To the joy of biotech CEOs everywhere, the NASDAQ Biotech Index rose more than 50 percent through 2013, indicating the continuation of a powerful surge of interest after years of what can most politely be described as lacklustre performance. And it’s not just the US — one Toronto merchant banker described the public biotech market right now as “frothy”, with lots of companies seeking (and many finding) capital even beyond the medical marijuana bubble. Investment bankers see opportunity.
Despite an estimated 25-to-30 percent of the $20 billion US Angels invest annually going to biotech (according to the Center for Venture Research at the University of New Hampshire) it is hard to say if the excitement is trickling down to earlier stage initiatives in Canada, or if Canadian Angels are taking note.
On the organizational side, among the 35 descriptions of national angel and incubator organizations listed in the widely read Backbone Magazine’s “Tech Resources in Canada” (https://www.backbonemag.com/Tech-Resources-for-Companies-in-Canada/angels-and-investors.aspx), only four even touch on biotech.
Of those, one (eSight Corp.) deals specifically with visual assistive devices, and another (DNA Genotek) develops products for entities requiring high-quality biological samples – very narrow targets, and hardly your traditional angel biotech investors. The third (Blue Sky Capital Corporation) has an investment in NoNO Inc., a biotech company that focuses on stroke screening and treatment, but that seems to be the limit of their involvement in the sector. The fourth has a life sciences / healthcare orientation (Medica Venture Partners), and is the only one of the group that even looks like a traditional biotech angel group. One other company, Georgian Partners, that has historically supported a couple of medical device companies and has a stable of active Angel investors, has moved entirely into big data and cloud-based business solutions.
But does this reflect the actual current activity in Canada?
The Network of Angel Organizations – Ontario (www.nao-ontario.ca), Ontario’s voice for Angel investor groups, boasts that Angel groups have made $91.6 million in investments into 169 companies. Although the website doesn’t provide timelines or sector breakdowns, a short (and highly unscientific!) poll among members produced estimates that perhaps ten percent of those investments are in biotechnology.
Given that one of the challenges for early-stage biotech companies is actually getting access to Angel investors, it makes sense to look at events connecting Angels and capital-hungry companies.
So, among its upcoming events, MaRS does list what it boasts as “Canada’s largest healthcare venture showcase”, the MaRS HealthKick 2014 (15th of May, for those interested), but this is MaRS’s only upcoming biotech listing. The other mention is actually an annual event put on by ventureLAB in Markham, the MedEdge Summit (to be held June 19, 2014).
Randomly polling a couple of Angel groups themselves, Golden Triangle Angel Network (GTAN), based in the tech hub of southwestern Ontario, has 37 investees listed on its website. Four are healthcare-related – eSight eyewear with visual assistive devices, MyndTec Inc. creating therapies using electrical stimulation for brain and spinal cord injuries, Rna Diagnostics delivering clinical efficacy testing for cancer treatments, and Spartan BioScience focussing on DNA testing. Maple Leaf Angels, the Toronto-based angel group, has 17 investments on its website. Of these, three are healthcare oriented: well.ca is a retail operation specializing in wellness products, Spartan is described above, and ChipCare develops point-of-care diagnostic technology.
If these groups are typical, it means that somewhere between 10 and 30 percent of Angel capital goes to healthcare-related companies, with the number likely being closer to 10 than 30. In fact, a recent Forbes article, “Biotech’s “angel” funding market” indicates that Angel groups per se may not be the source of a great deal of biotech investment at all: “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…”.
And individual Angels state unequivocally that the timelines involved in most biotech and all pharma ventures, coupled with the high failure rate (estimated at more than 40 percent), are distinctly off-putting.
So in what is arguably a tight market with a relatively small prospect of raising Angel funding, how can a Canadian biotech CEO improve the likelihood of winning Angel investment for his or her venture?
Don Stewart, CEO of PlantForm Corporation, a biosimilar drug technology platform based in Guelph, founded his company just before the bottom fell out of the market in 2008. Just surviving that time makes PlantForm a remarkable success.
Obviously, Stewart has had to be nimble from the outset, and his funding sources have ranged from his own pockets to Angels to governments to foundations to offshore groups. “We started with FFF (families, friends, and fools) and Angel funding, but because of the economic climate had to move rapidly to other sources of capital – and we developed near-term capabilities in order to win contracts that could then serve to provide capital to build our technology platform.”
