Investment in biotechnology and life sciences increased 10% to $1.8 billion in the second quarter, statistics from the National Venture Capital Association indicate.Biotechnology funding rose by 34% from the first quarter. Funding for biotechnology start ups has tripled since the first quarter, according to PricewaterhouseCoopers.

These numbers are remarkable, given the biotech sectors unpredictability and the current unpopularity of its stocks on Wall Street.

"In public markets people are pretty pessimistic about biotechnology stocks," says Gil Kliman of InterWest Partners.

Why then does investment continue to pour in? The answer lies in the history of the technology, the vagaries of the industry and a simultaneous evolution in investment methods and business models for firms and biotechnology companies.

Modern biotechnology started in 1976 when a scientist and a venture capitalist founded Genentech, which would pioneer a technology enabling the production of human proteins in a laboratory setting, leading to their use as therapeutics.

Firms, seeing the blockbuster success of drugs coming out of companies like Genentech, have invested in companies of varying sizes and in various stages of drug development. Firms now use a pragmatic, analytical and realistic approach to investing, learning lessons along the way inherent to expanding, but uncharted markets.

Investment interest is biotechnology is directly related to research into new concepts and the opening up of new markets. However, Kliman says investors get scared away from the sector when a company's drug does not succeed or profits are not realized at the rate firms expected. Despite long time horizons for drug development, people continue to invest because "you are always in pursuit of the next big idea," says Bob More of Domain Associates.

However, the road from Genentech's founding to today has been rife with disappointments for some and windfall profits for others.

The early days of biotechnology investment had the chaos and exuberance usually associated with newly discovered technologies or markets. Many early discoveries were based on theoretical models untested in animals or humans.

"[Biotechnology] started out as a kind of controversial area, where no one was sure if biotechnology would produce any important products," Kliman says.

Few firms invested in the then- small number of biotech companies and investment funds did not focus exclusively on biotechnology, says Louis Bock, managing director at BA Venture Partners. However, obtaining funding was much easier.

"Back then it was hey, this antibody sounds pretty interesting and everyone jumped on board," says Bock. Businessmen, consultants and bankers decided which company would be funded, not scientists and doctors, resulting in companies without products receiving investment, say Kliman and Bock.

More money would soon flow into biotechnology, but the realities of the industry would also catch up with investors as they learned how difficult translating a concept into a marketable drug would be. Referring to the fickleness of animal models, More says, "weve cured cancer in mice a whole bunch of times." Potential treatments for neurological disorders developed in the early 1990s by companies like Regeneron Pharmaceuticals, failed in clinical trials scaring investors away from this sector.

"A lot of biotech investors are kind of like lemmings, all charging around to what seems exciting," Kliman says.

Firms and the companies themselves evolved to adapt to the sector's realities. The backgrounds of those choosing what companies to invest in changed over time, as did the criteria for who would receive funding. Companies business models now accommodate the long lag time investors have learned they will experience in the biotechnology sector before seeing profits.

Most life sciences centered venture capital companies are now staffed with MDs and PhDs, Kliman says, who is an eye surgeon.

"People have become much more detailed in their evaluation of companies, andare much more critical of the science," Bock says.

Having a product is now vital to receiving funding, More, Kliman and Bock all say. This product centric investment model means research is done elsewhere.

"A lot of the companies were interested in are based on years of research done at academic institutions, funded by the NIH [National Institutes of Health] or non-profit foundationsa lot of these five to 10-year research projects [are] funded by resources other than venture capital," Kliman says.

Most biotechnology companies now balance having an ambitious but difficult to prove concept with revenue generating in-licensing agreements or by selling expensive bio-therapeutics for diseases affecting small numbers of people. Genzymes treatment for the rarely occurring Gauchers Disease, says More, has been very profitable for the company. Gileads rapid growth from a small venture backed enterprise into a billion dollar company can be attributed to its decision early on to purchase rights from Bristol-Myers Squibb to develop and sell the pharmaceutical companys late stage drugs. The resulting revenue funded Gileads development of more complicated technologies.

Venture-backed biotechnology companies with products in development do not bring instant returns on investment for firms. FDA approval must still be obtained and clinical trials completed.Biotechnology companies looking for cures for neurological diseases like Alzheimer's will have to wait years for efficacy data, given the slow progression of the disease, More says.

"If you have an antibiotic, its a very quick clinical trial, you kill the bugs or you dont," More says, acknowledging the complexity of diseases biotechnology companies seek to treat.

Many biotechs now work on the same diseases meaning they must offer incentives to patients for their participation in their studies. biotechnology funding, for all these reasons, has a very high burn rate.

"There is just a lot more money going in, things have gotten more expensive, trials probably are taking longer [and] that means [firms] carry operational costs [for] a longer period of time before data," Bock says.

There have been success stories.

"The Amgens and the Genentechs of the world paid off like winning lottery tickets to early investors," More says.

Bock called Genentechs cancer treatment drug "quite amazing."

"Thats made people more optimistic," Bock says.

Biologically derived human therapeutics being used successfully in patients with chronic kidney disease and cancer led Amgen to the top of the industry.

In response to investors and with an eye towards their own bottom line, most companies now focus on treatments for widespread ailments like heart disease, obesity and high cholesterol.

"Lipid lowering drugs have a $10 [billion] to $20 billion market out there," More says.

Biotechnology investment has seen its ups and downs. Investors have learned the time from concept to market maybe very long, but, the next revolutionary discovery could come from a small group of venture-backed scientists that grows into an industry leading company.