Latest / BioSpace / What makes life science angel investment work?
Transcript
- speaker-0: Hi, my name is Jennifer Smith-Parker, Director of Insights at Biospace, and you're listening to Denatured. In this episode, I'm joined by Yaniv Snehor, founder of the Mid-Atlantic BioAngels, and Alex Peterson, an investor at Mid-Atlantic BioAngels and partner at Alloy Bioconsulting. We discuss why life science is only angel group matters, how they evaluate opportunities, and the importance of strong teams, capital efficiency, and a realistic path to exit. Hi, Yaniv and hi, Alex. Thank you so much for joining this episode of Denatured. Glad to have you on the podcast. If you can please introduce yourselves, that would be great. Yaniv, let's start with you. speaker-1: My background is as an entrepreneur. started and ran and turned around a bunch of businesses. And then a few years ago, with a few partners started Mid-Atlantic Bio Angels, or as we call it Bio Angels, which is a life science angel investor group. Those partners have since retired. So I'm sort of the last man standing at this point. speaker-0: Brilliant. All right, Alex, how about yourself? speaker-2: Thank you, Jennifer. My name is Alex Peterson. I'm an investor in Mid-Atlantic Bio Angels in Yaniv's group. I'm an independent biotech consultant for commercial-type projects. My background is at mid to large biotech companies like B1 and Genentech, working on the commercial side. speaker-0: So let's go ahead and kick this off. So let's start with Yaniv as well, just because what led you to start Mid-Atlantic BioAngels and why did you feel that a life scientist only angel group was needed? speaker-1: So I've been involved in the angel community for a while and having seen the process around the investing in life science companies, I felt that it deserved a group dedicated just for life sciences because it is a very difficult area to diligence and you need to have a lot of different disciplines in the room when you have a discussion around it and didn't want to leave it up to chance for who you might or might not have in the room in the discussion. So. As I mentioned with the two other partners that I had at the time, we felt that it was important to have a group that's dedicated just to life sciences so that we're able to attract membership from the life science industry to participate in the diligence of this, as I meant, very difficult to diligence area. So that's how we started the group. speaker-0: Okay, great. And for yourself, Alex, so what drew you personally to angel investing and what is your role with your commercial oncology background? How has that played into how you evaluate opportunities? ⁓ But actually, before we even that question, let's go to how did you hear about Mid-Atlantic Bio Angels? speaker-2: Yeah, I mean, like most of the group, had a friend who was aware of Yaniv and Bio Angels. That friend, I trusted him and I described where I was at. You know, every career, you're to hit a point where you plateau in terms of your intellectual curiosity. And I was looking for something to expand beyond what I had seen for the last 15 years. And this was a great opportunity to get earlier stage. Most of the time I was working on projects, phase two to launch to actual full commercialization. And this gets you early when you're preclinical, when you're dealing with these types of investments, it's just been really intellectually stimulating. And I appreciate that recommendation from my buddy. speaker-0: You owe it to him at this point. for for young even let me ask you to also Alex probably this part of the consideration here, but how do you evaluate whether a life science company is the right fit for angel investment rather than VC funding? ⁓ speaker-1: First of all, there is the right fit for us versus the right fit period. So we have our own set of criteria that the group developed and that we look for opportunities where we believe we can make money. For us, some of the differentiating factors are usually the amount of money that that company requires before they reach an exit. Some companies, by their nature, will require very large clinical trials or a lot of money in the future before they can potentially exit. are the kind of money that private or angel investors can't bring to the table. So we look for opportunities that will not require those large future VC rounds, those 30, $50, $100 million rounds, because we would be diluted too heavily in those rounds and potentially not stand to have any return on our investment. So the right opportunity for us as a company that with up to maybe 25 or $30 million, that they could potentially raise in multiple syndicated rounds, which means there are multiple groups or small VCs, et cetera, that all participate in the round. That round is maybe between five and $10 million. And those companies can raise maybe three, four, five of these rounds at most, where every time between those rounds, they go back to their labs, they hit some milestones, they generate additional value, they come back for another round. That's a good model for us. We believe that we can make money in that model and that's what we've adopted as one of our main criteria for investment. speaker-0: Any comments from yourself, Alex, about what you're looking for too, and you're part of this group, and