Over the past year, some of the most interesting and intellectually-stimulating pitches we heard have come from startups in biotech, specifically companies developing therapeutics. From non-hormonal contraceptives that work for men and women to muscle-promoting gene therapy, the potential impact of these new drugs is both immeasurable and inspiring.

So, it comes as no surprise to us that private investments in this sector hit record-breaking numbers in 2018 ($13.5B in the first 10 months in 2018). And while most of the capital comes from life science funds and the corporate venture arms of pharma companies, there is growing interest from VCs, like ourselves, from the IT/tech ecosystem.

It’s no secret that biotech can be very lucrative – particularly when a drug successfully makes it to market. On the flip side, biotech is much more capital intensive than software. The cost of bringing a drug to market is expensive (hundreds of millions of dollars to billions of dollars) and risky (it simply might not work!).

As such, life science investors who fund drug development typically have deep pockets. And when making big investments, these investors have higher ownership targets (40-50%) compared to IT/tech VCs (20-25%). This aggressive ownership target is one reason more and more founders are looking for capital from IT/tech VCs who don’t demand as much equity.

To make investments attractive, biotech founders also sell that the time to exit might be faster than in IT (it is true that successful therapeutics companies IPO or are acquired before launch) and that now, they can accelerate drug discovery with AI/machine learning (meaning, less time and thereby less capital is required).

With these dynamics at play, I’ve been thinking a lot about how we at Version One can effectively invest in biotech. What is the best thesis to ensure companies are well capitalized, without diluting everyone’s ownership with every round raised, assuming every round is larger in both size and valuation than a traditional IT one?

One strategy might be to build a drug discovery platform where the technology can be licensed to other pharma companies for specific therapeutics that they might be experts in and have developed a brand for. Then, the revenue you earn from these partners/customers can cover your operating costs while you develop your own drug to bring to market – which is where the most value is captured in biotech.

I’d love to speak to founders and funders who are thinking about similar issues. How are you building biotech companies where all incentives are aligned in order to bring transformational treatments and therapies to patients who need them?