Ignorant question: why do biotech companies IPO so early? (Often before their first drug is in the clinic). I would have thought that would be a costly process for a company still facing serious technical risk ahead.
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VCs diversify by getting a quick exit, raising another fund, and investing in new companies. Public market investors diversify by spreading across most stocks, so their exposure to any one big drug failure is low.
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Even the management is diversified! Most C-level execs in biotech were brought in by the VCs, not founders, so they own a few % at most and are promised another job if the company blows up. Who has skin in the game? This is all an adaptation to Knightian uncertainty in biotech.
End of conversation
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