"VC Angels"--Angel Groups become the New Venture Capitalists

As crowdfunding becomes more prevalent some angel groups are repositioning themselves away from the crowdfunders as a new type of venture capitalist.  Those groups who have experienced investors and can tap the expertise in their group have the makings of a VC firm with a strong support base and an internal funding source.

These angel-based VCs are foregoing the usual application/screen/pitch/invest model used by current angel networks.  Instead, they spend their effort on searching for the best deals that fit the expertise of their group.  Most angel groups which still use the "Submit your application here" model don't see the best deals because those deals are being picked up long before they make it through the screening process.

The angel-based VC is typically led by 5 to 7 experienced investors who in most cases have a professional background in the finance world.  They leverage the resources of their angel group for expertise on managing the portfolio companies -- sitting on boards, monitoring progress, helping with sales, etc.

In the past venture capitalists passed on many deals because the VC firm had limited bandwidth to sit on boards and follow up with the portfolio.  "VC Angels" can have large networks of investors who contribute to the portfolio with their time in addition to their dollars.

A fund model would allow for sharing the results of all the deals rather than individual financings. Members of the group would be required to participate in screenings and follow up activities to continue vesting of their shares in the group fund. This model provides diversification to the members and ongoing contribution of support to the portfolio as well.

With the shift from a geographical focus to a vertical focus, angel groups could form in specific areas such as mobile apps, healthcare, fintech, cybersecurity or others.

Better Care at a Lower Cost -- Interview with Mark McClellan

That’s been health policy expert Mark McClellan’s mantra for years. Finding ways to get payment and regulatory policies to support better care and a lower cost is what McClellan does.

“That’s very much part of the current expansion of efforts to move to payment models that are based more on results and value,” he says.

McClellan will discuss the transition toward value-based health care delivery in his keynote speech “The State of Health Policy” May 3 in Austin at HealthCare Texas 2016, an annual conference bringing together more than 300 leading innovators in healthcare information technology, life sciences, and therapeutics.

“A lot of these payment reforms are about giving health care providers more flexibility in doing what they think is working with their patients and is best for their patients’ outcomes, but at the same time, since resources aren’t unlimited, having more accountability for results,” McClellan says.

Last December, McClellan, who served as head of the U.S. Food and Drug Administration from 2002 to 2004, joined the faculty at Dell Medical School at The University of Texas at Austin to advance the school’s mission of redesigning health care around value.

McClellan says that while his primary basis with UT is its new health policy center, he’s working with Dell Medical School on an ongoing basis as they take steps to implement new health care trends and ideas into the curriculum.

“One advantage of being a new medical school is that you don’t have to do things the old fashioned way,” McClellan says. “The leadership of the medical school has undertaken a tremendous effort to ask fundamental questions like ‘What kind of education do physicians need to practice in a future medical system that is hopefully going to be much more about better care at a lower cost?’”

Dr. Clay Johnston, inaugural dean of the Dell Medical School, said McClellan’s work will support efforts to revolutionize the way people get healthy and stay healthy.

“Mark has been a national leader in conceptualizing how to build a better health care system, and now he can really accelerate the pace in putting that system in place,” Dr. Clay Johnston said of McClellan after he was hired at UT.

Another one of McClellan’s objectives has been to help provide better information on the quality of care. McClellan says in recent years there has been much support for more transparency regarding prices and quality health care.

“I think there’s a lot promising work going on, including by some early stage companies, to help turn all of this health care data into information that’s really useful for patients and physicians and other health care providers that are guiding their decisions,” McClellan says.

McClellan notes that its very difficult to take raw information from claims data and convert it into a confident, accurate measure of the total cost of care that a patient faces.

“It’s not just a matter of what shows up on an insurance claim but things like: ‘Did a patient have a better functional outcome after surgery? What was the outcome of cancer treatment for a patient with an advanced cancer?’”

McClellan says the good news is we’re making progress.

“It’s an area where there’s been a lot of recent investment by health information companies providing patient-oriented and actionable analytic information on quality and cost of care,” he says. “I hope we continue to make further progress there.”

