Biotech Investing: How the Money Is Made and Where the Risk Sits
Written By: Ryan Morrison.
Based on a Navigating Wealth conversation with Eric Green.
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Biotech investing attracts capital with a simple promise: fund the medicines of the future and share in the upside when they work. The reality is harder. This is a sector where a company can be worth billions years before it earns a dollar, and where a single trial result can erase that value in an afternoon. This guide explains how biotech value is created, where the binary risk sits, how investors access the sector, and how a high-variance allocation like this fits inside a larger portfolio.
Biotech investing means funding companies that develop new medicines, a sector where value is usually created years before any revenue and where outcomes hinge on binary clinical trial results. It can suit investors who hold a small, volatility-tolerant position through pass-or-fail events. It rewards diversification and patience far more than picking individual winners.
Key Takeaways
Biotech value is created at clinical milestones and usually realized through acquisition by a larger pharmaceutical company, not through product sales.
Returns are driven by binary events: a drug candidate tends to pass or fail, so single-name outcomes swing hard in both directions.
Roughly one in ten drugs that enter human trials reaches approval, which is why diversification matters more here than in most sectors.
Investors access biotech through public stocks and funds, private and venture funds, or direct deals, each with different liquidity and diligence demands.
Biotech has lagged the AI trade for cyclical reasons, not because the underlying science weakened.
Most investors treat biotech as a small, high-variance sleeve sized so a run of failures will not derail the plan.
Table of Contents
What Biotech Investing Is and Why It's Different
Biotech investing means funding companies that develop new medicines, a sector defined by long timelines, value created before revenue, and outcomes that turn on clinical trial results. It behaves unlike most of a portfolio, which is exactly why it deserves careful handling.
Most sectors reward steady operators that grow revenue and compound earnings. Biotech often does not work that way. A clinical-stage company can carry a billion-dollar valuation while selling nothing, because its value rests on the probability that a drug candidate will work, not on this year's income statement. For an investor, that means the usual tools of fundamental analysis apply differently, and the swings are larger in both directions. Treating biotech as one high-variance position within a wider basket of alternative investments for high-net-worth investors is closer to how experienced allocators frame it than treating it like a typical growth stock.
Watch the Full Conversation
This article draws on a Navigating Wealth conversation with Eric Green, where we discuss how drugs get funded and built, why biotech has lagged the AI trade, and what AI will and will not change. Watch the full episode for the broader discussion.
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Eric Green is a cardiologist and physician-scientist who has spent more than a decade building and leading biotech companies, and is currently CEO of Trace Neuroscience, a company developing a genetic medicine for ALS. He has worked alongside venture-creation investors to start and fund these companies. In the conversation, he explains why biotech value is created long before revenue and what that means for anyone weighing the sector.
How Biotech Companies Create Value Before They Have Revenue
Biotech value is created at clinical milestones and usually realized through partnership or acquisition by a larger pharmaceutical company, not through product sales. Revenue often never enters the picture for the company itself.
Eric Green has been part of many biotech companies, none of whom have ever had to deal with the difficult burden of revenue. Value gets created well ahead of any product, driven by early readouts from clinical trials. When a company can show, even in a small group of patients, that a new medicine works, the company can become valuable years before a drug could be sold. From there, the path to a return usually runs through a partnership or an acquisition by a large pharmaceutical company rather than through commercial sales.
That is why the shape of a biotech company matters to an investor. At one end sit platform companies built around a broad new technology, such as gene editing, that could produce many medicines. At the other end sit focused companies built to take a single molecule through one defined step. Markets have recently favored the focused, time-bound model, where the question being answered is narrow and the capital is tied to a specific milestone. Knowing which kind of company you are funding tells you what event will create value and when. Most programs that fail do so at the Phase II hurdle that most programs do not clear, so the milestone structure is the risk structure.
The Binary Risk That Defines the Sector
Biotech returns are driven by pass-or-fail clinical and regulatory events, which makes single-name outcomes closer to binary than in almost any other sector. A trial reads out, and a company's value can roughly double or collapse on the result.
