New Investment: Angel Healthcare Investors, Boston

Angel Healthcare Investors of Boston Closes Six Investments in Six Weeks

Angel Healthcare Investors (AHI) of Boston is on a roll. This fast-moving angel group invested in five businesses and one fund since the end of March and has another four opportunities in due diligence. “While diligence on each opportunity took anywhere from one to six months, completing this many deals in less than 90 days is unprecedented for our group,” says Geoff Maletta, director of AHI. “We’ve invested nearly $2 million over the last six weeks; that brings our total invested capital to about $13 million.”

AHI, which was founded in 1999, has invested in 29 different opportunities; their current portfolio contains 24 active investments. “We have developed a credible track record and a strong culture, although we are always refining our business model,” Maletta says. “In just five years, we’ve exited several investments completely, returned more than $5 million to our members, and we look forward to more successful exits in the future. There is nothing better for the health of an angel group than demonstrating a return, especially when it happens, as it has for us, in the early years.”

AHI’s second quarter investments include a company developing an innovative laparoscopic surgical tool, a molecular diagnostics firm, a regional hospice, an early stage biotech company, and an industrial biotech business that develops biodegradable plastics.

In an industry where first round investments almost always exceed the million dollar mark and biotech exits may take five, seven, or even ten years, Angel Healthcare Investors holds to a carefully developed strategy to sustain angel activity. Their investment portfolio is diversified in ways that may be a little unusual for angel groups. “After the volatility in 2001and 2002, we decided not to limit investments to early-stage operating companies,” Maletta says. “Our portfolio contains other investments with different return and liquidity profiles, such as highly specialized hedge funds and healthcare real estate investments that generate recurring distributions. We also seek to manage risk by co-investing with partners appropriate to a particular deal—from angels to venture capitalists to corporate and strategic investors.”

Most AHI members come from the industry—physicians, healthcare executives, and entrepreneurs. The group receives and evaluates numerous healthcare and life sciences opportunities, but the front-end capital requirements and investment horizons can sometimes be daunting. “We have purposely designed a model that makes the fit between early stage companies and angel group investing much more snug,” Maletta says. “The goal is to help the young firms get further down their development path without burning so much cash. SmartCells, Inc., one of our second quarter deals, is a great example of how this model can work in the biotech sector.”

Based in Beverly, Massachusetts, SmartCells is developing a ground-breaking formulation of insulin based on a once-a-day injection whose performance is completely regulated by a patient’s blood glucose levels. SmartCells’ medication would relieve diabetics of the burden of constantly drawing and testing their blood to determine the level of medication they need. Additionally, because the product rebalances blood glucose virtually automatically, the cumulative damages caused by high blood sugar may be significantly reduced.

At first, Todd Zion, Ph.D., CEO of SmartCells, didn’t consider AHI as a potential source of capital. “We needed a million dollars to get us through some tough technical milestones,” he says, “so I turned to the VCs. We were too small for them, but one of the VCs referred me to AHI. We presented to a really sharp screening group of their members who had experience in healthcare and biotech. They challenged us to reconsider our business in terms of what an angel group needs to invest. Then they helped us come up with a unique operating plan and exit strategy that makes SmartCells as capital efficient as we can possibly be and focuses us on the best way to get our insulin formulation to the marketplace.”

AHI teamed with another angel group to create an angel-only investment in SmartCells that minimizes the future requirement for an institutional follow-on funding round. “We listened when the angels told us to concentrate on the things that uniquely create value for SmartCells,” Zion says, “our intellectual property and the documented history of clinical development and trials.” Rather than building up assets and personnel, he subleased laboratory space, and he further extended the life of his angel capital by securing nearly a million dollars in government research grants designed to support small businesses doing innovative research.

While the end users of SmartCells’ product are individuals, Zion says that his company’s target customers are actually the pharmaceutical companies who will be interested in commercializing his biotechnology once SmartCells knocks down enough of the development risk. “Right now we’re a single product company,” Zion says. “My dream is to see this product through. I’m not out to build a huge pharmaceutical company. We want to validate our product and make our investors more than whole.” With the potential valuation increases SmartCells could see, Geoff Maletta says that he expects that Zion’s angel investors could be very satisfied.

Another way AHI meets the challenges of investing in the healthcare/life sciences industry is to occasionally partner directly with venture capitalists. Maletta acknowledges that this can be a sensitive topic around angel groups. “Sometimes you see an attitude of ‘we versus they,’ that suggests angels and VCs are not aligned,” he says, “but in our organization we embrace many of our VC counterparts.” From the beginning, Angel Healthcare Investors deliberately cultivated relationships with venture firms. Over time, personal relationships between AHI members and a couple of highly-respected partners at venture firms resulted in those individual partners joining AHI. Maletta credits their influence as being very constructive in developing opportunities where it proved fitting for AHI to team up with venture firms.

“We just partnered with a group of VCs to participate in a Series A financing to purchase an existing hospice business,” he says. “The company’s plan is to develop a business built on innovation and technology and then expand its footprint and service offerings regionally. This deal is a great example of the relationship we have with the venture community. We were delighted to be invited into the deal, and they were delighted to have access to several experienced members of our group to provide advice on the business model and reimbursement process, as well as to serve on the board.”Although AHI’s second quarter pace may be an anomaly, Maletta and the group’s two managing directors, Robyn Davis and Mary McNamara, currently have more than twenty-five new qualified opportunities under active review, a fifty percent increase over 2004 levels. “It’s a combination of forces,” Maletta says. “Things are improving in the marketplace; our members remain committed and active; and our efforts over the last couple of years to work with the VCs when it’s appropriate are beginning to pay off. We expect 2009 to continue to be a record-breaking year.”

© 2005 Angel Capital Association

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