you're examining whether or not it's go or no-go? speaker-2: give a hat tip to what you need was crafted on the bioangels website. It lays out the specific criteria very well. And if you have any entrepreneurs that are pitching, I'd recommend taking a look at that and considering how that fits your plan. I mean, high level, all these investments, you need a clinical concept that's going to actually work. There's a marketplace fit. You're to be able to move through your regulatory. You have the right team in place. But I think the elements that a lot of people may not appreciate is exactly what you need said. will your capital requirements match up to what it would take for angels to make money in this space? If you hit a point where you're going to need a lot of money at an unfavorable pricing, then that's going to be a situation where angels get diluted and it gets a lot harder for angels to make money. So that's, that's one of the twists for this type of investment. It's not, is it a good business? Is there something that's promising, but you also need to be able to fit that expectation that the investors will make return on their investment rather than getting diluted out at some point in time. speaker-0: That does make a lot of sense. And as you're saying, it's also a good nudge to take a look at the website to understand better exactly what that criteria are, right? I'm just curious, for let's talk about that criteria a bit. actually, what is the top criteria that you and the group look for? know Alex, touched on it quite a bit as well, but can we go a little bit more into the wheeze upon that, Yanniv? And Alex. speaker-1: Sure. So I think every investor will tell you that the number one criteria is the management team. And that's because every team, as they launch on their efforts, nothing really works out like the business plan, you know, and you have to be able to adapt to the market conditions and make lemonade with the lemons that you end up having in the end. And a good team will be able to do that. So that's the number one criteria that we have. And also since we are not VCs and we do not take controlling interest in companies, we have a more difficult time replacing a entrepreneur who is the CEO. And we much prefer since all of us as angel investors have a day job, it's very difficult for us to sort of stop our day job and take over somebody else's company. And it's not our interest to do that. So number one, we look for a strong entrepreneur who is commercially minded and knows how to monetize the opportunity, knows how to turn this opportunity into something that will make money for them and for us. Number two, we're looking for things that will change the standard of care. So they won't just be incrementally better, but they will be a new paradigm for how things, how the standard of care is practiced. And there are many benefits for it, but one of them is You know, have a lot more intellectual property, IP real estate. You can own a lot more. ⁓ It's a much more significant opportunity. And now additional benefits. You have more time to capture a market. You can make mistakes in the beginning as an entrepreneur, but still if you have strong IP, you can get over that. Another thing we look for are markets that are large enough to support a preferably healthy acquisition exit. As we've done an analysis that Alex looked at our data and we looked at the comparison between an ⁓ &A exit versus an IPO exit. And we believe that an ⁓ &A exit is the right one for us. And if we look at it from another perspective, if a company is doing something very exciting in a certain field, somebody is going to swoop in and acquire them before they get a chance to even go public, before they get too expensive as they become public. And so those are the right opportunities for us together with the dollar amounts that we talked about earlier. speaker-2: The only thing I'd add is that your proof points are going to differ by type of technology. So broadly speaking, if you looked at therapeutics versus med device or diagnostics, your expectation of what you'd want from the pitch, the company, what they have in place, what the plans are, a preclinical therapeutic, you're probably going to be looking at a long, long path before they hit commercialization. And so you need a general concept that it would fit and that a buyer would value it, but you don't need a full commercial team in place. some of the med device companies, some of the diagnostic companies, potentially they could be talking about launch in two to four years and you need to be much more mature in terms of what you're expecting and what you've put in place to be able to execute that launch. And if commercial traction and partnerships are going to be a key part of the acquisition thesis, then we want to see that those pieces are there. So part of it is consider the type of company, consider the context, and that's also where the benefit of expertise really pays off. speaker-0: just curious when it comes to the angel investment landscape. mean, is there a number of angel investors out there or has the angel investors in the life science space, has that grown in the past couple of years? Have they shrunk? Has it stayed stagnant? speaker-1: are a lot of angel groups out there and most of them are generalists and many of them