This is the central fact of biotech investing. Across the industry, roughly one in ten drugs that enter human trials reaches approval, and the rest fail somewhere along the way. A single company is therefore a concentrated bet on a small number of pass-or-fail moments. The implication for portfolio construction is direct: owning one or two names is closer to speculation than investing, while owning many spreads the binary risk so that the winners can outweigh the failures. Patience matters as much as breadth, because the events that determine outcomes can be years apart.
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Is Biotech a Good Investment?
Biotech can suit investors who hold a small, volatility-tolerant position through binary events; it rewards diversification and patience, not concentration in single names. It is not a steady compounder, and it should not be sized like one.
The case for a biotech allocation rests on two ideas. The first is asymmetry: a successful drug can return many times the invested capital, which is why a diversified sleeve can perform even when most positions disappoint. The second is low correlation, since clinical outcomes are largely independent of the macro forces that move the broad market, which is part of how alternatives diversify a traditional portfolio. The return structure itself is distinctive. Eric Green puts it, the drugs are the only part of the healthcare industry that go generic. A successful medicine earns under patent protection for a period, then prices fall sharply once generics arrive. That window is where investor returns are made, which is another reason biotech rewards getting in early and holding through the milestones that matter.
How to Invest in Biotech: Public, Private, and Venture
Investors access biotech through public stocks and ETFs, private or venture funds, or direct deals, each with different liquidity, minimums, and diligence demands. The right route depends on how much concentration risk and illiquidity an investor can carry.
Public markets offer the simplest access. Individual biotech stocks concentrate the binary risk, while sector ETFs and funds spread it across many names and remove the need to underwrite a single program. Private and venture funds move earlier in the lifecycle, where value is created but liquidity is scarce and capital is locked up for years, an approach that has parallels in accessing private equity through secondaries. Direct deals offer the most control and the most concentration, and they demand real scientific and regulatory diligence that most investors are not equipped to perform alone. Understanding the structures involved, from fund terms to the difference between platform and single-asset companies, is easier with a grounding in private market asset classes and strategies.
| Access route | Liquidity | Access and minimums | Risk concentration | Diligence burden | Best suited to |
|---|---|---|---|---|---|
| Public stocks and ETFs | High | Low, any brokerage | High for single names, low for ETFs | Low for funds, high for single names | Most investors seeking diversified exposure |
| Private and venture funds | Low, multi-year lockups | Higher minimums, accredited or qualified | Spread across a portfolio | Outsourced to the manager | Investors comfortable with illiquidity |
| Direct deals | Very low | Relationship and deal access | Very high | Very high, scientific and regulatory | Specialists with sector expertise |
Why Biotech Has Lagged the AI Trade
Biotech lagged because a COVID-era boom gave way to a post-2022 retrenchment while capital rotated into AI, not because the science weakened. The fundamentals improved while the prices did not.
The sector ran hot during COVID, led by companies making medicines that mattered in the pandemic, and the exuberance went well beyond them. Many companies moved from private to public before they were ready, carrying too much early binary risk, and a downturn that began around 2022 is one the industry is still working through, with a number of those companies leaving the public markets through reverse mergers or closures. Layered on top is the pull of the AI trade. Capital allocators have repeatedly chosen the marginal dollar in AI over biotech, and health-care valuations have sat at a multi-decade low as a result. There is hope for an AI-enabled biotech revolution, but in Green's words it has been one that is a bit on the horizon and a little bit out of reach. For an investor, the gap between improving fundamentals and depressed prices is the opportunity and the warning at the same time.
Where do investors weighing a high-variance allocation like biotech pressure-test the manager, the structure, and the binary risk against peers who have already underwritten it?
Long Angle is a vetted community where members compare diligence on private and alternative allocations, share what their managers are missing, and decide what to size before they commit. The environment is solicitation-free, no salespeople and no commissions, so the read you get comes from experience rather than a pitch.
What AI Will and Won't Do for Biotech Returns
AI is starting to speed up parts of drug discovery, but its biggest prize, reliably finding new drug targets, remains mostly ahead of us. The investment case should not assume a transformation that has not yet arrived.
