Venture capitalists and angel investors have been stepping on one another’s toes when it comes to life sciences funding. Angels are expanding beyond the seed round, participating in Series A’s, follow-ons and later deals. And venture capitalists are now more likely to invest where angels have seeded and thus derisked.
“Risk is always smaller in hindsight,” said Don Ross of Health Tech Capital, a network of private investors.
These concepts were debated during MedCity’s Mid-America Healthcare Venture Forum in Chicago this week. Angel investors themselves are playing advisory roles in early stage companies – investing seed funding in companies that fit with their personal expertise. This used to be the purview of the venture capitalist, but angel investors are getting more and more hands-on, Ross said. There are cases where VCs and angel investors exist successfully – symbiotically, even – and others where things are just awkward.
What VCs are afraid of, Ross said, are financing structures that don’t sit well with what they’re used to. Take convertible notes: They allow venture capitalists to make sure their valuation sticks in future rounds, Arboretum Ventures’ Paul McCreadie said. But convertible note terms can be completely rewritten when the next round comes in, Ross said. They’re a way to smooth things over between angels and venture capitalists that butt heads over valuation, Ross said.
“It’s important that proceeds raised are right-sized with milestones that are achievable,” McCreadie said. The problem lies when there’s a convertible note out there, “lingering forever,” because perhaps not enough capital was raised to bring a startup to an inflection point or key milestone like an FDA clearance.
“You have to make sure the amount of capital put to work gives you time to reach a milestone you can make money off of,” McCreadie said.
