The Investment Strategy of Two Industry Icons

Investing your hard earned money can be stressful and risky. As a precaution, many people rely on other “experts” for financial advice and management, justifying the reasoning with one or both of the following criteria:

  1. Lack of time to research the abundance of investment opportunities.
  2. Lack of necessary knowledge of the industry or business model to make well informed and de-risked decisions.

Exploring the investment strategy of two investing icons, Peter Lynch and Warren Buffett, I conclude that it is possible for a novice to allocate sufficient time to invest intelligently using the knowledge they already have.

Resting Easy

Let me start with a quick story about one of my successful investments.

In 2010, while deployed in Iraq, I longed for a comfortable bed and a sound night’s sleep. Upon returning home, my first purchase was a solution to this longing; a Tempurpedic mattress. However, two years later, while deployed in Afghanistan and with my Tempurpedic in storage stateside, I again longed for a comfortable bed and sound night’s sleep. I missed my mattress so much, I resorted to reading about the company online, where I discovered their stock had just plummeted after releasing 2Q12 earnings report.

Knowing the quality of the Tempurpedic brand led me to believe that the drastic drop in valuation from $86 per share to $22 per share was only temporary. After some quick diligence, I confidently invested in the company, knowing that I would hold on to the stock as long as I was satisfied with my mattress, which has a lifetime warranty.

Tempurpedic stock now trades in the $60-80 range regularly, and I am still as satisfied with my mattress as I was when I first purchased it.

I share this story because there is power in simple knowledge of a product or service. Peter Lynch discusses this idea in his book One Up on Wall Street. His recommendation is incredibly simple:

  1. Invest in what you like or know.
  2. Conduct basic diligence on comparables in the market.
  3. Use your intuition and common sense to make investments.

Peter Lynch turned $20 million in 1977 into $14 billion by 1990, a 29.2% IRR, outperforming the S&P 500 by more than 13% per year annualized. His successful strategy and recommendation for investors is often summarized as “invest in what you know.”

Warren Buffett refers to this investment theory as the “Circle of Competency.” Berkshire Hathaway uses a very simple criteria for acquiring companies that fit within their core competencies. Knowing the limits of your competency is key according to Buffett, as he noted in his 1996 Investor Report when he wrote that, “The size of that circle is not very important; knowing its boundaries, however, is vital.”

Don’t Invest in a Hurry

Industry knowledge is a common theme that bonds successful investors such as Buffett and Lynch. Yet, another shared idea is investing for the long term. Both these men would emphasize that attempting to time the market is a poor strategy. Furthermore, your mindset at the purchase of equity should be focused on the expected value five or 10 years from now, rather than on a quick sell.

Applying these principles can ultimately result in higher returns. Additionally, leveraging your own expertise and unique knowledge to make informed decisions will give you an advantage over the market. Even in public markets, there is an asymmetry of knowledge between Wall Street and everyday consumers. Peter Lynch believes this gives individuals the ability to spot good investments in their day to day lives better than mutual fund managers.

Fortunately for physicians, there is a new marketplace to invest in what you know. angelMD’s crowdfunding platform bridges the strategies of Lynch and Buffett, by giving experts in the healthcare industry opportunities to invest in the solutions that solve their daily problems. Physicians know better than anyone what changes to the industry can be made to improve quality, access, and cost for patients.

Much like how the nights I spent sleeping on a awful mattress overseas gave me the insight to invest in Tempurpedic, the countless hours spent in hospitals with patients give doctors their unique insight into the medical industry. Through these doctors’ local knowledge or “circle of competency”, angelMD companies are carefully selected to ensure a successful investment.

Some may think this strategy is an oversimplification, but we at angelMD believe this idea is “The Science of Investing.”

