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Bit of Randomness Thrown In

Investing in biotech is a little different than investing in a software company, Silicon Valley venture capitalist Peter Thiel tells Technology Review in a Q&A. Thiel, an early investor in Facebook and a co-founder of PayPal, recently invested in the biotech Stemcentrx, Tech Review notes.

"This goes back to that famous Bill Gates line, where he said he liked programming computers as a kid because they always did what he told them to," Thiel says. "They would never do anything different. A big difference between biology and software is that software does what it is told, and biology doesn't."

Instead, biology is complicated and random. For biotechs hoping to get a product from the research stage through clinical trials to the market, there are a number of stages at which things can go awry, he notes. "You do this one little experiment and you can get a good result. But then there are five other contingencies that have to work the right way as well," he says.

How the worth of companies is gauged is arbitrary, he says. One way to do so would be to calculate the risk of failure at each step of the process. In that way, he says that a company that could be worth $1 billion if all goes smoothly could start at a value of $16 million, if there are six steps through which it must pass and has a one in two chance of actually succeeding at each step. But, Thiel says, those numbers are often made up or overconfident.

"And if even if just one of these steps is one in 10, you are really screwed," he says. "I would be very nervous to invest in a company where it gets pitched as a series of contingencies that 'this has to work, and this has to work, and this has to work.'"

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