How One Pharma Start-Up Raised $16 Million Without VCs

By: Deanna Pogorelc, MedCity News

Savara Pharmaceuticals needed several million dollars to take its inhalable drug for troublesome infections in cystic fibrosis patients through Phase II clinical trials. So CEO Rob Neville, naturally, began talking with venture capitalists. But in the end, he didn’t end up needing any of their money.

Over the course of about a year, Savara raised a $16 million Series B round – in two tranches – led by a quartet of angel groups from central Texas to southern California.
It’s a case study on the burgeoning influence of angel investing networks, which are moving across state lines and outside of their own networks to piece together bigger deals. They’re also enabling angel investors to move upstream and fill funding gaps opened by more risk-averse and tapped out life science venture funds.

“(Our) story had resonated well with first groups that we raised money with, and we found that we had traction and momentum in the angel groups,” Mr. Neville said. “It wasn’t a decision from the outset to go one way or the other; that was just the path where we had the most success.”

Mr. Neville said he first recognized that the company had traction among angel groups when it raised a $1.4-million Series A round from members of the Central Texas Angel Network in 2009. Although he talked to venture capitalists when it came time for the Series B, he said his team also went through a disciplined approach of identifying angel groups, looking at which ones were active in the industry, and prioritizing them. Then he began presenting to groups – a process much more complex and tedious than it sounds.

“Once you’ve gotten through the screening, you get to present in one chapter. Then, if you get traction, you get to present to another chapter,” Mr. Neville said. “Then they do due diligence, which usually takes about 2 months. Then you go back to those same people and say, remember us? and present again.”

To get to the scale of a $16 million round, Mr. Neville said he talked to about 15 networks. In the end, it worked out for Savara. About half of the 220 investors who joined the Series B were individuals outside of the life science industry who likely would not have looked at the deal if they weren’t connected to the network.

Angel groups are enabling networking on a larger scale, too. Sergio Gurrieri, who owns a life science business consulting firm and invests in start-ups through Tech Coast Angels, said the group reaches out to other networks when they believe they have a strong company on their hands. Tech Coast Angels joined investors from the Keiretsu Forum, Central Texas Angel Network, and North Texas Angel Network in Savara’s Series B.
Mr. Neville had high praises for all of the investing groups he works with, but had one work of caution for entrepreneurs. “As much as this is a process that is footing the gap for the venture firms, this is by no means a simple process,” he said.
In fact, that commitment of time and effort is one thing that’s kept other life science start-ups from pursuing a similar path.

As groups of high-net-worth individuals continue to band together in the form of angel investment networks and funds, they’re creating new opportunities for funding for mid-stage start-ups. But to some entrepreneurs, they’re also starting to look an awful lot like VCs.

There are about 350 angel investing groups in the US today, according to Marianne Hudson, Executive Director of the Angel Capital Association. Although most of the US’ more than 300,000 angel investors still work as individuals, the influence of their networking is growing. The median angel round size in 2012 was somewhere around $600,000, according to the 2012 Halo Report, up from $500,000 in 2010.

Investors say being part of a group solves a lot of problems. They have access to more deals, don’t have to write huge checks to raise a lot of money for a company, and can syndicate bigger rounds with other angel networks.

Clay Rankin, who manages Ohio’s North Coast Angel Fund, said his group tries collaborating in almost every deal it does – particularly when it comes to life science deals, where companies need $1.5 million or more.

“You still want to know and engage with the management team and help them in the growing process, but if you develop relationships with other networks that you know provide good governance and do good due diligence, you don’t have to be geographically near (to companies),” he said.

That means angels have access to a more broad expertise on the investing side, so due diligence is typically more thorough.

On the other side of the coin, that means more rigorous vetting than start-ups would typically undergo with individual investors. The process depends on the size of the investment group, and whether it’s structured as an angel fund, where investors can also make sidecar investments, or as a network where investors contribute as individuals. Typically, if a company’s application makes it past an initial screening, the entrepreneur will have to present several times to various groups within the network.

A few entrepreneurs who talked with MedCity News for this story had been turned off from angel groups because of these VC-like processes that resulted in rigid deal terms, often times without the expectation of a follow-on investment. For some, a 3-month application and vetting process ending in a take-it-or-leave-it deal that could be $200,000 or $1.5 million or anything in between, just wasn’t worth the time and effort.

And although angel networks might have a structured due diligence process, that doesn’t mean it’s a good one. One entrepreneur who had turned down an investment from a network in Ohio said that due diligence had been tasked to a person who was a designated “expert” in the healthcare industry, although he may not have known anything about the particular space the company was working in.

Shirley Gee, a member of the Keiretsu Forum, began to see this problem several years ago. She started a consulting firm called AngelPlus that works with entrepreneurs, including Rob Neville’s team from Savara Pharmaceuticals, who are looking to be more proactive about their due diligence. If start-ups have a report in-hand when talking to investors, she said, they may be able to at least partially avoid having that task fall into the hands of someone not well-suited for it. “We’re trying to encourage companies to add this due diligence as part of their business plan in the same way they would hire an IP attorney,” she said.

Although angel networks are increasingly formalizing the process of angel investing, Hudson of the Angel Capital Association reiterated that the vast majority of angel investments are still made independently of a group. It will be a while before it’s clear whether the formality imposed by the groups pays off in the form of more successful start-ups and bigger returns, or whether it will in turn create a new gap in funding for early stage companies who look to angels for small rounds of seed capital.

“The angel industry is relatively young, and as we start to document more of the results of our investments, you’re going to see a much higher level of interest in working with those groups that have successful track records,” Mr. Rankin said. “It’s an emerging and evolving environment, and I believe you will start to see more national focus.”