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It Pays to Invest Early and Lead Syndicates: A VICIS Case Study

angelMD Senior Investment Analyst John Leader

Investing in startups is a risky business, and even seasoned investors oftentimes steer away from up-and-coming companies. The distinct fear for many prospective investors is that any invested money is gone without a market to make it liquid again should the need arise. However, this also comes with an assumption that the investment doesn’t appreciate in value over time, and that it only changes on the event of an exit.

Thanks to angelMD, this assumption is far off-base.

Tracking the growing value of a illiquid investment is easier than people believe — but not always available to the average investor. All angelMD portfolio companies are required to submit quarterly reports that detail both the narrative around the company’s progress as well as semi-annual unaudited and annual audited financial statements.

The Impact of Appreciation

A savvy investor can compare a company’s financials from quarter-to-quarter, and even year-to-year to analyze the progress of the company and their investment. Additionally, the accompanying narrative from the CEO provides insight on the company’s progress towards key milestones and objectives like FDA submission/clearance as well as clinical trial results.

These reports provide investors an inside look an otherwise privately held company, but they come at a cost — most companies will only provide them to investors to invest $250 thousand or more. That’s where the benefit of syndication via angelMD comes into play for the everyday investor: for an investment minimum of $10 thousand, we aggregate your investment with dozens of other investors to give you a seat at the table as a “Major Investor” on the company’s cap table.

While reports are a nice way to monitor your investment, many investors want to see actual appreciation in their principal balances, and that comes through follow-on rounds of investing. Most medical startups require a large amount of capital to clear all regulatory hurdles and bring a product to the commercial markets. This requires multiple rounds of financing over several years, each a different, and hopefully higher, valuation. This is where investors can see the true appreciation in their investments.

VICIS, A Case Study

A great example of this is our first syndicate for VICIS, where investors committed their funds back in January of 2016.

VICIS creates football helmets that reduce concussive impacts 20-50%. With the publicity around studies linking football with CTE, a degenerative neurological disease with a high incidence rate in football players, VICIS has been a popular startup on the angelMD platform.

In January 2016, the company was valued at $10 million. Eighteen months later, in July 2017, VICIS has over a $100 million post-money valuation.

As a result, had you invested $10,000 in the initial syndicate for VICIS in January 2016, you would be able to measure the increase in your investment’s value by factoring in the appreciation in their valuation while factoring in for dilution as well. As more individuals invest their money at a higher valuation, your early stage investment grows accordingly and is validated by their interest level.

These are real dollar figures that represent not only the growth in VICIS’ business, but also in the unrealized portfolio gains to investors. Yes these investments are still illiquid, but through follow-on rounds of investing, the market is identifying VICIS as a valuable asset that is taking positive steps towards an eventually profitable liquidity event.


Overall, just because you cannot track an investment every day like you can on the stock exchange doesn’t mean that your money just goes out of your bank account never to be heard from until an exit 2 years down the road. There are ways to track them, and through the angelMD community, we work together to do just that. A major part of my job is to speak with our valued syndicate investors to share updates on their investments and to relay any questions you may have ot the startup executives to them and get you answers — service that would normally cost six figure checks, available to all angelMD members through the powers of syndication.

If you’d like to speak with me about the mechanics around early stage investing or about how you can get more involved in our investing process, please send me an email, or you can click here to schedule some time to chat over the phone.

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The Case for Investing in Orphan Drugs

Investing in biotech companies developing therapeutics seems like a natural for physicians and other healthcare providers. One area that should particularly be considered are “orphan drugs” — products being developed for a rare disease. A disease is classified as a “rare disease” if the patient population in the US is less than 200,000 patients. It is estimated that there are over 7,000 rare diseases and that 10 percent of the US population has one of these rare diseases.

 

In total, not so rare at all.

 

Investing in companies developing a drug for a rare disease may align with the personal interest of health care practitioners. Individuals in the medical field have a deeper level of scientific knowledge than a typical investor, and they have a broader appreciation for the medical consequences of the disease and for therapeutic alternatives.  In addition to their medical background, there are some other compelling reasons to consider companies developing drugs for orphan diseases.

