Angeling in Biotechnology

March 11 2010 No Commented

Angeling in Biotechnology

It seems everywhere I travel I find another “center of excellence” in Biotechnology and Life Science.  R&D in these arenas seems to grow and flourish.  Those with a focus on commercializing this science are then quite disappointed when angels express low enthusiasm for their particular projects.  Let me explain why.  

Angels seek deals that can exit in less than a decade.  Angel investors are, indeed, patient investors, but they are generally unwilling to take on projects that involved years and years of qualification testing for regulatory compliance.  We most often invest in deals as they are beginning to acquire customers, not when they are beginning the arduous process of government approvals.  Awaiting FDA (or other government) approvals and then beginning the expensive branding, marketing and sales process is simply not in our genetic makeup.  Consequently, drug development deals which require $10s or $100s of millions to commercialize are not angel deals.  That said, we are often eager investors in medical device startups and other biotech and life science deals which do not require arduous testing protocols before acquiring customers.

Angels seek deals that can achieve positive cash flow (earnings from revenues) with less than $10 million in invested capital.  In the opinion of my friend, Carol Sands, who runs the Halo Fund and the Angel Forum in Silicon Valley, angels who invest in deals that require $10 million or more in capital prior to exit seldom make money.   Why?  Because somewhere along the way the company will have a hiccup and be forced to raise money in a down round, diluting early angel investors into oblivion.  In fact, in today’s difficult market for raising venture capital, many angels seek investments in startup that will require “angel-only” investment (less than $2 million in capital) to achieve positive cash flow – taking venture capital completely out of the picture. 

Angels seek deals with experienced entrepreneurs at the helm that are already working with customers, at least at the prototype stage.    Again, this may be possible with some biotech and life science companies, and especially medical device companies, but drug development companies are far from this particular stage of development.

Angel investors seek startup deals which will require less than $10 million in total investment and are expressing a preference for deals that can be done with single or multiple angel investments of less than $2 million.  We also prefer funding deals for which a highly profitable exit can be defined in 5 to 8 years.  When a viable startup business can be defined within these parameters, we angels can become quite interested in life science and biotechnology deals.

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence.