Investing in biotech startups for healthcare professionals

Dec 10, 2018

We’re fortunate as physicians to bring in a high income compared to other professions. Being in a position to incorporate a alternative investments to our portfolios is achievable. I find investing in biotech, life sciences, and health startups to be attractive for a few reasons:

  • As a physician, endeavors related to improving health are exciting
  • The missions of these startups are relevant to my work and patient population
  • I can read about the company and really understand what they’re doing

I’m way more enthusiastic about biotech investing than, say, real estate. If real estate’s your thing, keep doing what you’re doing. Otherwise, let’s delve into investing in biotech startups as an “average joe” physician.

Note: Most startups fail. There is a high likelihood that you’ll lose all the money you’ve invested in a startup. A good rule of thumb is to only invest in a startup if you’re passionate about seeing it succeed and you want your money to be used by them in trying to succeed – regardless of what the outcome will be.

Accredited investing in biotech startups

For accredited investors (those with a net worth of ≥$1 million or a yearly income of ≥$200,000), the most readily available options  to invest in biotech or life sciences startups is through the use of syndicates.

Syndicates are funds created by pooled investments. Individual investors can each contribute a relatively small amount but, together, make a large investments toward a single startup. This opens up doors to investment opportunities and saves on administrative costs. It also means that like-minded investors can utilize one another’s expertise in the due diligence process.

The main downside of syndicates to individual investors is that the manager of the investment is entitled to a sizable percentage of gains generated. Your investment won’t be as profitable as if you’d invested your money directly with the startup.

There are numerous companies that allow accredited investors to invest through an online portal. I’ll mention three in which you’re likely to find a good assortment of biotech startups.

Propel(x)

Propel(x) is a platform that helps startup companies be discovered by investors and facilitates the investment process. The specialize in deep tech startups, which includes life sciences as well as other sectors. As a medical professional, you’re likely to find numerous companies that sound interesting and promising as you browse through the list of potential investments. I’ve personally invested in startups through Propel(x).

Here are the steps the company takes before you ever get involved as an investor:

  1. Propel(x) does the initial legwork of curating startups that are a good fit for their platform.
  2. They assist the startup in creating a profile full of information to help investors learn about the company and make an educated decision about investing.
  3. They seek out third-party individuals with expertise in the same field as the startup. These experts provide information and data-backed insights about the market size, competitors, technology, and answer various questions submitted by potential investors.

This is where you – the investor – come in:

  1. You find potential investments on the Propel(x) site by either browsing through available opportunities or searching by sector, technology, or other filter.
  2. Once you identify a company that interests you, you can read information about it that’s generated by Propel(x), submitted by the startup, or offered by an expert.
  3. After noting your interest in a startup by ‘following’ the company, you’ll be notified of investment round updates, informational webinars with the startup team, and important dates.
  4. When you decide to move forward with an investment, you simply indicate your pledge amount through the site. A representative from Propel(x) gets in touch with you regarding investor documents and money transfer.
  5. You can track all your investments and potential investments in Propel(x)’s personalized dashboard, though they’ll also email you updates and tax details.

For me, the process has been smooth. None of the companies I’ve invested in have had an exit yet, so I can’t speak about that aspect.

Other syndicate platforms

AngelMD takes a similar approach to Propel(x), but their scope is more limited. They run syndicates for healthcare and medical companies specifically, utilizing physician experts and scientists to assist in sourcing and evaluating the startups.

Angelist is one of the most popular investment communities for syndicates. They don’t have a biotech focus, but certainly have biotech opportunities. Their approach is to have a deep-pocketed, experienced angel investor lead each syndicate. This lead investor receives a carry, while Angelist receives management fees.

Angel Networks

Not all investments need to be through an online portal. Angel networks are another option for physicians to be investors in startups. These tend to be regionally-based. For example, in the Southeast, the AIM Group invests in early stage tech companies in a range of fields by working with investors across Alabama and parts of Florida. If this somewhat more personal approach to investing is more appealing to you than an online portal, look for networks in your area and reach out about investor opportunities.

Want to learn more about angel investing? Check out the high-quality resources at Angel Resource Institute.

Crowdfunding for non-accredited investors

For those who don’t meet the accredited investor criteria, equity crowdfunding is an option. Look for Regulation CF (or Reg CF for short) options, which usually have very low minimum investments. Caution, though: if your net worth doesn’t qualify you as an accredited investor, there’s really no need to diversify beyond basic allocations.

Reg CF is also a route for those who technically qualify as accredited investors, but who don’t want to invest the minimum amounts typically required for angel investors (which is often several thousand dollars). It can be a good way to get your feet wet and learn the process of investing in startups.

Here are a couple of routes to take:

Republic and Netcapital are equity crowdfunding portals that allow non-accredited investors to invest as little as $10. They have only a handful of opportunities available at this point, though that could certainly change down the road. Within that handful of investment opportunities, only a couple are health-related at the time I’m writing this.

These options are similar to the familiar Kickstarter platform in terms of the ability to browse through the companies and easily make your small investment online. The main difference, of course, is that you won’t get a sample of the product or a t-shirt in return. Rather, this is a true startup investment in which your return depends on the company’s exit. If they go public or are sold to another company, you may get your investment back – and sometimes more.

The business model for these portals is fairly simple. Startups raising money with this method owe a percentage of the total raised to the site.

There’s a lot more to it than this

This is a very brief overview of some options for investing in biotech startups. But there’s a number of other factors to think about before you start committing any of your hard-earned income as investor.

With the potential of high return comes high risk.

I haven’t discussed assessing risk, evaluating financial projections, diversifying, or when and how to involve a lawyer. These, among other considerations, are important. If you’re interested in learning more about these aspects, comment below to help me gauge interest for future articles.

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