MABA is regularly approached by companies seeking funds for their life sciences startups (therapeutics, devices, diagnostics and digital health). One of the first things we discuss is their total funding needs to reach an exit, and the difference between angel and venture capital (VC). Understanding the difference can help you set the best strategy for your company. Once you have reached the stage where it is time to raise funds, some companies are better suited for, or would prefer angel funding, while others are more appropriate for venture capital.
There are many differences between angel investors and VCs, including the source of the funds that each invests, the investment horizon, the loss of control in VC rounds, and others, which the entrepreneurs need to seriously consider before embarking on the fundraising journey. In this blog, we will concentrate on the amounts that the company will need to raise.
Individual angel investor groups traditionally invest between $250,000 to $1 million dollars in a round, and often collaborate to invest together in what is known as a syndicated round. In a syndicated life science round, a company may raise between two to six million dollars across the angel investor syndicate. And, after the round, the company will need to hit some milestones and generate additional data, and come back after a year or two, or three, and raise another such round. We’ve seen companies do so successfully over several years, and raise a total of $20-25 million dollars before they reached an exit. Subsequent raises after the initial round are often easier and faster to raise, especially from existing investors who are ready to support a portfolio company that has met its milestones and provides new, positive data.
For companies requiring more than about $25 million to reach an exit, or individual rounds that are greater than about six million dollars, angel funding might not be a viable path. Venture capital has the ability to write checks well in excess of $10 million per round and can support a company well beyond $100 million dollars, if needed, before it reaches an exit.
While some view the traditional progression of funding being “friends and family”, followed by angel investors, followed by VC, in large and follow on VC rounds the early investors – the friends and family and angels – often find themselves heavily diluted, or crammed down, with significantly diminished returns, even though, as early investors, they took on the greatest amount of investment risk. For this reason, some angel investment groups, such as MABA, prefer not to invest in companies that will require future VC rounds and more than about $25 million of funding to reach an exit.
So if your company is fundraising, ask yourself how much non-dilutive funding (excluding grants) you will, realistically, require to reach an exit. If that amount is much greater than $25 million, or you will require rounds that are in the tens of millions, then you should probably seek venture capital funding. If, on the other hand, your commercialization path can support rounds that are one to three years apart, two to six million dollars in size, and no more than a total of about $25 million until you reach an exit, then we would welcome hearing from you.