Monday, May 29, 2017

Angels Evaluating Your Life Science Venture

From the last blog, you figured out how to get the attention of Angels (or a group of Angels) for your life science venture. The next goal is to receive a favorable evaluation.

An Angel group noted that 86% don't get the chance to make a pitch [Clark Paul, Banks Charlie, Dunbar Matt, Lackey Mac. Perfecting Your Pitch: VentureSouth’s 101 Tips for Pitching to Angel Investors. April 23, 2017]. VC funding is worse probably. Per How does deal flow apply to VC firms?, only 30 of 650 scanned executive summaries will make it to the stage where the VC samples the financials and management; that's 4.6%. You have your work cut out if you want your life science venture to get funded. Keep in mind that there are many funding sources, so the numbers aren't as bleak as that figure would imply.

So how do you increase your chances of funding from a specific Angel?

At the early stage, Angels are looking for evidence of 
  1. a value proposition for a life science problem,
  2. validity regarding potential clinical impact, and 
  3. use of appropriate technology in the implementation 
(see Soenksen Luis R, Yazdi Youseph. Stage-gate process for life sciences and medical innovation investmentTechnovationdoi:10.1016/j.technovation.2017.03.003.). Those criteria are probably not a surprise to you.

Is this a hot topic?: Since the focus is the life sciences, consider how hot your topic is. Medicine is not neutral in its attention to a disease. And what is "hot" is not based on scientific fact (e.g., years of life lost, incidence, lifelong prevalence, cost to treat, etc.). If "impact" determined funding then almost all funding would go to prevention and basic science breakthroughs. In comparison, NCI receives more than any other institute at the NIH, over $2B. Cancer wins the prize probably because it is scary. If you want to get funded the topic must be one that an Angel sees as critical. Thankfully Bill Gates has shown light on health issues of 3rd world countries; hopefully, such neglected topics will soon be seen as worthy of investment.

So what is hot right now? Orphan diseases? Biologics? Related to the opioid or obesity epidemic? Zika virus? May sure, your topic is hot. And that you highlight how your topic is hot. And of course, hot topics come and go. Yesterday's "bioterrorism" issue is cold until it becomes hot again when evidence of the use of a biological weapon is demonstrated.

Next consideration is the team, but since we are talking life science, the team has to be more than a competent bunch of folks who can launch a business. You need to have a team that also has mastery over the topic and the competition that is also addressing that problem. If FDA approval is required, in addition to lawyers you need folks skilled in that labyrinthine process. But don't go too crazy with details, it is possible that your venture will be purchased early in the process (per Evaluating Life Science Companies for Investment, 9/6/2016). It is unlikely that an Angel has no life science expertise; don't fudge.

It's about health - and honesty: Outline the upside in both the financial return on investment AND the impact on health; the Angel wants you to achieve positive health outcomes. Finally, the problems of Theranos are fresh on everyone's mind. Be scrupulous in your development and presentation of the product. Any hint of deception and your venture will be in the 86% that go nowhere.

Where will more money come from?: Finally, an Angel understands how complicated a life science venture can be and you will most likely need additional funding. The Angel needs to know that you intend to eventually access additional funding [Styhre Alexander. Valuing and Investing in Life Science Companies. In: Financing Life Science Innovation. Vol Palgrave Macmillan UK; 2015:107-136. doi:10.1057/9781137392480_5.]

Hopefully, with the above, your new venture is on its way to a successful evaluation.

The Startup Process: Sourcing - Evaluating - Valuing - Structuring - Negotiating - Supporting - Harvesting

Reference: Stevenson David Amis-Howard (2001). Winning angels: the seven fundamentals of early-stage investing. Pearson Education.

6 comments:

  1. Brad,
    I truly like how you took the information in this chapter and applied it directly to your entrepreneurial endeavor. That is how I've been approaching reading and thinking about the information in this book. For me, considering being an angel investor is not on my radar. Trying to get a startup off the ground is hard enough. However, in the future, once I find myself in a position to give back, I feel I'll have a head start thanks to this book.

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    1. I think it really helps to see the world from their perspective. As I see it, Angeldome in the age of Internet sourcing of ideas is moving from the old "I want to be involved because this is interesting and a topic I care about - and I want to make money" to "I want to make money". I think demonstrating value, and having a strong team/technology is more important than ever

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  2. Brad,
    As Nicole said being an angel investor is not on my radar but looking at our businesses through their eyes is eye opening. I wonder how many of the investors in Theranos will have second and third thoughts about investing in a Life Science start up again. In all the readings outside of the book, I've found that a lot of the advice after the idea is the team. The stronger and more experienced the better.
    Cece

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    1. My guess is folks will invest in something exactly like Theranos in the very near future. Medical testing is such a huge and lucrative business and who likes being poked by needles. They just didn't do enough work validating their technology. The business case was strong.

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  3. You did an excellent job of applying the lessons from the assigned reading to the medical sector. I had not thought about the susceptibility of the medical industry to whims of hot issues as it relates to investment. I also had not considered that what is "hot" might not necessarily be supported by scientific fact. I suppose this goes to show that we are all human and (many of us are) in pursuit of a healthier life.

    I do like that you point out that the investment must have high returns for health and the investment. Honesty seems critical, too. I'm sure no investor at any level wants to be involved in questionable or seemingly unethical behavior. Even though it's a long established company, Mylan Pharmaceuticals comes to mind here with the Epi-pen fiasco.

    Thanks for contributing to my learning today.

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  4. And thanks for your comments. People outside of medicine often don't understand that if you don't impact health positively you don't have a product. And that the "customer" cares a lot more about the "product" then they do about a ceiling fan. So with the epi-pen they were right that the right price is what the market will bear. But making (excessive) money off of people's fears and misery doesn't make you look good.

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