How Do You Talk to an Angel?
Members of MABA invest between $250,000 to $500,000 in life science start-ups of all types. Submissions for review have included ophthalmic drug, various types of therapeutic and diagnostic, device and imaging companies.
Dr. Kanter has agreed to speak with OIS.net to answer a few questions about his experience as an angel investor. Excerpts from his responses follow:
Q: What are the qualities of an effective angel?
EK: An effective angel cannot only be motivated by return on investment. We work hard on mentoring and developing relationships with entrepreneurs. We provide strategic focus and, where possible, accelerate the growth of these start-ups into more mature entities that would be attractive to venture capital investors or, in certain circumstances, make the company an attractive target for acquisition. Tolerance of risk is essential to any investment, none more so than within the realm of angel investing. An effective angel can minimize the risk of investment by effective due diligence, including an understanding of whether a product presents the opportunity to be “disruptive” in nature. Is it a game-changer? Will it appreciably change the way things are currently done? Is there a value added to the product in terms of quality, pricing and clinical outcomes? Or is it just the newest iteration of an acceptable standard that’s not ripe for change? A critical understanding of intellectual property is fundamental within the due diligence process.
Q: What qualities do you look for in an entrepreneur?
EK: I look for experienced entrepreneurs, preferably with a proven track record for success. Entrepreneurs who not only have skin in the game, in the sense that they have committed their own personal capital to the venture, but founders with an understanding of the market and their competition, as well as effective managers who can run the day-to-day operations of their companies. We look for individuals with an ability to listen and take advice from their investment partners. We want effective leaders who will be able to raise additional capital for their ventures when the time comes. It’s also important for an entrepreneur to have a rational understanding of the valuation of his or her company when negotiating a round, as well as a realistic sense of when to exit. A fluency in both the details and the nuances of the regulatory pathway is critical for both entrepreneur and angel alike.
Q: What are some of the red flags that you look to avoid?
EK: Success in angel investing is predicated, in part, on identifying a strong and committed entrepreneur to lead the company in which we’re investing. Specifically, the entrepreneur should be an individual who is passionate about his or her venture, and who is willing to invest their own money, time and energy into developing a successful company. Other important considerations that are critical to identify prior to investment include the obvious market related issues; Does the idea make sense? Is there a market for the product? Is it disruptive in nature? Does it have the appropriate IP protection? I would say, quite frankly, that everything else being equal, the most blatant red flags are adherent to the entrepreneur him or herself. Does the leader have unrealistic expectations of competitive advantages and future revenue projections? Does he have a poor understanding of the market space? Does she have an inability to listen to advice and to rally from poor short-term decision-making? Obviously, the list can go on and on, however, as I mentioned earlier, a great idea is important, but identifying an entrepreneur with a great idea AND the ability to execute a fundamentally sound business plan is crucial towards minimizing the risks of any investment.
Q: We’ve seen the venture capital field sort of shrinking a bit, particularly in medtech, with fewer and fewer venture funds out there. Is this a great time to be an angel because you’re seeing opportunities that perhaps might have gone to a larger entity, such as a venture fund, at an earlier stage?
EK: Angel and VC deal flow should be complimentary and additive. The basic difference between angels and VCs is really primarily one of structure and scale. In terms of structure, angels are individuals and groups of individuals who invest their own money. While VCs may be individuals, they are more likely structured groups that invest other people’s money with different motivating forces. So you know, I would say angels are not only looking for return on investment, but that we’re also personally vested in helping to make the business mature and succeed. VCs have a fiduciary responsibility to their investors, so they’re primarily interested in return on investment. In terms of scale, angels are involved in deals amounting in tens to hundreds of thousands of dollars, at much lower corporate pre-money valuations, usually no more than 3 to 5 million dollars, whereas VCs invest several million to perhaps tens of millions of dollars in companies valued at much higher levels. So, we both serve a role. I would say that VCs operate further down the road, however, we are seeing venture capital arms that are looking towards more early stage investments. Ultimately, success for both VCs and angels is dependent upon quality deal flow. It works in both of our interests to be synergistic– if a deal is too early for a venture capitalist, he or she may refer that deal to us, because we’re more interested in the earlier stages of the corporate life cycle. Once we’re able to nurture a company to achieve certain inflection points, we require the VCs to provide additional investment capital to take the company to the next level.
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