Funding is essential to starting a life science business. Angel funding is funding from private investors (individuals or groups) in exchange for equity. Angel investors may be more flexible than venture capitalists concerning timelines, amount of money, etc.
When seeking angel investors, you need to put your opportunity out there. Expand your face-to-face and online networks, connect with local angel groups, and seek out specific health- and medical-focused angels online, such as AngelMD, Life Sciences Angel Network, or Life Science Angels.
At the early stage, angels are looking for evidence of the following:
- A value proposition for a life science problem
- Validity regarding potential clinical impact
- Use of appropriate technology in the implementation
When pitching your idea, you’ll also want to think about how “hot” your topic is right now and if your team not only has the ability to launch a business but also has mastery over the topic and competition and understands processes such as FDA approval. Outline the financial return on investment and the impact on health, and make sure not to exaggerate any claims.
Angels will also want figures for the value of the startup at the beginning and in the future (to calculate their expected return). Cost-savings will be a factor in the value as will clinical benefits and diagnostic utility. Calculating future value is, of course, partially a guess. Your business plan should provide performance estimates of future sales, reasonable expenses, and potential earnings, which will all help calculate the future value.
When considering how much funding they will offer, angel investors sometimes apply a dollar value to assets and ideas. Some may have a maximum amount they will not go over. Others expect the business founders to be contribute a significant portion of the funding. Make sure you learn what the angels you’re pitching to expect in this regard.
In exchange for angel funding, you’ll have to negotiate an agreement for what the angel gets in return. That may be common shares and various rights or preferred shares. Common shares might be the easiest route if the angel is simply looking for a small stake in the company. Preferred shares could provide additional rights related to board selection, obtaining dividends, making liquidation decisions, or redemption of shares. You could also offer a convertible note, which is likely to be convertible into preferred stock and discounted to the rate of the actual sale of preferred stock as compensation for the additional risk that the angel endured. This may be the best structure if additional funding beyond that of the angel is expected in the future.
When negotiating, consider the power differential between you and the angel. For instance, do you need more than just money from the angel, such as advice on how to run the company or recommendations for key team members? Come into the negotiation room with the goal of everyone winning. Funding a startup is not a zero-sum game. Also be aware that negotiation is almost impossible if it involves more than two people. Too many cooks in the kitchen can make things very messy, very quickly.
After you’ve obtained angel funding and started your business, eventually, you’ll probably want to sell the company. That’s what your angels and other investors are waiting for, and they will have strong opinions about when you should sell. Most life science business ventures sell to pharmaceutical companies. Look to investors to obtain expertise and negotiate a favorable sale of the company. Make sure you also think about what comes next for you. After you sell, what rights will you have to participate in this field? Will you continue to be able to expand your knowledge? Will you be able to utilize your expertise? These are essential components of any sales agreement, and it is important that you are comfortable with the outcome.
When seeking out angels and other investors, negotiating, and selling your company, remember that you’re not looking for perfect solutions. You’re looking for a solution that meets your financial and developmental needs and goals. Good luck with your planning and your future venture.