 

Orphan Diseases represent a very attractive sector of the pharmaceutical industry. Big pharma continues to rely on licensing or acquisition of smaller companies to supplement their portfolios.  This trend bodes particularly well for startup companies developing products for these rare diseases. Orphan drugs are expected to account for over $200 billion in worldwide revenue by 2022, this represents an 11 percent annual growth rate, over twice the industry average.

 

Here are some orphan drugs facts showing why orphan drug companies may be a valuable addition to an angel investment portfolio:

  • Orphans drugs account for 1/3 of all new FDA drugs approved.
  • The likelihood of approval for an orphan drug is much higher than for a traditional pharmaceutical drug.
  • 30 percent of orphan drugs generate over $1b in annual sales.
  • Orphan drugs cost less to develop (a bit less than ½ as much).
  • The FDA registration trials require fewer patients and the trials are frequently quicker.
  • Physician adoption following FDA approval is faster for drugs for rare diseases.
  • Typically, orphan drugs enjoy easier market access with lower price resistance from payers (the average orphan drug in the US is priced five times higher than a non-orphan drug).
  • Partnering deals for orphan drugs on average are 30 percent above non-orphan products.
  • Companies developing orphan drugs receive tax benefits and other financial incentives.

Drugs for orphan diseases, are a major trend in the pharmaceutical industry today. There are many companies developing highly specialized drugs for very specific diseases.  Many of these companies represent a novel investment thesis for angel investors, and potentially provide a great leap forward in medical care while providing attractive financial returns.

 

Sources:
Evaluate Pharma: Orphan Drug Report 2017, June 2017
Hughes DA, Poletti-Hughes J (2016), Profitability and Market Value of Orphan Drug Companies: A Retrospective, Propensity-Matched Case-Control Study. PLoS ONE 11(10): e0164681. doi:10.1371/journal.pone.0164681

 

 

Craig W. Philips, Entrepreneur-in-Residence University of Washington
Contact: philips2@uw.edu

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An Introduction to Private Equity

Private equity is an asset class that involves buying stake in companies that are not publicly traded. It is generally purchased through a private equity firm, a venture capital firm, or an angel investor. Investing in the right company in its infancy can be extremely lucrative but knowing about private equity is essential in this process. Getting involved with private equity investment today means getting involved in the newest investing trend and making a potentially fruitful investment.

 

Investing in private equity is an alternative way to participate in primarily long-term investments. In the modern market, this asset class has a much higher ceiling for ROI due to traditional stocks being rather subdued. While the price volatility and risk involved with private equity are higher than those in their public counterpart, the median 10-year return in private equity from 2005 to 2015 was 11.8 percent whereas the S&P 500 had only increased 6.8 percent in that same span according to the Private Equity Growth Capital Council.

 

A private equity investor having industry knowledge as well as diligence can provide a huge advantage over others. This is the result of a company potentially being critically undervalued due to the lack of valuation on many private companies. An investor can then do their own analysis and make a decision based on the product or service offered by the firm, possibly making the choice to invest.

 

Much of the success (or lack thereof) of these assets is due to the quality of company management. Upper quartile managers massively outperform the public MSCI World–Morgan Stanley’s index of 1,650 companies from 23 countries. This gives savvy investors another tool to beat the market: by identifying private companies with top managerial talent.

 

Private equity can also allow investors to take on a role with the firm they are funding. Because of the smaller size of private companies, each investor could play a much more significant role as a shareholding decision maker.

So, What’s the Catch?

Arguably the most significant issue with privately-traded companies is that only about one in six ever become profitable. While investing always comes with risk, private equity comes with more than most. However, with the proper research, the potential rewards are very high as well.

 

Another difficulty of private equity investing is a lack of liquidity. Investments often take five to ten years before there is any return. Because of this, a potentially large amount of money can be unavailable to the investor for a long time.

