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Yes Paul, venture capital is about returns

Earlier today, I wrote about how venture capitalists have invested more dollars this year in life sciences companies than in IT companies. In response, uber-pundit Paul Kedrosky tweeted the following:

Common error in VC analysis by @danprimack: It’s about returns, not spending — absent IT there is no VC

I would have just had this out 140 characters at a time, but my new laptop won’t accept TweetDeck and (sans fancy new version) feels like a rotary phone. Therefore …

It is true that the goal of venture capital is to produce returns on investment. Some VCs may tell you it’s about building businesses and helping entrepreneurs, but they’re only saying that to further their pursuit of returns.

It also is true that IT investments have generated most of the VC market’s greatest hits. Think Kleiner Perkins’ investors would be giving it all that cleantech rope sans Google? If so, think again.

But it is not true that without IT there would be no VC. Or, put better, it is no more true than if I were to say: “Without health care there would be no VC.” They are both vital part of the same whole, even if they are wildly divergent parts.

When it comes to returns, health care has held its own with IT. Just take a look at the data from Cambridge Associates (flip to pg 8).  It shows that health care companies receiving initial investment in 2000, 2001 and 2002 actually outperformed IT companies receiving initial investment during the same period. IT crushes health care in 2004 (18.5% vs. 8.3%), but barely eeks out a win in 2005 (15.4% vs. 14.9%).

Perhaps more importantly, returns for health care VC investments were positive for each listed year (1997-2010), while IT investments were painted red for two years. Fewer peaks for health care, but fewer valleys too. That’s the sort of semi-stability — and consistent ability to put money to work (i.e., spending) that helps convince institutional investors to keep venture as a regular asset class, thus presenting opportunities for IT when it comes around again.

Such symbiosis also can work on the GP side. Polaris Venture Partners is one recent example, with strong health care returns holding up flagging IT returns. Another would be Accel Partners, which once was a full-fledged generalist. In fact, health care returns from its early funds helped raise some later funds which helped give rise to Facebook. No health care VC, no Justin Timberlake as Sean Parker.

I recognize that health care venture capital isn’t sexy or easy to blog about. Everyone at TechCrunch can download the latest app and pass snarky judgment, but no one is going to infect themselves with some disease in order to find out if an experimental new molecule works. So let there be a perpetual imbalance of attention. I cannot, however, let stand the assertion that IT is what propels venture capital while health care is just a peripheral concern. If either one of them disappears, so does the other’s ability to produce returns.