Texas Biotech Landscape -- 2016

Biotechnology comprises a significant and growing part of the Texas economy as new innovative biotech companies sprout up in Austin and throughout the Lone Star State each year. Biotech is essentially technology grounded in biology that harnesses cellular and molecular processes in order to develop products aimed at improving human health. Biotech encompasses an array of breakthrough technologies, including those that combat diseases, increase crop yields, and develop cleaner energy sources.

Texas is home to one of the country’s leading biotech industries with more than 3,700 biotech manufacturing and research and development firms and more than 93,800 biotech-related jobs. (The average salary of these jobs is around $90,000). Dozens of global biotech companies, such as Novartis, Medtronic, and Abbott, have major operations in Texas. In 2012, Texas ranked No. 2 in the nation for the number of life scientists and physical scientists employed, with nearly 48,000, according to the National Science Foundation.

Austin, the state capital, is home to state-of-the-art research facilities and has one of the country’s most educated populations. Austin’s creative and entrepreneurial landscape is bolstered by the availability of funding, research collaboration, clinical trials, and highly-skilled workers.

This combination of factors begs the question: Could Austin become the next biotech hotspot?

This very question was posed in a recent article in STAT, an online health, medicine, and science publication.

The article points out that, within a 25-mile radius of downtown Austin, nearly 200 life science companies have sprung up, many of them startups that launched within the past few years.

The University of Texas at Austin currently brings in approximately $60 million in grants from the National Institutes of Health each year. This June, UT’s new Dell Medical School will welcome its first class of students. Dell Medical School promises to bring even more intellectual property and grant money to the region.

“We seem to have all the right components in play,” Tom Kowalski, president and CEO of the Texas Healthcare and Bioscience Institute, told STAT, when asked if Austin could become the next major biotech hub. “It all seems to be a wonderful harmonic convergence.”

Last year was a big one for the city’s biotech industry as Austin-based companies Mirna Therapeutics and XBiotech both went public with initial public offerings that raised $44 million and $76 million, respectively. Aeglea BioTherapeutics also filed for an IPO after receiving more than $80 million in private funding and grants in less than two years.

For biotech companies looking for a more affordable area than Silicon Valley, Austin makes a lot of economic sense. There’s no state income tax in Texas, and the state offers sales tax credits for some research and development expenses.

“Austin’s life science industry is reaching critical mass,” Asuragen, Inc. CEO Matt Winkler told the Austin Chamber of Commerce. “As an entrepreneur, I look forward to Austin’s future as a bioscience hub.”

Profile of Chris Kersey of Camden Partners

Ask a realtor what matters most in a property and you’ll hear “location, location, location.”

Ask Christopher W. Kersey, Managing Member of Camden Partners, what matters most in an investment strategy and you’ll hear “people, people, people.”

“Venture capital and private equity are very relationship-based businesses,” Kersey says. “Camden has raised many funds in the last 20 years, and we’re now backing folks whom we’ve backed before. We work with business builders with whom we have previous relationships, whether they’re the CEOs, the founders, co-investors or deal sourcers.”

Kersey says “serial relationships” are the key driver for what he does at Camden Partners, a Baltimore-based private equity firm providing capital to companies in health care, education, technology and business services.

“The best entrepreneurs and executives - the people who have been in this business for multiple cycles - know how they want to build their next operating company and they know which trends are important and I think we likewise have a good sense for how industries evolve over time,” Kersey says. “There’s some trend recognition and predictive skills needed in our investing industry, but much of the success is attributable to people.”

On May 3, Kersey will give a keynote speech on global health care and technology at HealthCare Texas Conference 2016, an annual innovation and growth capital conference in Austin that brings together the greatest minds in health care technology from across the U.S.

Kersey serves as the Chairman of the Board of Johns Hopkins Medicine International, the development branch of Johns Hopkins Medicine with hospital management and clinical education services in North America, South America, the Middle East, Europe and Asia.

“It’s a honor to be a part of the leading academic health care brand in the world,” Kersey says of the position, which he has held since July 2011. “We have a stellar team representing an amazing institution globally.”

A major focus of HealthCare Texas Conference 2016 will be on how health care is being transformed through information technology, big data, and value-based reform.

In Kersey’s view, the top two technological trends in health care today are point of care technologies that enable mobility and revenue cycle management companies that improve CFOs’ management of cash in terms of how providers and payers are paid and when they’re paid.