 

Sometimes information can be hard to find as well. This can make private equity perilous, as accurate information is critical to picking investments. This is amplified when company managers have technical backgrounds, but are not familiar with what information investors need.

Private Equity Today

Private equity investments are increasing in both frequency and size. Last year, private equity investing hit an all-time high of $681 billion, a nine percent year over year increase.  At the beginning of 2017, Forbes predicted that the upward trend would continue and that the 2015 record of $681 billion would be surpassed for another record-breaking year.

 

Today institutional investors are targeting companies that they predict will produce an exit via acquisition, resulting in a payout for investors. According to a study done by Provitas Partners, in the past 10 years there has been an increase from 45 percent to 77 percent of institutional investors that target middle-market buyouts, as well growth from less than 25 percent up to 56 percent looking for small-market buyouts.

 

The United States has always been the frontrunner for the most private equity investments simply based on the ease of starting businesses here, however new markets are emerging.  According to a survey of 84 institutions, the most anticipated market that they will be investing in is China, followed by four other countries in Asia. The sixth most positively forecasted market is Brazil. This is a reflection of globalization in finance and the development of international markets.

 

The risk involved with private equity is certainly higher than with publicly traded stocks, however this risk can be — to a degree — mitigated by knowledge of a sector and due diligence on the part of the investor. The potential returns that come with the private sector are extraordinarily high and can outweigh the costs.

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Funding Beyond Borders: Visualizing the angelMD Network

It’s no secret that startup funding is largely confined to a select few regional markets. As recently as 2015, 78 percent of startup financing was confined to the metropolitan markets of New York, Boston, San Francisco, and Los Angeles.

For companies outside of these areas, there has been a very limited ability to reach potential investors. While many of our startups are located in these major markets, it is clear that innovation knows no bounds on angelMD. To illustrate this, check out the map below to see the 43 states, as well as more than 20 countries, where angelMD’s startups are located.

(Our office locations are marked by the angelMD logos, recently funded companies on our platform are marked by green check marks, and $ symbols represent active syndicates)


Our office locations in Seattle, Houston, and Denver, are all strategically placed to help us become involved in markets where entrepreneurial culture and health-tech innovation intersect.

Our first location was strategically placed in Seattle. Seattle is the #10 city in the world for startup funding, and is also home to world class hospitals and medical schools.  Seattle has long been a capital for neuroscience and tech innovation, and we love being able to connect to talented innovators in this dynamic community.

Our second location is in the Texas Medical Center in Houston.  The Texas Medical Center is the largest medical center in the world, and is home to 106,000 employees that connect with over 10,000,000 patients per year and perform over 180,000 surgeries.  By being able to connect with groups inside of the TMC such as the TMC Innovation Institute, we have seen firsthand the type of medical innovation that is coming out of this massive, talented community.  angelMD sees TMC and the greater Houston area as drivers in change for healthcare and is firmly invested in continuing to facilitate health-tech growth in the area.

Our third office is located in Denver, which has become increasingly a hub for private equity investment.  Colorado managed to fund startups with over $340M of funding in Q1 of 2017 alone, which placed the state fourth in the nation for venture capital funding. We see Denver as an emerging powerhouse in the private equity realm with great potential for growth.

While our offices are located in these three cities, angelMD’s mission is to connect with a diverse group of physicians and startups from all across the world.  Our platform has a powerful ability to provide the same kind of funding support that was once limited to a few major cities, on a large and virtual scale that is as accessible to a company in New York as it is to a company in rural Nebraska.

We believe that innovation in healthcare knows no bounds, and can back that belief up through our network of 4000+ physicians and startup founders.  We see immense value in not only connecting to startups across regional markets, but to physicians and investors across the United States, and increasingly across the world. Check out the virtual tour of our network below to see the dispersion of physicians, investors, and startup founders on our platform:

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