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Angel investors filling startup capital void

on July 18, 2012 Source: Kauffman Foundation

For startup life sciences companies seeking financing, one of the major hurdles in recent years has been venture capitalists' decreasing willingness to risk capital on early-stage firms. But there are unmistakable signs of hope on the horizon, according to one of the industry's most experienced investors. Angel investors – particularly angel networks – have been increasingly stepping up to fill the startup capital void, according to Allan May, chairman and founder of Life Science Angels, an investment group founded in 2004.

Angels are accounting for an increasing percentage of early-stage investment in life sciences firms, May says. In the United States, 25 to 30 percent of angel money is spent on medical device, biotech and diagnostic companies.

Life Science Angels is the largest angel organization in the nation focused solely on early-stage medical device and life science startups and comprised solely of high net worth individuals from the medical device or biotech fields. Along with more than 100 serial entrepreneurs and founders, LSA membership includes a number of life sciences scientists, physicians and engineers, 25 major venture capital firms specializing in life science investments, and 20 sponsors.

Since 2005, LSA has invested $30 million in 30 early-stage companies, attracted in excess of $600 million in contemporary or follow-on venture capital, and achieved two favorable exits, with one portfolio company in IPO registration.

May is also chairman of the board of the Kauffman Foundation’s Angel Resource Institute, a nonprofit devoted to the study of angel investing and improving the connections between angel investors and entrepreneurs. In addition, he has founded or invested in more than 50 med tech and biotech startups.

May and two other researchers spent 18 months interviewing “super angels” who have invested $5 million to $100 million directly in between eight and 90 new ventures each.

According to May, angel investing is “becoming less of a hobby and more sophisticated, specialized and focused on returns.” He says the angel sector is still developing. “It's about where VCs were in the 1970s.”

Another reason angel investors are superseding VCs in early stage investment is that “there is now a much greater variety of business models that angels will finance, so you have much more flexibility in how you tune those pitches when you deal with angels.” Now, about two-thirds of the early-stage financing deals are syndicated among angel investors, May notes.

Another positive development is that disease-focused, patient advocacy funds, such as the Michael J. Fox Foundation, are getting more involved in angel investing in life sciences companies, as are “super angels” – high net worth individuals and families who have certain diseases or health conditions in their family backgrounds. “They need to invest alongside people who can add value in the early stage” – meaning experienced life sciences investors, May says.

Another new source of early-stage capital is non-profits who assist life sciences entrepreneurs and innovators. As examples, May cited the Fogarty Institute for Innovation, Rock Health in San Francisco, an incubator for startups working on web- and mobile-based healthcare technologies, and the Florida-based Wallace H. Coulter Foundation, which funds biomedical engineering R & D.

May also cited another positive trend for early-stage investment: a rebound in M & A activity in the medical device industry, both in the number and size of deals. “As those exits occur and those VCs get returns, that will spur interest in early-stage investing,” he predicts.

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