Kersey says the infusion of technology into how health care is delivered makes health care an exciting sector to invest in. And it’s only the beginning.

“When I talk about the future of health care, I frequently say that we’re in the second inning of an extra inning baseball game in terms of how technology can transform the delivery of health care.”

Camden Partners’s assets under management are approaching $1 billion.

“We anticipate gradually increasing our fund sizes with each subsequent fund,” Kersey says. “Serving as a steward of capital - our own capital and our investors' capital - is a real honor. I’m very proud of the current portfolio, but perhaps most importantly, my partners and I have the opportunity to work with some of the country’s best CEOs.”

Two of Camden’s most successful companies in the portfolio are Essence Group Holdings and PatientSafe Solutions. Essence is the leader in population health management, evidenced by a recent No. 1 KLAS ranking in population health services, and PatientSafe is a top mobile clinical communications company specializing in point-of-care medication management and barcode scanning. 

The success of Camden’s relationships with Essence and PatientSafe are “excellent examples of prior relationships with management team members,” Kersey says.

So what is it Camden looks for in a management team?

No. 1 is character and integrity. No. 2 is a proven track record of success with institutional capital.

“Backing previously successful CEOs is a big deal,” Kersey says. “Regarding our investment strategy, we also place a real premium on what we call technology-enabled service companies that possess hybrid business models that differentiate based on great customer service on the front end combined with proprietary technology on the back end that helps the business scale.  This is a very powerful front end-back end combination.”

Texas Medical Device Landscape--2016

Each year medical devices continue play a vital role in people's lives. These products are revolutionizing medicine with groundbreaking advances in both the treatment and the detection of diseases.

A medical device is defined by the FDA as "an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory…intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease.”

The U.S. is the largest medical device market in the world with a market size of approximately $110 billion. In 2012, the U.S. market value represented around 38 percent of the global medical device market. There are nearly 7,000 medical device companies in the U.S., most of which are small and medium-sized enterprises (SMEs).  More than 80 percent of medical device companies have fewer than 50 employees. Medical device companies are mainly concentrated in regions known for other tech industries, such as microelectronics and biotechnology. 

Many of the biggest players in the medical device industry have corporate facilities in Texas. More than a dozen Fortune 1000 medical device companies have manufacturing or management operations in the Lone Star State, including Abbott Laboratories, Agilent Technologies, Baxter International, Becton Dickinson, GE, Johnson & Johnson, Medtronic, St. Jude Medical, Stryker, Zimmer, among others.

These companies have developed a large medical device workforce in the state. Over 740 firms employ more than 15,400 workers in this sector, making Texas one of the top states in the country for the number of medical device workers.

A wide variety of medical products are developed and manufactured in Texas, ranging from surgical sutures and bandages to medication delivery systems and molecular biology kits. While a broad spectrum of medical specializations are served by Texas device companies, the state has developed several unique clusters, including ophthalmology, orthopedics, cardiology, diagnostics, and wound care.

Venture capital has played a major role in the development of Texas’s medical device industry. Since 2005, the state’s Texas Emerging Technology Fund (TETF) has invested more than $88 million in medical device-related deals, and, from 2009 to 2014, venture capital firms invested more than $526.7 million in 82 Texas medical device deals.

Texas's Life Science and Health Care Scene -- 2016

Research and development (R&D) is at the core of Texas’s biotechnology industry. In Texas, biomedical research, or research conducted to aid and support the development body of knowledge in the field of medicine, is bolstered in large part by the state’s vast network of public universities and medical institutions. These school and health-related facilities invest strongly in biomedical research and development. In 2013 alone, Texas universities spent nearly $3 billion on medical and life sciences research, which made up more than 65 percent of all higher education R&D expenditures in the state.

Public investment in biotech R&D is complemented by Texas’s significant concentration of private sector R&D activity. More than a thousand private R&D firms, employing nearly 20,000 workers, call Texas home. Many of the world’s largest private biotech R&D firms have operations in Texas, including PPD, Covance, Quintiles, and INC Research.

In addition to R&D centers, Texas has more than 1,600 medical and testing laboratories. These laboratories employ nearly 40,000. Major lab firms in the state include LabCorp’s Esoterix subsidiary, Spanish biological product firm Grifols, and Sonic Healthcare’s Clinical Pathology Laboratories subsidiary.