PlantForm sought opportunities that matched its skill base. In 2011, it was awarded almost $300,000 to develop HIV antibodies, and a year later parlayed its expertise to win a $1.8 million US Defense contract to research and develop medical countermeasures to chemical threats. At the same time, Stewart was tireless in presenting Plantform to Angel groups, investment gatherings, and industry conferences. The reputational benefits from such accolades as being named “Innovator of the Year (2010)”, one of Canada’s top investment prospects (2010), an OCE Mind-to-Market finalist (2011), “Most Promising Technology” (2012), excellence in writing (2013), and “Industry Partner” (2014) have meant extended reach and more investor interest from a broader base of prospects. As Stewart modestly says, “It helps to show up.”
Stewart has tackled his funding issues from the cost side as well, using whatever assets were available at hand, and suggests that start-ups should look to universities for resources. “Right now, as a result of retirements and funding changes, there is a lot of lab space opening up in universities. It’s an ideal entry point.”
Although Angel investors helped to support PlantForm’s early days, Stewart says that the capital needs of most biotech companies are now impossible for Angels to meet. “Most companies need to raise more than $10 million just to get through the early phase, and this puts Angels out of the bucket except for “back-of-envelope-stage” baby companies.”
Nicol MacNicol, a seasoned investor and Bay Street regular as an investment advisor and portfolio manager with Caldwell Securities in Toronto, would agree. “I may not get as much of a bang, but at this point I prefer to look at later-stage companies. And better yet if they’re already public – at least I can get out. With a private company, if something goes wrong, you’re done. I don’t care if there are bigger gains in the private sector, there is also huge risk.”
However, having seen hundreds of early-stage biotech presentations and invested in several of those companies, MacNicol says,
“There are a few boxes they have to tick. They have to know the sector. They have to understand the technology well enough to be able explain it to me understandably. They have to be reasonable in their projections and in their targets. It helps if they have a track record. I’m basically looking for people who’ve already identified their strategic investor and know who they’re marketing their company to. I’m not interested in megalomaniacs who think they can dominate a sector from a standing start.”
MacNicol may be more focused on the public markets, but his comments are echoed throughout the Angel community. This is a tough audience, but not an uninterested one. It’s merely that the risk-reward ratio doesn’t work in Angels’ favour under the current system, as even Angels who identify and invest in a successful venture can get crammed down by subsequent rounds of investment if they can’t participate in the necessary follow-ons.
It’s a structural problem. But it may be solvable.
Since September, 2013, when crowdfunding (which for equity necessarily involves Angel investors) went live in the U.S., healthcare has accounted for 37% of the capital raised. There is clearly both appetite and opportunity. In Canada, Oscar Jofre, CEO of BoardSuite Corporation and co-Chair of the Equity Crowdfunding Alliance of Canada ECFA Canada), reports that he is working with a group in Toronto to launch a portal for the sector. This could enable more Angels to take smaller pieces of biotech launches – resulting in lower risk and more diversification, both key to prudent investment.
In the meantime, however, there are definitely things the average Angel investor looks for before investing in the high-risk world of biotech, and most of them are well within management’s ability to affect:
- Clear communication about the technology: the explanation should be accessible and comprehensible. This sometimes means medical devices are easier to fund than new medications or therapeutic platforms;
- Realistic estimates and targets: management can’t overstate, and must be sensible about its reach and prospects;
- Revenues, or a short time to revenues – two-to-three years maximum. This means that drug developers will find it harder to raise Angel money, and should be prepared to look for strategic investment or paid contracts – or be well-enough positioned to bootstrap;
- Clear path to an exit for investors, either through being bought by a strategic investor (so know the potential targets!) or going public;
- Regular communication: be prepared to stay connected with investors.
There are also ways in which biotech companies can improve their chances of staying alive, either to enable Angel funding or to get to revenues without an Angel:
- Keep costs down by using local resources, such as university labs, graduate students;
- Connect with government at all levels for program monies, regional development initiatives, strategic initiatives, and conferences. IRAP, BDC, and the like can be good sources of information and resources;
- Look for contract opportunities, and partner with universities and local labs to supply any additional necessary technology or skills;
- Look for presentation opportunities that will support the company’s public profile and reputation. Have your deck ready to go.
The rewards in life sciences are huge, and as the sector converges with information technology, it only shows signs of continuing to grow. Angels want to be part of this growth – if biotech companies can demonstrate how they can participate profitably, Angels will be there.