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The venture capital surprise

July 11, 2011: 9:19 AM ET

New research on the VC industry turns conventional wisdom on its head.

In the world of venture capital, tech is the movie star and life sciences the second banana. The champion and the also-ran. Just look at the most recent Forbes Midas List, in which the first life sciences investor doesn't appear until #16 (Bryan Roberts of Venrock).

But new research suggests that this hierarchy has quietly reversed itself over the past decade.

Venture capitalists Bruce Booth (Atlas Venture) and Bijan Salehizadeh (Highland Capital Partners) recently analyzed the past 10 years of returns from nearly 1,300 VC firms, on a deal-by-deal basis. What they found was that VC investments into U.S. life sciences companies between 2000 and 2010 yielded a gross pooled mean IRR of 15% for realized deals and 7.4% once unrealized deals were included. This compares to a 3% IRR for realized IT deals over the same time period, a 4.1% IRR for realized software deals.

Moreover, each sub-category of life sciences deals came in at least 2x better than did realized results of IT sub-categories. All of this is a complete reversal of the 1990s, when IT deal performance absolutely dominated life sciences deal performance. And it holds even if you remove deals done in 2000, which was just before the dotcom bubble burst.

"There is a widely-held perception among both GPs and LPs that life sciences is venture capital's ugly stepchild compared to tech," says Booth. "So we were surprised to find what we did."

Four notes on the study:

  1. 1. The data is based on deals, not on funds. As such, it does not necessarily mean that funds dedicated to life sciences outperform funds dedicated to IT. Some of the strongest life sciences deals may have come from generalist firms.
  2. 2. The data only goes through the end of 2010, so does not include this year's big tech IPOs like LinkedIn, Pandora, etc.
  3. 3. Some readers complained about selection bias in a prior piece I wrote utilizing Cambridge Associates data. Please remember that CA data is based on fund financial statements (not surveys), and often comes from CA's LP clients (i.e., not GP-directed).
  4. 4. Booth and Salehizadeh have published their entire paper in the new issue of Nature Biotechnology, out today.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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