43. Why Angels Don’t Do Drugs | Life Sciences Investing (Sergio Gurrieri)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Sergio Gurrieri of Tech Coast Angels joins Nick to cover Why Angels Don’t do Drugs | Life Sciences Investing. We will address questions including:

  • Can you first talk about the sector at large and the sub components of investment opportunities within the life sciences category?
  • Who are the traditional players that invest in this area?
  • At a high-level can you talk about why the venture investing model is so different for businesses of this type than, for instance, a B2C app company?
  • We’ve recently discussed SaaS on the program and some of the key metrics and milestones that are important through the early-growth, growth and scale phases. What are some of the key data points, metrics and/or milestones that are critical to monitor for life sciences companies?
  • What are some of the ways that life sciences startups can reduce risk at the early-stages in an area that is often considered incredibly risky and capital-intensive?
  • Where do you see the most significant growth opportunities in the life sciences sector over the next 10 years and what advice do you have for early-stage investors that are interested in the sector?

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Key Takeaways:


 1- The Three Categories within Life Sciences


1. Drug Discovery & Drug Development: Highest risk and highest reward
2. Molecular and Clinical Diagnostics: Medium Risk
3. Medical Devices: Lower risk relative to the others
2- Why Life Sciences is so Risky
  • Very capital intensive…Starting from scratch it takes about $1.2B to take a drug all the way to market
  • Very long to get to an exit… Sergio mentioned that if a company can move very quickly it still will take 10-12 years to get a drug to market
  • Significant clinical testing hurdles… Recall that Sergio talked about how testing results of drugs on other species rarely transfers to humans and
  • Regulatory Approval… So even if a drug gets through clinical trials, there is still a challenging path to get all the third party testing and data in order to get the approvals required

And the two critical milestones that the investor is looking for in this category are:

  • Regulatory Approval
  • Clinical validation, which is essentially proof-of-concept: Does this drug or device work in humans?


3- Ways Sergio Reduces Risk & Uncertainty in Life Sciences

  • Investing later: If the startup can get through some of those critical clinical or regulatory hurdles prior to investment, it reduces the risk profile significantly
  • Avoids new drugs: Instead of looking a totally unknown formulations, he can look at new formulations of existing compounds or treatments.
  • New delivery mechanisms: Sergio had cited that an existing method of delivery may be intravenous and, for example, he looks for oral applications, or inhalation that delivers the drug through the respiratory system.
  • Re-purposed drugs: These may be in other geographies or may be used to treat other disorders, but have found to be useful in new areas.
  • Orphan Drugs:  Disorders that may affect populations less than 200,000. While the market size may be lower, this reduces risk in the development process because the FDA gives market exclusivity for seven years in the U.S. and faster processing.

Tip of the Week:   The Power of WANT



*Please excuse any errors in the below transcript

 Nick: Today we have # Sergio Gurrieri. He is VP of # Due Diligence and Board Director at # Tech Coast Angels, and he joins us today to talk life sciences. Sergio, welcome to the program and thanks so much for your time.


Sergio: Oh thank you very much, Nick.


Nick: So can you start us off with your background and how you became involved in startup investing?


Sergio: Yeah, yeah sure. Let me say just a couple of words about Tech Coast Angels first, for those maybe in the audience that might not be familiar with it. TCA is actually one of the largest and most active Angel Network in the United States. We have five chapters and over 300 investors, 300 members all located in Southern California. And we typically invest in companies across a large variety of industries from diagnostics to medical devices, drug discovery, drug development, high tech, software, media and so forth. San Diego is actually the largest chapter of TCA. We have over 100 members, and as you just said, I’m on the board, VP of Due Diligence. So, just to tell a little bit about my background, how I got started. I consider myself a little bit of a unique kind of angel investor, mostly because my personal motivation and my objectives might be a little bit different from typical angels, and it all kind of started around 2010. So I started reassessing my corporate career in biotech, and for biotech, I mean, not necessarily drug discovery, usually most people associate Biotech with drug discovery. For Biotech in this case, I mean, the actual companies developing the core tools and platform technologies for genomics, for proteomics. So you can think about it as all those tools for genetic engineering, for cloning, for PCR, genomic analysis, gene expression, microarray sequencing, immunoassays, and so forth. So I did work for three of the large smalltech deliverer 1:49, biotech corporations, and there would be # BD Biosciences. I was with the Clontech division of BD up in Palo Alto in the early 2000s. Then I moved to # Invitrogen here in San Diego, that became Life Technologies  around 2008, now is Thermo Fisher. And then I worked for a couple of years with # Millipore, headquartered in Boston area but with an office here in San Diego county. So I really enjoyed very much my time with these three large corporations, but I really wanted to start something on my own. I was not really interested in the inevitable politics of these large corporations. So I started making some attempts to turn what I thought were maybe great ideas into strong business plans. And I spent about a year and a half doing market research, doing prototyping, financial modeling and so forth. And then I said looking at this, some of the statistics, and I looked at the success rate for startups, and I realized that they were not really that good, that strong. I figured out I had to come up with at least 10 good ideas before at least one of them could be a successful business. My objective was not necessarily that I wanted to diversify, both in terms of time and money. I didn’t really want to put all my eggs in one basket. And when you start your own company, the diversification is just not an option. It’s actually the opposite. Investors want you to focus on maybe even one specific product, one specific market. I didn’t want to do that. I realized that actually I was much better at evaluating and supporting somebody else’s business rather than creating one of my own from scratch. So that’s exactly why I joined TCA in 2011. My purpose was to build a portfolio startup company, that’s what Angel investing is all about. Don’t invest in just one or two, because your chance of success is actually relatively small. You need to build a portfolio and you’re going to be hearing from different angels what the right size for a certain portfolio should be. And in my opinion, there is a micro investment philosophy. My perfect size is around 15 or so, and because less than that it’s really difficult, less than 10 or 12 is really difficult to diversify enough. More than 20 they’re very difficult to manage. Some investors will say you need to go up to 50 or 100 companies, if you invest early stage, we’ll talk about it. But I don’t really go very early, I try to go as late as I can, still within the angel investment category.