Over the past decade, the state’s Texas Emerging Technology Fund (TETF) has invested more than $142 million in some of the state’s major higher education institutes for biomedical research-related deals in areas ranging from genetic engineering to pharmaceutical manufacturing.

The Lone Star State is also among the leaders in cancer research. Major Texas institutions in cancer research include MD Anderson Cancer Center in Houston, Scott & White Cancer Institute in Temple, and Texas Oncology and Mary Crowley Cancer Research Centers in Dallas. Furthermore, the Cancer Prevention and Research Institute of Texas (CPRIT), a $3 billion initiative based in Austin, has played a major role in expanding Texas cancer research. 

Escalate Capital by Ross Cockrell—Venture Capital Profile

Can you tell me a little bit about the history of Escalate? Where it came from and how long it’s been around?

We started in 2005 as a spin out from Austin Ventures, where I had been for 10 years. My partner, Tony Schell, was running the Comerica tech lending practice here in Austin. We had known each other since our time together at UT Business School in the mid-‘90s. We have raised 3 funds totaling $625M in capital with our most recent closing in late 2014 at $235 million. We’ve been executing pretty much the same strategy since day one, which is to provide mezzanine capital to expansion and later stage tech and healthcare companies. We invest all over the country and have made 75 investments to date as a firm.

Typical structure is in the form of subordinated debt, where we are coming into companies’ later rounds of financing, providing a little more leverage than is traditionally available from banks. We work a lot with SVB, Comerica, Square One, writing $3M-$15M checks into software, tech enabled services, and Internet companies.

Profile-wise, we look for companies with a fair bit of stability and low wipeout risk. Since we are not making as much on the upside, we typically try to underwrite for credit first and equity appreciation second.

So this is mezzanine debt, correct? How would you define mezzanine debt?

We brought what had been a fairly popular financing solution in traditional PE, real estate, and other asset classes to IT, which was a novel concept 10 years ago and we had to do some evangelizing early on. When I came up in the venture business, there was a traditional playbook that said you went out and raised multiple series of equity, maybe layered in a little bit of bank debt, start-ups were largely all equity financed. We are offering another financing solution for certain types of companies looking for additional growth capital or to make acquisitions.

What size company and what criteria does a business have to meet in terms of revenue to get in your door at Escalate Capital?

Companies that we invest in are typically in the $10-$50 million revenue range with a fair bit of granularity in the business. We are not interested in making bets around technology standards or in customer or channel concentration. We invest in a fair bit of B2B software, and companies that utilize software in offering solutions.

Do you do much with Healthcare IT?

We do, we’ve invested in probably 12 Healthcare IT companies.

Any management buyouts?

Selectively, where we come in alongside equity to help finance a recap, but that’s not the primary use of funds in our typical situation.

Have you made any Texas deals?

Early on we invested a lot in Texas: HomeAway, RetailMeNot, LDR, and SailPoint are some of our Austin deals, and we’ve been fairly active in Dallas and Houston as well. All told we’ve invested in around 20 companies based in Texas.

Do you syndicate deals, and how does that work?

We are generally the only provider of capital within our portion of the capital structure. It’s been pretty rare for us to have opportunities syndicate. You could say we syndicate with senior lenders, which are good partners of ours and great sources for deal referrals.

So you partner with the banks on the debt side, not with other firms?

We have and we would, but it’s pretty unusual.

Tell me more about the management team.

Besides me and Tony, we a third partner who covers the East Coast for us named Chris Julich. With a total headcount of seven, we are a fairly small shop; that can certainly be an advantage for companies that are looking for speed and the ability to work directly with principals.

From the last Texas Venture Growth Forum, did you find any groups interesting?

Yes, you guys did a terrific job, especially for the first time. It seemed well attended by companies and investors alike. We try to have a pretty good grasp on what is going on in our backyard, but it’s awesome to meet new companies and I had a chance to do that for sure.

What’s your take on putting Limited Partners out there at the next conference?