Green describes three places AI could change the business: finding new drug targets, choosing the best molecule once a target is known, and running clinical development. The nearest-term application is the middle one, where AI helps design a molecule such as an antibody more quickly, and there are early signs it is working. The largest prize, and the biggest bottleneck in the industry, is target discovery, which remains hard because a promising idea is so far separated in time from the human experiment that confirms it. That distance, Green notes, is a world away from the rapid iteration cycles you might see in tech. Even routine uses such as drafting regulatory documents move slowly, because a heavily regulated industry is cautious about anything that could raise a flag. The takeaway for investors is to value the science on today's evidence, not on a discovery revolution still on the horizon.
Where Biotech Fits in a High-Net-Worth Portfolio
Most investors treat biotech as a small, high-variance sleeve inside a broader private and alternatives allocation, sized so a run of failures will not derail the plan. The position is meant to add asymmetry, not to anchor the portfolio.
Across Long Angle member discussions, investors who hold biotech or other high-variance positions tend to size them as a modest share of a diversified alternatives allocation, fund the exposure through diversified vehicles rather than single names, and accept long holding periods as the cost of the asymmetry. The discipline is in the sizing. A sleeve that can quietly fail without forcing a change to the rest of the plan is a sleeve an investor can hold through the binary events that create the upside. Anchoring that decision to how high-net-worth investors allocate across asset classes keeps biotech in proportion to the rest of the balance sheet. For many, the most useful step is comparing the call against peers in a vetted community of high-net-worth investors before committing capital.
Frequently Asked Questions
Is biotech a good investment?
Biotech can be a good investment when treated as a small, high-risk sleeve and diversified across many names. It is poorly suited to concentrated bets, because most individual drug programs fail. The sector rewards asymmetry, patience, and breadth rather than conviction in a single company.
How risky is biotech investing?
Biotech is among the highest-risk equity sectors because outcomes are binary. A single clinical trial result or regulatory decision can roughly double or wipe out a company's value, so single-name positions carry far more idiosyncratic risk than a typical stock.
How do you value a pre-revenue biotech company?
A pre-revenue biotech is valued on the probability-adjusted value of a drug candidate's future cash flows, discounted heavily for clinical and regulatory risk. Because the probability of success is low and uncertain, valuations move sharply as trials read out.
What is a binary event in biotech investing?
A binary event is a moment, usually a clinical trial readout or a regulatory decision, where a company's value can swing dramatically on a single result. These events, not quarterly earnings, drive biotech returns and define the sector's risk.
Is it better to invest in biotech through stocks or funds?
For most investors, diversified funds or ETFs are the more prudent route, because they spread the binary risk that sinks individual names. Single stocks and direct deals offer more upside and control but demand scientific diligence most investors cannot perform alone.
Will AI make biotech a better investment?
AI is starting to speed parts of drug discovery, especially molecule design, but its largest payoff, reliably finding new drug targets, is not yet here. Investors should value biotech on current evidence rather than pricing in a discovery revolution still ahead.
How much of a portfolio should be in biotech?
There is no fixed number, but most diversified investors keep biotech to a small share of a broader alternatives or equity allocation. The sleeve should be sized so that a run of failures does not materially damage the overall plan.
Final Thoughts
Biotech investing is not a stock-picking game for most investors, and it is not a steady compounder. It is a high-variance sleeve whose value is created at clinical milestones, realized through acquisition, and decided by a small number of binary events. Understood that way, the decisions become clearer: diversify across many programs, accept long holding periods, value the science on today's evidence rather than tomorrow's promise, and size the position so it can fail without derailing the rest of the portfolio. The investors who do well in biotech are usually the ones who treated it as one disciplined part of a larger plan, not the whole bet.
The hardest input to find on a biotech allocation is an honest read from someone with no stake in the outcome.
Long Angle is a vetted community of high-net-worth founders, operators, and investors who compare notes on exactly these decisions, sometimes with members who have built or backed companies in the sector weighing in by name.
Recommendations come from firsthand experience, not commissions, because the community is solicitation-free.
Members sanity-check the call before they make it, then share what happened. Apply to bring your real situation to peers who have been in it.
Resources Mentioned
Trace Neuroscience - Eric Green's ALS biotech company, developing a genetic medicine for the disease (traceneuro.com)
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