will invest in life science. It usually depends on whether they have a mix of members who understand the field and that the group is comfortable making that investment. We are one of the only groups in the world that invest exclusively in life science. So that's the only thing we do. It's therapeutics and devices, mostly a little bit diagnostics and digital health. And we don't do anything beyond that. So every group has their own shtick. Everybody decides what they want to invest in. They have their own criteria and how they go about evaluating, cetera. But we're one of the only specialist groups in life sciences. speaker-2: Yanniv has a much stronger longitudinal view. He's been in this angel investing a lot longer than I have. For me, the perspective is I'm in another group in Utah, the Park City Angels. This one, you have a collection of members from outside of sciences for the most part. It's a lot of people with software backgrounds or operating backgrounds or logistics backgrounds. It's a lot of things where they know business, but they haven't been as steeped in therapeutics or med device or any of the diagnostics. ⁓ Consequently, like you've touched on, with the background, that increases somebody's expertise in an area. And then I think there's also a correlation between having expertise and being willing to fund a company that you believe in because you've seen that prototype before. speaker-0: make a lot of sense. And I'm curious, Alex, with your own commercial oncology background, how has that played into how you evaluated opportunities? speaker-2: Yeah, I mean with therapeutics, that's where my sweet spot is. ⁓ Understanding what the path is, where they would fit. And then also you kind of get a gauge on whether your team that's pitching has much of an idea of the market that they're going towards. Some of the issues that could arise if there's a disconnect between an understanding of the market and what you're designing. If let's say your phase one, phase two aren't going to support either your regulatory or your commercial launches, ⁓ that could be an issue. understanding those endpoints that a potential buying partner might look for in terms of what they want to see for your data before they make an acquisition. Those are also the types of things where that commercial lens can come in handy. And then also it's just, you know, logic checking and right sizing. I mean, it's pretty common for most of the pitch companies to come in with an expectation of the market that is pretty unrealistic. And so it's having that frame of reference on How do you actually market size? How do you define what your customer is? Putting in some of that critical thought, thinking about if you did launch, if you got to the point where this product or service or whatever it is is on the market, what would that look like? What is the positioning? What is the competition? How do you evaluate whether what the company is claiming is valid or whether they're going to see some struggles? ⁓ I think those tools that I've gained from looking at the marketing lens or the market research or the forecasting lens. All of these things help to pressure test those elements of what the companies are representing. speaker-0: really interesting that you said so many companies come in with an unrealistic views of the market actually. it just is, is that just, ⁓ I mean, can they just pull up data out by Googling it? Or is there some way to just pull up? I don't know, just to find out what the market potential is and do their own research. I just find that interesting that they come unprepared for that. speaker-2: On of my head, my hunch is that the higher percentage of the pitches have a $10 billion or larger market, and I doubt that's really the case. If you actually dig in and you see where this product would fit, what is the patient type? What is it that they would be displacing? Whether it be no treatment or an existing treatment, what really would it be? So you have a hematology asset, and they're saying, we're going to take all of hematology. That's generally unlikely. You're going to have a specific patient population in which you run trials. That's going to be where your indication is. That's what you're going to be promoting to. That's what your sales reps are going to be emphasizing. If you have a biomarker population, strengthens your ability to take share within that population, but it also limits. If you're just focusing on EGFR within lung cancer, you're not going to get the non-EGFR patients. So it's really understanding. Is your clinical development plan going to prove what you need to get your indication and then support how you're going to launch? And it's those sorts of understanding and how you limit it. And just by nature of it, a lot of angel pitches are coming from people where they have deep, deep scientific understanding, PhDs, foreign Ds, MDs, a lot of people where what they know is the science, but they may never have worked in a commercial context before. And even some folks like I've got friends who are medical directors and they understand the science, they understand the clinical side, but this is why mature pharma companies have life cycle teams with commercial representation to talk about what your implications are going to be depending on how you structure your phase one