top of page

Why Investing in Neglected Areas in Venture Capital Leads to Outsize Returns

The Case for Healthcare Venture Capital

Healthcare Has Been Neglected By Early-Stage Venture Capital Firms

For LPs interested in true diversification and outperformance, we believe the majority of venture capital allocations should emphasize contrarian firms that will deliver a basket of non-consensus investments in areas that are typically overlooked.

These days, the majority of venture capital dollars flow into a small number of cities where there are high concentrations of venture capital firms. Many of these firms focus primarily on tech investing and find themselves fiercely competing amongst themselves to invest in companies that are working on similar problems, leading to higher valuations and a lower likelihood of meaningful multiples on invested capital for LPs.

Despite venture capital returns in healthcare outperforming tech returns substantially from 2012 to 2016 (see below), there are half as many firms investing in healthcare than in technology. As a result, we see an exceptional opportunity for LPs in venture capital opportunities outside of traditional tech investing. While many early-stage tech VCs invest in healthcare technology, very few invest in biopharmaceuticals, healthcare services/delivery, and medical technology – massive industries where only a small number of firms consistently invest at the earliest stages.

Healthcare vs. Tech Venture Capital

“Neglectedness” Should Be A Core Criteria For Any Contrarian Investor

When we invest at FundRx, we of course consider the usual criteria many health and life sciences venture capitalists use. For Example:

  • The scale of the unmet medical need a company is tackling,

  • How feasible their approach is based on their team’s capabilities and where modern science is today, and

  • Whether market dynamics indicate their solution will ultimately make economic sense (or not).

  • Critically, we also consider a fourth criteria that is uncommon in the fear-of-missing-out driven venture capital business: “neglectedness”. That is, is the prospective company working on a problem or method that is not presently well-funded and resourced, despite clear unmet need?

Many VCs believe their job is to get into “hot” deals (e.g., scooters, blockchain, CRISPR.). Our view is that this strategy will only work for a very small number of incumbent firms who are the first port-of-call for entrepreneurs. Instead, we actively work to invest in areas that most investors would view as not "hot" at all.

For example, we were one of the first investors in Meissa Vaccines, which is developing a vaccine for RSV, a life-threatening virus that hospitalizes over 3mm children under the age of five each year. As a result of a long string of failed attempts to develop a vaccine starting in the 1960s, many investors have entirely ignored the space, despite recent advances in our understanding of the virus and of vaccine development.

Many of the entrepreneurs we’ve backed are working on similarly high-neglect problems. They run the gamut from Contraline, which is developing a male contraceptive (a space ignored by the industry for decades), to Atlas Health, which helps low-income patients reduce their medical debt by algorithmically matching them to aid programs they are eligible for. These companies are solving problems many investors see as intractable. Yet if they succeed, they will capture the vast majority of their potential addressable markets, not to mention the good they will do.

Investing In Neglected Areas Leads To More Meaningful Returns On Capital

From a purely financial point-of-view, we believe neglect-investing leads to outperformance within the venture capital asset class. This is in part because in a world flush with venture capital dollars, competition between VCs within trendy investment areas leads to sky-high valuations that make it very challenging to generate meaningful returns on capital.

Firms in neglected areas, on the other hand, have more rational valuations that allow investors to minimize their downside (because they can purchase a more reasonable percentage of the company for fewer dollars), while maximizing their upside (because successful companies in historically neglected areas often have low-to-no competition themselves).

Though this neglected-firm effect has been studied academically, few VC investors have explicitly tested it in practice. As early as the 1980s, Cornell faculty demonstrated the existence of this effect and showed that neglected firms (in their cohort) delivered over double the monthly returns than those that were widely covered by analysts. The below chart highlights this effect in the public markets (Credit: Dr. Riccardo Colacito, New York University).

Chart demonstrating the existence of neglected firms delivered over double the monthly returns than those that were widely covered by analysts.

Of course, not all neglected companies make great investments. Venture capital firms must have the infrastructure to identify why the timing is right for a previously high-neglect area, and the resources to support those companies through their early development. Firms that have these qualities, however, will likely have the kind of proprietary access to companies that will enable them to generate the outsized outcomes – both financially and socially – that should be expected from the venture capital business.

Special Thanks to Our Contributors:

FundRx Logo

Zeshan Muhammedi

Managing Partner

Gurdane Bhutani


71 Broadway, Level 2B #102

New York, NY 10006

At FundRx, we have a global community of over 1,500 venture partners - all healthcare domain experts - that we collaborate with to understand what's feasible and what's not, and to catalyze the companies that we ultimately partner with. If you're interested in learning more about how we invest, please reach out.

Table of Contents

  • Healthcare Has Been Neglected By Early-Stage Venture Capital Firms

  • “Neglectedness” Should Be A Core Criteria For Any Contrarian Investor

  • Investing In Neglected Areas Leads To More Meaningful Returns On Capital


About PrimeAlpha

PrimeAlpha is today’s leading technology platform for alternative investment opportunities founded in 2015. We generate connections and help investors discover differentiated opportunities.

PrimeAlpha was developed by industry practitioners as a cutting-edge technology platform to help managers and investors discover and network. Like many great solutions, PrimeAlpha was born from the pain points faced by both managers and allocators in the investment life-cycle and marketing and IR process. Today, PrimeAlpha optimizes ROI-driven solutions emphasizing engagement and efficiency through a technology-enabled yet high-touch platform.

If you want to learn more reach out to us at

Important Disclaimers
This article (the “Article”) is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any investment or any securities. This Article does not constitute investment advice and is not intended to be relied upon as the basis for an investment decision, and is not, and should not be assumed to be, complete. Readers should make their own investigations and evaluations of the information contained herein. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person or entity who may receive it. Each reader should consult its own attorney, business adviser and tax adviser as to legal, business, tax and related matters concerning the information contained herein.  Except where otherwise indicated herein, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date of preparation. Certain information contained in this Article constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,”  “target,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. Readers should not rely on these forward-looking statements.  Certain information reflects subjective determinations which may prove to be incorrect. There can be no assurance that the estimates or projections will be accurate or that historical trends will continue. In considering the prior performance information contained herein, readers should bear in mind past performance is not necessarily indicative of future results. All rights reserved. The material may not be reproduced or distributed, in whole or in part, without the prior written permission of PrimeAlpha LLC. 

bottom of page