Angel Financing in Life Sciences

Angel investors are significant players in the startup ecosystem who, through syndication with other angels, can invest amounts on par with investments made by the professional venture capital community. Angels, however, have been historically more reluctant to venture into life science investing. Despite this history, there are a growing number of life-science focused angel groups as well as those who balance investments across tech, life sciences, and other sectors.

Who are the angels?

The strict definition of a so-called "angel investor" is someone who invests their own capital into startup ventures and is not typically a professional venture investor Often, angels are successful entrepreneurs or retired senior executives. In some cases, venture capitalists will engage in direct angel investing into both their own portfolio companies as well as others not funded by their own firms. Angels can be roughly grouped into three categories: individual angels, super-angels, and angel groups.

Individual angels are generally less active and may only invest in a select few deals based on prior personal relationships with the entrepreneur/founder.  They may invest $10k-$100k (occasionally more, if they are very wealthy) and usually don’t bring significant expertise outside their own domain to the table.

Super-angels are highly-engaged angel investors who invest in multiple deals per year over several years. They may be retired former entrepreneurs with enough capital to invest in a larger number of deals. In many cases, they have built strong networks within their local entrepreneurial ecosystem and may participate in various startup incubators (i.e. TechStars and MassChallenge). These super-angels can oftentimes bring significant investing expertise to the table. Super-angels often take up board or observer seats and become more active in the coaching of entrepreneurs. Super-angels may invest smaller amounts ($10k-$50k ) into a variety of companies, or larger amounts into fewer companies. The wealthiest super-angels can invest multiple millions into a single venture; at the high end are “family offices” – professional operations that manage the investments of ultra-high net worth

individuals.

Angel groups are a vital part of the angel ecosystem; there are over 200 of these angel investment groups in the U.S. alone. Varying in levels of structure and formality, angel groups typically charge members an annual fee and have a professional staff or other leaders running meetings. Generally, the groups operate through a smaller committee structure that screens startups and selects those to present to the whole group at a monthly meeting. In most cases, members will invest on their own but benefit from the group’s access to deals, the diverse backgrounds of members, and perhaps a couple of super-angels who may lead negotiations with startups.

Some angel groups focus on specific industries within their local region (Mass Medical Angels is a prime example). Other instances of Boston-based angel groups that will look at life science deals include "generalist" groups like Boston Harbor Angels, Launchpad Ventures, and Beacon Angels.

Where are the angels?

Angel groups can be found in many large cities; there are well over a dozen right in the Boston metropolitan area, a good list of which can be found by clicking here.

Many angels are also networked into and spend time working with various incubators in the entrepreneurial ecosystem -- Techstars, MassChallenge, and MIT Venture Mentoring Service are local examples of organizations where angels are actively engaged in mentoring and sourcing potential future deals.

Though angel groups typically allow for potential startups to submit business plans to a screening committee, it is often more fruitful to network into the group first. Identifying a potential investor/champion, working with that person to approach their angel group formally and having this current member make the case for the investment strengthens a startup’s funding chances considerably.

Angels also can be found through various referral sources including but not limited to lawyers, accountants, and incubators in the local entrepreneurial ecosystem, all of which can often help a startup establish valuable connections to angel investors.

Angel Deals

Some key considerations to take into account in working with angel investors include the following:

How much money do you need to raise and how much can this angel or group invest? Many angels are comfortable investing smaller amounts alongside other angels and may want to see a minimum raised before they release their funds. You will need to determine if additional groups/angels will be needed to close your round (i.e. does a syndicate need to be formed?)

How will you agree on deal terms and structure? There is considerable sophistication within modern angel groups and among many individual angels such that deal terms and docs are often adapted from common venture capital industry norms. You will need to work though deal pricing, security preferences, and shareholder rights in a very similar manner to what would be negotiated in a typical VC deal. A good law firm well-versed in both angel and VC deals is invaluable at this stage. 

What added value can the angel(s) bring to the table? You need to set appropriate expectations for what you need/want vs. what the angel can provide in your business relationship. For instance, do you need industry expertise and contacts, access to other investors, or other general business wisdom?

What is your board structure? In many cases, angels and groups will ask for one or more board member or observer seats. You will need to think about your board structure and short and longer-term needs as you work through these issues. We’ll cover boards in a future blog post.

What is your timeline, and how can you include the angels in it? Several angel groups work through a volunteer-led process, meeting monthly or every few months. This means that decisions can be slow and deals can take up to 6+ months to close. Much of this time should be spent strengthening relationships with a few key angels, building confidence and using these foundations to close a successful round.

Potential Challenges with Angels

Angels may have limited ability/interest to participate in future investments (“follow on rounds,”) so it is important to have a good idea of future capital needs and how these might be met. If you are expecting your base of angel investors from your $1M A round to lead your $10M B round, you may run into problems!

Returns on investments can take multiple years to accrue in the biotech industry. During this time, the firm is constantly spending money - often at an accelerating rate approaching the clinic.  This dynamic can be disconcerting to investors without biotech experience. Growing capital requirements can become a problem with angel investors and angel groups - often requiring identifying other, complementary sources of capital (grants, VC, Pharma deals). If you are unable to access these other sources and have to rely solely on your early angels, you may find future capital raising to be a significant challenge.

Managing a larger group of investors poses unique challenges as well. Angel board members may not have strong connections to your broader angel investor base, and even if they do, may not always communicate key company messages clearly, concisely and in a timely fashion.  At Siamab, we found that holding quarterly investor calls a few days after each board meeting, including all of our angel investors, was very helpful in ensuring that everyone was appropriately informed of and on the same page about key company events, activities, expectations.

Another concern sometimes raised is that some venture investors may not be interested in doing business with a company with a large angel investor base that they would have to engage with following an investment. Similarly, angel board members may hesitate to support bringing in a much larger, deeper-pocketed investor (VCs) with heavy preference requirements and corresponding dilution and control expectations.

Conclusions

Angels can be a viable funding source for lean science startups - but it is critical to approach them with a clear understanding of the timing, challenges, and limitations. All companies, including smaller biotech startups, need to be thinking about long-term funding strategy; not just this round, but the next 1-2 rounds. If you’d like to learn more about angel investing, a good resource is Seraf Compass, an excellent blog written by the heads of Launchpad Ventures, Hambleton Lord and Christopher Mirabile.