Crowdfunding: Angels in Biotech, or Devil in the Details?

Posted December 11th, 2013 in Biotech financing

In the tech-dominated venture capital world, 2013 could be called the year of the crowd.  With the JOBS Act and the emergence of credible platforms like AngelList, crowdfunding has come into the mainstream in a meaningful way.

Social media, software, and other technology sectors have benefited most from this momentum and this has been the subject of much discussion elsewhere (here is a great post from my partner Fred Destin on the AngelList ‘Revolution’).  The impact on biotech, on the other hand, has been more limited and it’s worth exploring more as we contemplate the various funding approaches for early stage healthcare companies.

Before understanding what crowdfunding could do for biotech, its important to understand how big this individual-investing “angel” market is currently – a subject with very little data.

Biotech’s “angel” funding market

Angel investing has been running at an annual rate of ~$20B for the past few years across all sectors, according to the Center for Venture Research at the University of New Hampshire (here).  The CVR is widely regarded as one of the best sources for angel data.  In the first half of 2013, they estimate that $9.7B was invested via angel funding into 28,590 entrepreneurial ventures, according to their statistical analysis, which is based on a survey of angel groups and angel investors.  The sector distribution reported suggests 21% of the startups were in Healthcare Services/MedTech and 8% in Biotech.  Interestingly, over the past few years, healthcare as a whole has been ~25% of this overall angel funding pie, roughly in line with its share of the overall venture capital market.

With 8% into biotech, these data would imply ~2000 biotechs were angel funded in the first half of the year, a surprisingly high (and almost certainly inaccurate) figure.  This may have something to do with their statistical sampling method for data extrapolation, but even if it overestimates by 5-10-fold, these CVR data still suggest there were several hundred to a thousand biotechs backed by angel investors just in the first half of the year.

To try and triangulate the scale of angel funding in biotech with other sources, a quick review of the Boston market’s angel shops suggests, at the very least, that these new biotech startups aren’t working through angel investing groups.  Mass Med Angels has backed 11 deals since 2009 through their 87 members.  Cherrystone Angel Group has backed four life science deals in recent years, including SmartCells where they made 10x+ upon its sale to Merck (here).  Launchpad Venture Group supported ~10 life science deals, some of which overlap with Cherrystone.  Boston Harbor Angels have 18 life sciences in their active portfolio, again overlapping with other angel groups.  Beacon Angels and Boyton Angels have a few more.  But in aggregate, and eliminating the overlap, there aren’t more than 25 or so active biotechs invested in by these groups over the past several years (much less only the first half of 2013).  Given Boston’s prominence in the biotech scene, its improbable that it is only a couple percentage points or less of the angel-funding arena.

Further supporting a smaller estimate, DowJones Venture Source captures 235 biotechs since 2005 that have raised funding at some point from “individual investors”, including only 51 startups that specifically list “individual rounds” of angel-funding (though this may be due to low rates of self-reporting and Reg D filings).  Crunchbase, the free database of tech companies (including biotech), has only ~40 Biotech/Medical startups in its dataset that managed to secure angel fundings since 2005, many of which are different than the Venture Source startups.

In short, the data are scant and its hard to get a good number – but based on the above and my observation, I’d guess that fewer than 100 biotech startups are backed by angels with more than $500K in any given year.

Important to note that many of these are very exciting companies.  Avaxia Biologics has raised $15M+ from angels for its oral anti-TNF antibody efforts, in addition to AbbVie Ventures.  Neurophage Pharma has been supported with $10M+ from angels for neurodegenerative disease program, and additional funding from Shire and Mérieux.  Blaze Biosciences has just raised $9M for its anti-tumor agents.  These are real financings and exciting companies.

With that as a backdrop, the more interesting question is whether crowdfunding and the emergence of new platforms here will change the game in biotech?  Could we move from these rather small angel-backed biotech numbers to something more significant – either 5x more startups or 10x more angel capital flowing into the sector?

Impact of Crowdfunding. 

