WASHINGTON, DC — University technology-transfer offices seeking investors to help move early-stage life-science inventions to market often bemoan the fact that venture capitalists and biomedical companies are becoming increasingly hesitant to invest in such technologies.
As a result, academic tech-transfer offices and entrepreneurs are often forced to turn to individual angel investors to fill the oft-cited funding gap that develops between seed funding from friends and family and later-stage VC investments.
However, relying on angel investors is also becoming dicier as as they too have become more tentative about funding deals straight out of university tech-transfer offices, industry insiders said at a university startups conference last week.
It’s not all bad news, at least to some life-science plays, as angels are still attracted to their technologies and innovations — though some specific areas, such as pharmaceuticals, make much less attractive investment targets, experts said.
The conference, held here last week, was organized by the National Council of Entrepreneurial Tech Transfer, or NCET2; and co-hosted by Columbia University, the University of Wisconsin-Madison, the National Institutes of Health, and the National Science Foundation.
Academic tech-transfer officials attending the conference had a rare chance to pick the brains of a variety of angel investors during an interactive panel at the event that encouraged audience participation.
Angel investors representing several geographic regions and industry sectors shared their thoughts about the challenges of consummating deals with tech-transfer offices, what constitutes an attractive deal, and how they see their roles changing in the future.
One of the most consistent sentiments shared by panel members was that university-born startups, particularly in the life sciences, have not traditionally been an attractive source of deals. According to panel moderator John Houston, chairman of the Angel Capital Association and founder of Ohio TechAngels, only one of 20 companies it has invested in came from a university.
Houston said that angels typically invest around $400,000 to $500,000 into a deal — much less than the average VC. And, because they don’t get paid like VCs do, they are much more concerned about using their time efficiently, which can sometimes be a problem when dealing with tech-transfer offices that don’t have a deal properly organized or who are prone to excessive negotiating.
Ted Rogers, a managing partner with Ashburn, Va.-based PPI Ventures, said that he manages a portfolio of around nine companies, three of which are based on university research and two of which required a direct interaction with an academic tech-transfer office.
“I don’t want to go into a tech-transfer office and argue about a lottery ticket.”
Meantime, Katherine O’Neill, executive director of the JumpStart New Jersey Angel Network, said that JumpStart investors have bet about $18 million on 22 deals over the past four years, but have made “no direct investments with tech-transfer offices recently.” She didn’t elaborate.
David Weaver, founder and president of Great Lakes Angels and an entrepreneur-in-residence at the Pittsburgh Life Sciences Greenhouse, said that about 30 percent of the deals he has done have come out of a university tech-transfer office.
Weaver said that a key question for tech-transfer officials to answer is, “How soon can you get the technology in a licensable form to get it to the company? Tech-transfer offices often don’t have everything packaged.”
Liddy Karter, president of the Angel Investor Forum, a Hartford, Conn.-based angel collaborative, echoed Weaver’s concerns about angel investors’ time constraints. She said that one of her pet peeves was when tech-transfer offices take up her time but then “give all the best deals to VCs.”
Karter added that tech-transfer offices do a “good job getting things just so far,” but often times it is not enough to cause an angel investor to bite. One of the main reasons this is a problem is that a technology needs to have an obvious commercialization path so angels can clearly see a future return on investment.
According to PPI’s Rogers, angel investments are the most risky investments, which means that angels would like to see a minimum 10-fold ROI in three to five years, something that is “difficult to get in a medical device play; and almost impossible to get with a pharmaceutical deal.”
When asked by an audience member what universities should expect from an angel deal in terms of equity, Rogers quickly joked, “Zero,” but then added that “anything more than 10 percent puts me off.”
Richard Holdren, executive director of Houston-based Healthcare Angels, said that his group has recently been investing outside the US more often than not, and then bringing technologies back to the states.
“We find that we are often paying less for some technologies outside the US,” even at universities and non-profit research institutes, he said. Holdren also underscored the importance of tech-transfer offices obtaining government funding such as Small Business Innovation Research grants to advance a technology and make it a more attractive investment target.
For example, he said that Healthcare Angels is about to invest $400,000 in a macular degeneration treatment out of a university in Montreal, a technology into which the Canadian government is also pumping approximately $1 million.
“That’s the kind of deal I like to see,” Holdren said.
JumpStart’s O’Neill added that the main issues preventing angels from doing drug-development deals in the US are time and capital-intensivity.
Another audience member asked the panel how angel investors ensure there will be money available to fill any funding gap that arises after their initial investment lands, in light of the fact that VCs are pulling back to later stages of technology development.
O’Neill answered that the “best angel deals don’t need follow-up funding. In addition, really good angel groups have great relationships with VCs,” and therefore are typically able to garner additional investment in a promising technology.
However, she also said that she believes angel groups will probably start putting more money into deals in the future and doing more deals in syndication.
Angels Fear to Tread
According to the panel, many angels are reluctant to work with tech-transfer offices because too often they are unrealistic about their expectations for a technology’s commercial potential.
“I don’t want to go into a tech-transfer office and argue about a lottery ticket,” which is essentially what many early-stage university technologies represent, Rogers said. Still, he said that most successful deals with university tech-transfer offices are in the biotech arena.
Rogers also said that in many cases he would rather work directly with an entrepreneur on a deal because “you give up equity right away with a tech-transfer office.”
Taking that notion one step further, JumpStart’s O’Neill said that entrepreneurs are also typically fully committed to making the deal happen — something that tech-transfer offices or faculty inventors are not always prepared to do.
It is for that reason that Georgia Tech University typically discourages its professors from getting involved from a business standpoint in startup companies, according to Stephen Fleming, chief commercialization officer at the university.
Rather, Georgia Tech tells its professors, “‘You’ll remain a professor,’ and then we go and find an entrepreneur” to run a company, Fleming said. “It’s not that useful trying to get faculty to be more entrepreneurial.”
Offering a university tech-transfer perspective on angel investments, Fleming echoed the comments of most of the angels on the panel, saying that “angels are not usually a good match for deals coming out of Georgia Tech.”
Part of this may be because a school like Georgia Tech tends to produce a lot of complicated, market-specific inventions that would require much more capital than a typical angel has to offer to further develop it.
When asked whether tech-transfer offices might consider looking at investment deals that are smaller than the typical angel level — for instance, chunks of $50,000 or $75,000 — Fleming responded that it wasn’t a bad idea, “but would not be good for a lot of sectors. For instance, in the area of biofuels, $75,000 or so is not going to help much.”
Following the discussion panel, Andrew Koopman, manager of new venture development for the New York University Office of Industrial Liaison/Technology Transfer, told BTW that his university does get a steady stream of visits from people he would consider to be angel investors.
However, he conceded that there are certain areas, like pharmaceuticals, where angel investors “are less likely to tread. Otherwise I think angel investors vary by their experience.”
He added that angel investments in biomedical technologies depend greatly on the nature of the opportunity, and that angels are more likely to support technologies that have a little more “sizzle.”
“A lot of angel investors tread in areas where they are looking to raise additional capital from other sources, and in order to approach those sources, they need to have a story that is easy to tell,” Koopman said.
“If it is something in a very specific disease indication that is more arcane or esoteric … that is a little more difficult for them to market for the next round of funding,” he added. “It has to be an idea they can easily translate to investors that aren’t as niche-oriented.”