-By Anthony Gellert
There’s never been a better time to invest in early-staged startups. Full stop.
Yes, there was a banking crisis in Silicon Valley. Yes, we are still brushing off the effects of the pandemic. Yes, these are very risky assets. But most important, all the asset classes that rely on low interest rates and a bull market are in real trouble. Interest rates are now too low to fully guard against inflation. And too high to make equities the obvious first choice. This especially includes later-staged VC, which relies on frothy IPO markets in which to sell their portfolio companies.
Early-staged investments are different. Unicorns aside, the bread and butter of this asset class are companies we find at valuations under ten million dollars that will eventually sell to a strategic for hundreds of millions of dollars. And there’s a steady stream of these opportunities. Bull market or bear market, large companies are always looking for new technology. They need it. Established, incumbent companies are historically bad at innovation.
Paying hundreds of millions for a new and proven technology or medical device or even therapeutic is much easier. They buy it and then market it through their corporate machine. While only a drop in the bucket for their massive budgets, these acquisitions are a big deal for us. And very lucrative when it happens.
Caution: don’t do this alone. Alone, your only access to deal flow is through unsolicited LinkedIn messages, shady angel deal websites, or aggressive friends trying to pedal their latest tech idea on you. Your only access to company research is your own industry experiences. But any single investor has only a small network and limited expertise. Maybe you know everything about how payroll works. But how many payroll startups will you see in any given year? Decade even?
Instead, join an angel group and invest cooperatively with others. In an angel group, each member brings their own specific expertise to the discussion. And in the aggregate, the group knows far more than a single investor or a single VC for that matter. Mid-Atlantic Bio Angels is an angel investing group whose members, mostly based in the NY tristate area, each bring their own narrow medical expertise and their own personal network of contacts. Together, as a group, they are formidable investors. If a startup uses complex science, at least a few members will understand it perfectly. With more than 50 medical and other professionals watching the pitch and doing the research, you are in a great position to learn and invest.
To improve your chances of success, you should build a portfolio of investments. Historical data from multiple angel groups has shown that such a diversified portfolio strategy is the best way to produce a positive return, even when accounting for portfolio company failures. But that can be expensive. So many angel groups, including Mid-Atlantic Bio Angels, have internal investment pools to help their members allocate a relatively small investment among many investments, based on the pool member votes. And MABA also operates a similar co-investment Sidecar Fund, for non-members who want to index MABA’s investments.
Nothing is guaranteed, of course. All angel groups experience flame outs. But I believe that angel group investing is an important part of a diversified portfolio. Especially now.