How big could crowdfunding be for biotech?  A quick top-down estimate suggests, without failing the red face test, that it could be huge.  There are about 120M households in the U.S.  The top 1% is ~1M households, and they have a mean household net worth near $15M.  If they invested just 0.1% of their net worth each year – or $15K – into crowdfunded biotech working in a disease area of their interest, it would create $15B of fund flows into biotech.  This is 3x more than the total biotech VC market.  If just 10% of them did it, and focused it on brand new startups, it would still more than double the amount of capital flowing into first time financings.  Keep in mind that crowdfunding could open up private biotech funding to a broad range of individuals well outside of the top 1%.  Since disease affects all of us, “doing well by doing good” could be a motivating investment thesis supporting increased angel interest in the space.  In short, the scale of the potential impact of small relative allocations of capital is enormous.

Up until now, there’s been no efficient platform for angel investing, especially in biotech.  It’s all driven locally, often by informal angel groups like those listed above.  Or it’s through networks around successful Pharma executives, like Henri Termeer, who are active in advising and supporting new startups (see interview here). But that’s been changing over the past couple years.  There are now a bunch of new platforms aimed at channeling capital from the crowd into startups in biotech (among other sectors): AngelList, Health Tech Hatch, Medstartr, Petridish, VentureHealth, and Poliwogg to name a few, and dozens more are active across other non-biotech sectors.  These range from broad social media driven investing platforms (like AngelList, of which we are investors at Atlas) to a broker-dealer model (Poliwogg).

The metrics in the tech sector highlight the possibilities: 28K startups are actively looking for funding on AngelList from around the world.  Over 4000 startups listed on AngelList have raised $2.4B.  They’ve managed to create an impressive marketplace for funding, jobs, investing online, and syndicate formation.  Atlas has created an “AngelList Syndicate” where we back a selective set of active angel investors in tech deals in the Boston ecosystem (here).

Right now, AngelList has some ~250 “biotech” startups seeking capital (here); most of these startups are genomics, DIY, diagnostic, or life science service companies rather than therapeutics plays (though there are a few).  But that may change over time.  We’ve actually posted a few of our seed stage therapeutics deals on the site, including Rodin (here), and are open to adding some angel capital to test the experiment of whether these platforms can work.

Luke Timmerman wrote a great piece earlier this year on the topic (here), and started it with a telling statement: “Most biotech pros will shrug, or chuckle, if you ask whether crowdfunding will transform life sciences financing in the U.S.”  This is totally accurate.  It’s clear that crowdfunding won’t replace VCs in biotech, as others have said before (here), but I do believe that if positioned properly and supported more broadly by the sector, these platforms and their offerings could greatly augment the capital flows into the earlier stage biotech arena.

Importantly though, nascent biotechs often need a lot more than capital, and VCs add more value than just funding (here).  They need folks skilled in venture creation as well as savvy science-led entrepreneurial management teams.  Access to business development networks is often key for early collaborative models and broader syndication.  Often early stage venture firms help incubate these companies and provide added capabilities through more active engagement and interim leadership (as we do at Atlas, and others do).  The value-added impact is especially true in the earliest stages of a new venture.

So the big question is whether early stage venture firms can play nicely with crowdfunding approaches and an increased angel investment model, and vice versa.  We’ve got a number of companies with individual investors on the cap table that we’ve worked with from the seed rounds of those startups – Nimbus, miRagen, Annovation (with Mass Med Angels), and others.  But it’s not been something we’ve actively solicited to date.  Maybe that should change.

There are a bunch of “the Devil is in the details” considerations to think about:

  • Board dynamic: will angel investors want Board representation alongside larger venture investors?  How much input will they want in company strategy?
  • Cap Table chaos: having 100s of individual investors on a cap table for an early stage startup requires a lot of investor management.  And complicates the “information rights” around what to share or not.  Is this something VCs want to deal with?
  • Future rounds: we build syndicates that can go the distance and do their “pro rata” going forward.  We often include pay-to-play terms to encourage that participation.  Will angel investors be there for future fundings?  Should VCs change their pro rata expectations?  New norms probably need to be established.
  • Risk expectations: 40% of biotech’s lose money historically, and drug development is hard and often takes longer than expected.  Are angels ready for the ride?  Lots of money could be lost chasing bad ideas or tough science.

There are probably many other areas of potential conflict.  But I think the potential for positive change here is big enough to want to see some of these experiments work.  So we’re keen to find a few more seed-stage deals in the Atlas portfolio where we can work collaboratively with angel investors or angel groups on growing and building at their earliest stages.  Maybe I’ll regret it, but I think it’s an experiment worth considering.  The potential here for a long-term positive impact on the sector is considerable.

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