Hi Tom,
Glad you ask. This gets us exactly to the heart of the matter. It’s good that you used the biotech example for the question. In this Risk/Reward issue I use my Cancer Cure story.
A research scientist finally synthesises a medicine that cures cancer...It works!...The test were 100% effective(its only a story!)
The scientist finds a venture capitalist and proposes to manufacture this medicine worldwide...Approvals for sale and distribution are in the bag.
The venture capitalist eliminates all the possible things that would make the venture fail. The fact now is that this venture is essential risk free. It's a sure Fire Start-Up that will produce big profits. This biotech is risk-free because all the risks have been eliminated. It pays out big profits just because it is a Sure Fire Thing....
The public(and a lot of people in the investment world) don't know that this Start-Up is a Sure Fire Thing and classify it as a high-risk venture. This is how the usual interpretation is created that high-risk ventures create high profit, as if it was an iron clad rule. This is the fallacy.
If we would examine all the Biotech ventures that were successful we would discover that they were successful because of the fact that al the elements of success were there. I we examine all the failures we would find the precise elements that caused the failure.
Whether a real venture is risky or not depends on its actual construction. The statistical risk of biotech ventures that is perceived by investors is a different ting altogether, and consistently making big money by investing in the biotech industry is only possible by having a good understanding of the company you are going to invest in.
All this means that profits are made by virtue of risk-elimination, not by putting money in high-risk ventures.
Conrad
AI