If those guys are interested, I think that’s fantastic. I’ve never seen that before combined with these kind of events. That would be another awesome connection to make and a great way to potentially increase attendance among investors

The Cabernet vs. the Tempranillo-- Choosing the Right Funding Model for Your Climate

In the late 90s I started making my own wine.  To learn more about winemaking I traveled throughout Texas visiting wineries to talk to professional wine makers.  At that time, there were about 40 wineries in Texas but it was growing.

Personally, I like red wines and took every opportunity to try them.  The vast majority were Cabernet Sauvignons.   Almost all of them were absolutely terrible.  One winery explained that the Cabernet grape doesn't do so well in Texas because the weather doesn't cool off enough at night to make as good a wine as it does on the West Coast.  It's just too hot here for that type of grape.

To make my own wine, I ordered Cabernet grapes from California.  Peter Brehm would travel up and down the coast gathering up buckets of grapes from various wineries and then put them in cold storage in Oakland. When I ordered the grapes, he would put them a Southwest flight to Austin where I would pick them up at the cargo lot. From there I would crush the grapes, ferment the juice and bottle it.  Not a bad way to have your own vineyard.

Today, the Texas wine industry has over 240 vineyards and growing even faster.  In checking back into the Texas wine scene recently I was surprised at how many wineries have shifted over to Tempranillo and Tannat grapes.  Those varietals come from Italy where the weather is similar to Texas. I was pleasantly surprised at how good those wines are.  It may be the industry has improved on its winemaking techniques but I believe the fundamental choice of grape makes the most difference.

I tell this story because I work with startups and growth companies and I see many Texas companies trying to emulate the Bay Area model of startup funding. Of course, it's hard to raise funding for a startup company anywhere.  It's especially hard if you're trying to use a California model to fund a Texas business.  Texas startups hear about the vast amounts of funding raised by California startups who appear from a distance to having nothing more than a great idea. It also looks like every startup in California is getting funded.  The reality is that only 1% of California startups raise substantial funding.  The other 99% don't get much press coverage so the perception from the outside is somewhat skewed.

In Texas, there are not as many venture capital funds.  There is a great deal of funding available -- it's just not in the venture capital model.  In Texas it's in the family office and the venture arms of corporations.  These investors want to see traction, proven business models, and  raising funding on an idea alone doesn't resonate well them.

My advice to Texas companies is to choose a startup funding model that works well in Texas and not try to emulate the California model.  Cater to the funding sources that are here and not look for the rare venture capital funding source as it will be like trying to find a decent Cabernet wine that's made in Texas.  I still like Cabernets from California, but found the Tempranillos in Texas are just as good once you try them.

Braden Snyder of Updata Partners -- Venture Capital Profile

Updata Partners by Braden Snyder -- Venture Capital Profile

What is the history of Updata Partners?

Updata is a technology-focused growth equity firm based in Washington, D.C. The firm was founded in 1998 and was an early leader in the growth equity category. We have invested in more than 60 industry-leading companies and have built and sold businesses exceeding $3 billion in shareholder value.

What do you invest in?

As a growth equity investor, we invest in businesses that have reached between $5 to $50 million in revenue, that are growing greater than 25% per year, and that have a proven and capital efficient business model. Within the technology market, we focus our efforts on software, internet / digital media, and technology-enabled services companies. Our capital is used to accelerate growth by investing in sales and marketing, expanding into new geographies, developing complementary products, and / or financing a potential acquisition. We generally target bootstrapped or lightly capitalized companies and are flexible when it comes to deal structure. We invest between $5 and $20 million into companies in the form of both primary and secondary capital, and we partner with other investors on larger transactions. 

What do you not invest in?

Within technology, we stay away from hardware-based businesses.

How do you handle syndication deals?

We are typically the lead investor, but we welcome the opportunity to invest with partners that can add value. We are not typically part of large group deals. We also have strong support from our LPs, who actively look for co-investment opportunities and help support us on larger transactions.

Where do you invest geographically and have you invested in Texas deals?

We invest across the U.S. and internationally. We have had success targeting geographies with a strong technology ecosystem, talent pool and early stage capital sources, but lack a growth equity capital pool. We have experience investing in Texas, including Alert Logic, based in Houston, which was acquired by Welsh Carson, and Merlin Technologies, based in Dallas, which was acquired by Trident Capital.

What do you think about the Texas-based deals?

