Angels filling biotechnology funding gap
Biotechnology companies have been facing a widening funding gap. Between frozen federal research budgets and a growing focus among venture capitalists and senior partners for larger, more mature, biotechnology firms – at the expense of smaller ones – a funding gap is growing between basic research and initial proof-of-principle commercial research.
So, who fills the gap between basic research funding and venture capital? Angels! Angel investors are wealthy individuals who make equity investments in biotechnology firms. Angels differ from venture capitalists because they tend to invest their own money, they tend to invest earlier than venture capitalists, and they may be less experienced in funding start-ups than venture capitalists. A leading question on many industry-watcher’s minds has been whether angels have been addressing the funding gap. Having been burned by dilution from later investors in past funding cycles, and having lost great amounts of money on technologies which didn’t pan out, many angels have shied away from early-stage biotechnology investing. A recent report from the Center for Venture Research has found that angel investing is up 10.8 percent from 2005. Furthermore, healthcare services, and medical devices and equipment continued to account for the largest share of angel investments, with 21 percent of total angel investments in 2006, followed by software at 18 percent and biotech at 18 percent.
What’s interesting is that angels are spending more. A total of 51,000 startups got angel funding in 2006, up just 3 percent from 2005. That translates into average deal sizes notching up 7.5 percent over 2005 levels. All that money came from a pool of investors that hasn’t changed much either.
From what we have experienced, angel investors are shoring up the gap in new innovations coming forward. However, they seem to be more naive than VC’s in terms of due diligence prior to investing. Scientists from the company march in with charts and scientific graphs 99% of angel investors don’t know anything about. The rule they seem to forget is: there is ALWAYS a patient market, and there is ALWAYS a scientific platform – that undoubtedly has competition. Will any new life science innovation get a percentage of the whole market? Absolutely not. They will get a percentage of a percentage based on third party reimbursement and their label. We end up doing this work for our clients and typically the results are startling to them.
Angels and VC’s tend to think that some phone calls to scientists to provide insight will help. This also hurts investments in the long run as they are asking strangers to give them financial advice. And most of these strangers – albiet with great CV’s – have never seen the data on the platform, or on other similar platforms that will ultimately compete with the innovation. More so – how can those “experts” who are brought in for evaluation on a particular scientific technology know everything about so many varying therapeutic areas? They can’t. So companies depending on a handful of “experts” to give them advice aren’t playing with a full deck – of common sense or investment strategic advice.
What I find the most amazing in the life science investment sector as a whole is the lack of investment review by true experts. Professionals who work for big pharma, biotechnology (of companies we’ve heard of), or big device. When interviewing “experts”, ask them how many successful products they’ve put on the market – Do they understand all of the nuances that lead to a successful life science product? Ask them what actual burn rates are to include FTE’s, clinical trials for THIS particular product, manufaturing and distribution costs – Do they understand and have they demonstrated their understanding above “costs of clinical trials = {blank}”; based on what? In other words, do they understand the regulatory path, the manufacturing, how this product will differentiate its label, and what strategies will be required to secure rapid product uptake?
It concerns me to look at the long term viability of the life science market as investors will continue to shy from it if they continue to get burned. The rate of new innovation discovery is tremendous; finding those that will attract IPO’s and licensing agreements means looking at them as ranking industry would – the big boys – and the only people that can do that are those that are internal to these organziations, or those who have been recently. When looking for advice on life science investments, start with the whole teams experience and make sure – if they have a cross-functional team – that its from a company you’ve heard of.
We’re grateful for the Angel community; without them emerging innovations wouldn’t get a chance in these days of upswing with tech investments. And we support the VC community as well. In the long run it will require better due diligence by ranking professionals and looking beyond level of education to level of documented experience.