Angel Investors Bearing Good News

The snow was falling steadily when I spoke with Allan May, a founder of Life Science Angels. It was a beautiful but chilly winter day in Pittsburgh.  Not in California.  “It’s 60 degrees here,” he said, smiling through the phone.

Competing with the weather in Menlo Park will never be Pittsburgh’s forte.  But West Coast angel investors, who recently spent time in the city, are forecasting that Pittsburgh will be a hot market for future investors. And that was before Pittsburgh placed #2 in a national ranking for venture capital funding growth (see innovation news story in this week's issue.) Strong research facilities at both Carnegie Mellon and the University of Pittsburgh, high quality entrepreneurs and early-stage companies and, the depth and mindset of the city’s entrepreneurial support system were a few of the many attributes noted.

Pittsburgh Buzz
“There’s a lot of buzz going on about Pittsburgh,” says John Cornwell of of Silicon Valley-based Sand Hill Angels.  “You’ve done this transformation.  It has a cosmopolitan feel.  It’s just waiting to take its rightful place.”

Jack Florio of San Diego-based based Tech Coast Angels. agrees. “All the pieces are right.  All the right people are saying the right things. There is no question that Pittsburgh is on the right trajectory as the other Tier 1 and Tier 2 areas such as San Diego, Boston and Research Triangle,” he says. The difference is growth, maturity and infrastructure.  “You need great science and research and you have that in Pittsburgh.  I think that Pittsburgh will get there due to the mindset of the people that I worked with.”

At the invitation of BlueTree Allied Angels (PA) and NorthCoast Angel Fund (OH), the three West Coast angels visited Pittsburgh in December to discuss how to maximize returns in life sciences companies.  Their panel discussion in Pittsburgh not only drew a packed crowd of entrepreneurs, investors and business leaders, but also garnered significant sponsorship from key players in Pittsburgh’s life sciences community including Buchanan Ingersoll & Rooney, Pepper Hamilton, Pittsburgh Venture Capital Association, Pittsburgh Life Sciences Greenhouse, Innovation Works, Idea Foundry, Pittsburgh Technology Council and The Ohio Capital Fund.  

Angel or seed investors serve an important role in maximizing returns in life sciences companies.  But all three angels agreed that key players – including incubator organizations, lawyers, accountants and venture capitalists, among others – must be in place.  Together, they form a vital infrastructure that can make or break a life sciences movement in any city or region.

They are the change agents that interface with entrepreneurs, possess the mindset and temperament to both take and encourage risk, and willingly invest their time on boards or work hand-in-hand with entrepreneurs to enable their success.   

“San Diego was not like this forever.  It took 10 years of growth and development in the community. It started with leaders who brought their offices here.  The law firms.  The accountants.  The organizations that help entrepreneurs get organized and trained,” notes Florio.

“They realized the need to build large firms that understood the risk associated with small companies.  Lots of infrastructure grew over time by people who wanted to have a stake in San Diego’s future success.  We’ve got lots of research institutes…and lots of collaborative work.  I saw that in Pittsburgh. Engineering and biotech collaborations.  Law firms and accounting firms.  Organizations that are putting down roots in order to grow and support your venture capital industry.”

The trick in Silicon Valley wasn’t in the start-up phase, but in the ‘ramp-up’ notes May.  “Approximately 40 cents of every investment dollar spent in the U.S. is within 100 miles of where I am. There’s an organized system here. Innovation is about putting a fantastic product in the market that no one else has.  There’s a lot of ramping involved: test the product, gain regulatory clearance, acquire IP – intellectual property – to protect it and get the investment. 

Pittsburgh is fundamentally different today than 40 years ago.  Everyone should be proud of that!  Now they need to keep going, pick a few shots and really focus on those areas where they think they’re ahead.  Grow the mid-level part.  Don’t focus as much on start-ups as ramping and exits.  The start-up side is priming the pump.  Once you get the mid-level part going and people making money, it becomes self-sustaining.”

Cornwell agrees. “Pittsburgh has a lot of the pieces to be a real technology innovation site.  People are not caught up in the hype.  They are more realistic than in the Bay Area.  I think that the typical quality level of Pittsburgh is higher.  It’s hard to find quality deals.  Everyone is talking about ‘deal flow’ right now; there’s a lot of money sitting in funds that has not been invested due to lack of quality of the investment deals.

Everyone here [in the Bay area] thinks that they will be the next Google. In Pittsburgh, there’s a natural eco-system.  There’s top-notch science going on at the new life sciences center at the University of Pittsburgh.  There’s peer review.  You’re in an environment where someone can call ‘BS’ on you.  It enforces some discipline.  It has some real benefits.”

The Psyche of an Angel
Would these angels ever invest in Pittsburgh-based companies?  That’s a tricky question because angels, contrary to most venture capitalists (VC), want to be near their investment in order to actively participate and guide it to the next level.  That’s part of their value proposition.  But there also needs to be a local critical mass of funding capable of piquing their interest.

“If you are just looking for money, not help…it’s the wrong marriage. Angel investors invest where they can add value,” according to Florio.  “In life sciences and technology, we are looking for a business where we can invest a small amount of dollars and expertise to take them to the next level to get VC investment [without major dilution]. 

On the technology end, we seek good smart entrepreneurs, who can look at the engineering and say: ‘Do I think this team can engineer? Will the cost be right?  Once the product is complete, will there be a market for it?’  We want to see a product that will see the light of day.  On the life sciences side, we will never see that technology; we will see proof of concept.  Their exit will be acquisition and be part of another technology or research program.”

While angel investors enjoy the challenge of seeding the right venture, according to May, their motivation is very different than that of a VC.  “A true angel is someone who doesn’t just write a check.  They help build a company.  Actively.  They are helping to create an early stage company; it’s a different motivation.”  

Cornwall acknowledges, however, that geography is also important. “If it’s more than an hour drive, it’s difficult to find an angel who wants to make that commitment unless it’s a unique opportunity.  Unless it’s a ‘bridge deal’ with a quick turn.  The ‘mentor capital’ role does not work remotely.

Right now, Pittsburgh does not have a critical mass of institutional investors and VCs who are local.  When you are dealing with early stage companies, they need a lot of hand-holding.  It requires a local presence.  To break that geographic barrier, Pittsburgh needs development of a local critical mass of funding capability.  As deals are funded locally and you raise serious seeds of $50 million…it’s just a matter of time before you have the big players setting up shop locally.”

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Cally Jamis Vennare is a strategic communications and marketing advisor and feature writer. A native Pittsburgher, she is passionate about the arts, travel, photography, fashion and the health and vitality of our community. This is her first article for Pop City.

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Captions:

Nicholas Lochoff, copy of Simone Martini "Annunciation" (detail)

Hi-Tech Construction at CMU

Software development at Intel

Stained glass at St. Paul Cathedral

All photographs copyright Brian Cohen