Texas has a strong history in our core software markets, producing leaders like BMC Software, i2 Technologies, Dell and others. We have been very impressed with the quality of the investment opportunities in Texas, and since raising a new fund, we have focused closely on enhancing our presence in Texas. We are excited about the opportunity to further these efforts and continue to evaluate the great opportunities in the region.

What kind of operational support do you offer your portfolio?

All of our GPs are former operators and entrepreneurs, which is a great benefit our portfolio companies can leverage. Having been in the seat before, we understand how to add value and develop a successful management team / board of directors / investor dynamic. Also, we open up an extensive network of industry contacts, experts, and companies our portfolio companies can access. We view our involvement as a true partnership and do everything we can to set up our portfolio companies for success. 

What is the history of Updata Partners?

Updata is a technology-focused growth equity firm based in Washington, D.C. The firm was founded in 1998 and was an early leader in the growth equity category. We have invested in more than 60 industry-leading companies and have built and sold businesses exceeding $3 billion in shareholder value.

What do you invest in?

As a growth equity investor, we invest in businesses that have reached between $5 to $50 million in revenue, that are growing greater than 25% per year, and that have a proven and capital efficient business model. Within the technology market, we focus our efforts on software, internet / digital media, and technology-enabled services companies. Our capital is used to accelerate growth by investing in sales and marketing, expanding into new geographies, developing complementary products, and / or financing a potential acquisition. We generally target bootstrapped or lightly capitalized companies and are flexible when it comes to deal structure. We invest between $5 and $20 million into companies in the form of both primary and secondary capital, and we partner with other investors on larger transactions. 

What do you not invest in?

Within technology, we stay away from hardware-based businesses.

How do you handle syndication deals?

We are typically the lead investor, but we welcome the opportunity to invest with partners that can add value. We are not typically part of large group deals. We also have strong support from our LPs, who actively look for co-investment opportunities and help support us on larger transactions.

Where do you invest geographically and have you invested in Texas deals?

We invest across the U.S. and internationally. We have had success targeting geographies with a strong technology ecosystem, talent pool and early stage capital sources, but lack a growth equity capital pool. We have experience investing in Texas, including Alert Logic, based in Houston, which was acquired by Welsh Carson, and Merlin Technologies, based in Dallas, which was acquired by Trident Capital.

What do you think about the Texas-based deals?

Texas has a strong history in our core software markets, producing leaders like BMC Software, i2 Technologies, Dell and others. We have been very impressed with the quality of the investment opportunities in Texas, and since raising a new fund, we have focused closely on enhancing our presence in Texas. We are excited about the opportunity to further these efforts and continue to evaluate the great opportunities in the region.

What kind of operational support do you offer your portfolio?

All of our GPs are former operators and entrepreneurs, which is a great benefit our portfolio companies can leverage. Having been in the seat before, we understand how to add value and develop a successful management team / board of directors / investor dynamic. Also, we open up an extensive network of industry contacts, experts, and companies our portfolio companies can access. We view our involvement as a true partnership and do everything we can to set up our portfolio companies for success. 

Texas Entrepreneur Network (TEN) Infographic -- Business Funding Texas

Business Funding Texas is a Texas Intrastate Crowdfunding portal. The state of Texas passed its Intrastate Crowdfunding law at the end of 2014, allowing any resident of Texas to invest in a startup.  Unaccredited investors are limited to $5K/person/deal/year.  The law is much simpler than the JOBS Act recently passed by the SEC which requires more reporting, more detailed income tests, and financial audits.  Accredited investors in Texas can invest as much as they want.

The Intrastate Crowdfunding raise works well for consumer facing businesses that have a large network of unaccredited investors.  Microbreweries, wineries, distilleries, and consumer product good companies are ideal candidates.  The fund raise is primarily an exercise in having your customers invest in your business.  The raise strengthens your business beyond just funding in that it builds a strong group of enthusiasts and advocates around your business who will then support and promote your business to others.

Also, the experience of running a crowdfunding campaign can teach a new company a great deal about sales and marketing.  Crowdfunding is essentially investment marketing.  One learns how to create and run a campaign which can prove valuable in building the skills to sell and promote the product.

Businesses which can raise funding from their customers/clients are well positioned to raise additional money from accredited investors as it demonstrates a loyal following for you and your business.