Biotechnology companies have been facing a widening funding gap. Between frozen federal research budgets and a growing focus among venture capitalists and senior partners for larger, more mature, biotechnology firms – at the expense of smaller ones – a funding gap is growing between basic research and initial proof-of-principle commercial research.
So, who fills the gap between basic research funding and venture capital? Angels! Angel investors are wealthy individuals who make equity investments in biotechnology firms. Angels differ from venture capitalists because they tend to invest their own money, they tend to invest earlier than venture capitalists, and they may be less experienced in funding start-ups than venture capitalists. A leading question on many industry-watcher’s minds has been whether angels have been addressing the funding gap. Having been burned by dilution from later investors in past funding cycles, and having lost great amounts of money on technologies which didn’t pan out, many angels have shied away from early-stage biotechnology investing. A recent report from the Center for Venture Research has found that angel investing is up 10.8 percent from 2005. Furthermore, healthcare services, and medical devices and equipment continued to account for the largest share of angel investments, with 21 percent of total angel investments in 2006, followed by software at 18 percent and biotech at 18 percent.
What’s interesting is that angels are spending more. A total of 51,000 startups got angel funding in 2006, up just 3 percent from 2005. That translates into average deal sizes notching up 7.5 percent over 2005 levels. All that money came from a pool of investors that hasn’t changed much either.