As an investor and advocate for healthcare innovation, the last 5 to 10 years have been extremely exciting, especially with respect to the healthcare, technology, and life sciences sectors. In fact, several may argue that this time frame has nurtured some of the most promising early-stage startup companies, and has thus afforded some of the best investment opportunities of our lifetime.
Angel Investing Surges
Most recently, the visibility of angel investing and momentum surrounding it has dramatically surged. One might argue that free wheeling capital cash flow, Shark Tank, and Silicon Valley have perpetuated a movement with inflated valuations through the roof. As an investor, this screams opportunity, but this is inherently coupled with risk. Where to begin?
Angel investing isn’t just for millionaires, but it certainly helps to have money! For the rest of us, it’s a rewarding hobby that enables enthusiasts to “give back,” helping entrepreneurs and startup companies advance their interests and passions. And it is much more exciting than putting cash into mutual funds.
What can you invest: Three things—time, money, and/or resources (or any mix of the three). Before you get involved, be unequivocally clear what you want to dedicate from all three of these. Time: Don’t let it be a distraction from your day job; Money: How much? Resources: How can your network be leveraged?
I’ve found it’s important to have a loose collective of investment partners with complementary skill-sets, experience, networks, and expertise. In my case, I collaborate with three to four industry colleagues to bounce ideas, scout investment opportunities, play good cop/bad cop on pricing negotiations, and decide who is ultimately “in” or “out” of an investment round. You have to kiss a lot of frogs in the process, so you might as well have some friends along for the ride.
Don’t know where to start? Build your network, attend accelerator pitches, meet with entrepreneurs at industry events, and refer to syndicates such as AngelList. Crowdfunding is a good place to start.
The two most popular vehicles for investing your money: Convertible notes and equity.
Convertible notes are often used for seed rounds when the company is in its infancy and valuation is a bit unclear. These are loans that convert to equity upon a trigger (Series A or subsequent round of financing). Convertible debt manages the juxtaposition of risk/reward nicely, giving you a chance to get in on the ground floor, with a “kicker” upon conversion (say 20%) and compounding interest (8% to 10%) while your money provides much needed capital for the company. While risk is minimized, your upside is limited as well.
“Moonshot” Funding Opportunities
For those “moonshot” investments, an equity investment gives you uncapped opportunity to get maximum multiples (but this risk is all yours). So it’s certainly not for the faint of heart. You should enter the deal prepared to lose 100% of your investment. But know that in the 10% chance the company “hits,” you could have multiples of 3x to 5x or in extreme cases, 10x plus.
Words of advice: Invest in what you know. Invest in (and with) people you trust. Remove emotion from the equation. Finally, be patient.