Is there room in BioTech for Angels?

Recently at the Alliance of Angels, we have been confronted with the issue on whether biotech deals can work for angel investors. Traditionally, individual investors have regarded many of these types of deals (and rightfully so) as extraordinarily capital intensive and unfriendly for angels, as there is often no clear exit in the near term. Three letters alone, FDA, are enough to send most angels running for the doors.

But, is there a model out there in which angels can participate in the enormous upside potential without being entirely diluted by the tidal wave of follow-on financing. Getting all the way through phase 3 of FDA trials can cost a company hundreds of millions of dollars, but will generally assure a lucrative acquisition. However, if a company can get to mid-stage clinical testing, can they justify a high enough valuation and secure an exit at that point???

• Dan Rosen, chair of the Alliance of Angels feels that dilution is not necessarily the only concern. “In a deal where you are raising $50M the possibility of having to raise unexpected rounds increases, as does the likelihood of a down round. For an early investor holding a small equity stake, can you hold your share during a down round?” This is a concern to all early-stage investors in these companies, but particularly to angels.

One interesting model with which we have recently become familiar comes out of our own backyard. The Ratner Biomedical Group, led by Buddy Ratner at the University of Washington, works extensively in the areas of molecular bioengineering and nanotechnology and spins off successful ideas as independent companies (two of whom we have seen at the A of A, Healionics and Calcionics). In this type of model a company might come in seeking to raise a small initial round, perhaps around $1M to work through pre-clinical development milestones. Later rounds are planned to get the company through mid-stage clinical trials, but smaller numbers for the Bio Tech world- with figures that might be in the arena of $35M in future financing.

The argument for these type of investments is that although $35M has a significant dilutive effect for an early investor, however we have seen those type of follow-on numbers in other industries and the upside in Biotech is tremendous. Who wouldn’t want to be holding .01% of a billion dollar company? Bio Tech (even minus Med Devices) reportedly made up 10% of Angel investments in 2006-so someone is playing. If nothing else it can be a great addition to the riskier side of an individual’s portfolio.