be one of the single biggest roads to profitability.
Just make sure you’ve got an idea where you’re headed and a rock solid grasp on risk management.
The last thing you want to do is blow your money on a promise that really isn’t there.