and how that's going to track through to your phase three or your pivotal trial. speaker-0: Yeah, that makes a lot of sense. I have to take a step back to realize, right, not everyone has had that commercial exposure, as you said, especially if you're deep in the weeds of the science world. how do you think about capital efficiency and milestone planning when deciding whether to invest? speaker-1: So first of all, Alex showed by his answer, he showed you how important it is to have people who understand very specific paths for a company. And then if you marry Alex's expertise to expertise relating to financials, human resources, regulatory, et cetera, that is the reason why we have a group that is specifically in life science with people like Alex's and different backgrounds with everybody being able to do that. We take the view of all the folks in the group and we look at what an exit is going to look like for a successful asset like this. And we try to work backwards and to understand given what Alex and folks like him and others in the group have seen in terms of these types of assets, what kind of exits they've commanded, what kind of interest there is from these acquires to buy these and at what phase. from our experience. A lot of our members work in the industry, so we have firsthand experience. And we work our way backwards and we try to figure out if that story is a financial story that makes sense for us. So that use of funds that is no more than 20 to 25 million dollars, can realistically get you to a point where you have an asset or a story that has enough value behind it. So Alex talked about where in therapeutics, You need to have enough data in devices. You need to show traction. So can that company get to that kind of point in their story where it's such a, such a value point that somebody is going to want to buy them with that amount of money. So that's being very efficient, very direct, very specific with how you use your funds to get to a very specific point of exit in your respective market. speaker-2: Trying to tie out cool science to cool science that companies would actually buy. I mean, are you expecting that you're going to launch and build the market? Okay, you're probably talking about a long path with a lot of money. Do you think you're going to get acquired after phase one? Let's see some proof points or let's see some evidence that would reinforce your open-air dream to say that that's a realistic possibility. If it is the type where there's either precedent transactions or you've had first-hand legitimate conversations with acquirers because after phase one, if you're going to be filing for your IND, this could be three years away. And so, like, let me know that this is realistic, that this is a proof point, and that you've structured your phase one so that that result is achievable. I mean, some of the other things are, what's your focus? Some companies want to run three different tumors in phase one trials. It's going to be pricey. You extrapolate that out and you're going to have to run with your phase two what that is going to look like. might not be an angel investment. that degree of focus, higher focus, as long as it's tailored, a lot of times you're going to increase the risk. But if it pays out, then that's how you could get an exit after phase one or phase two. If it's broad and we're doing an academic project and we're boiling the ocean and testing everything, there may not be that tight connection between the specific endpoints in a capital efficient fashion that would lead to the type of exit in a reasonable period of time. speaker-0: I think the final question for you, for your gentlemen, is what predicts success and failure in life science angel investing? speaker-2: I mean, I think of it more as the failure side. For me, my investment lens is looking at what the thesis is and understanding what are the nodes where something could go wrong and trying to reduce the risk that something goes wrong. You look at the stats, this is a very risky business with a lot of companies that will hit a bump in the road at some point. And so how do you reduce those failure nodes and by implication that increases your likelihood of success? And that's a big part of what the analysis was. It's taking 1,100 companies, looking over time and seeing which ones have been able to overcome those hurdles. And is there a persistent trend that our group has been missing where we should be unlocking more capital? So reduce those failure nodes, and you're probably going to yield better investments. speaker-0: You got any of any parting words for yourself? speaker-1: Yeah, I think that when you, when you do your screening, you try to eliminate all of those ⁓ marks where potentially things could go wrong and eliminating those high risk factors. And then when you're left with the ones with where you think that there is a potential there, see some things that are going to be a strong markers for potential success, like a very strong market demand, very ⁓ competent management team. So at that point, if you can marry those, then you are improving your chances for success. speaker-0: Well, on that note, thank you so much, Yanniv, and thank you, Alex, for joining this episode of Denatured. If you'd to listen to more episodes, please turn into biospace.com. Thank you.