Nick: I kind of want to get your input on this life sciences category, because we have not had an investor on the program yet that has specialized here, and it is a very unique sector. There’s investors that seem to specialize in this sector specifically and then many that just avoid it all together. Sergio, can you first talk about the sector at large and some of the sub components within the life sciences category?


Sergio: Yeah. So let me say that I actually have invested mostly in life science companies, even if not exclusively. I have sixteen deals so far and about 60% of them are one way or another in life sciences but not exclusively. I see life sciences as really three main sectors, drug discovery and development. And they are actually different, discovery versus development is actually a different deal. And then molecular and clinical diagnostics and medical devices. So the reason why these are typically seen by angel investors as scary kind of deals because they fall in the category high risk high reward. And that means you really need to understand them very well. They can be very capital intensive. Some of these deals, some of these companies might need 10 or 50 or even 100 million dollars to take the company all the way to an exit. So what that means is that the financing risk is very high, because of course angels are not going to be able to raise that kind of money. An additional risk component, which is regulatory risk, and then you don’t see of course on the high tech side. So from a drug discovery and development perspective, that is the highest risk category. But that means of course that is where you’re gonna probably see the highest reward if the company is successful. If you heard any of the presentation by TCA, we used to say and we still do sometimes, one of the bullet lines will be ‘Angels don’t do drugs’. And the reason is actually very simple because it takes really a long time, again very capital intensive and a long time to exit. However, we make exceptions and we do invest in drug discovery, drug development companies, but under certain special circumstances, maybe niche markets are good or orphan drugs, where they are called orphan drugs so they’re addressing maybe a relatively small population of less than 200,000 patients or so. Reformatted drugs are also good, repurpose drugs, so not necessarily again new drugs but maybe old drugs for new indications, maybe new delivery mechanisms. So again, existing drugs but delivered in a different way. So we do have quite a few companies that are really strong in our portfolio. So that’s the drug discovery, drug development. The molecular pellicle diagnostics, then I would say that this maybe a little bit lower risk, still high risk but maybe more moderate. Because the path for approval of regulatory, the approval is much more clear. Devices are probably the lowest in terms of risk. A lot of angels actually prefer to invest in devices if they invest in life sciences. And the reason is specially for non invasive devices, and for non invasive I mean all the external monitoring systems, they are relatively low risk. I’m not talking about the implants or maybe knee replacements or hip replacements, those more invasive implants, of course, they have much more regulatory scrutiny. But the external devices, the monitoring devices, they have a much more certifiable path to approval, and therefore are seen as relatively low risk. However, most of the time when we talk about life sciences , people think we mean drug discovery and development. So I’m assuming we’ll probably focus on those kind of companies today.


Nick: And with your existing portfolio, what’s sort of the breakdown in the three major categories?

Sergio: I have about five in drug discovery and development companies, one in diagnostics and two in medical devices. And so, again, I’m not a typical angel, meaning I try to look for the real late stage deals still within the angel investment category. So I don’t go really early at the discovery phase or at the concept phase. The companies I have invested in they are already really really close to the clinics, or already in phase one or even phase two clinical trials.


Nick: Gotcha. So what series of investment would you classify that at, and what sort of valuation ranges are you in at that point?


Sergio: Most angels like valuations in the range 1 to 4 million dollars. So anytime a company comes in with a valuation higher than 4, might become a deal breaker and most people start dropping off. When you start talking about 6 or 8 or 10, few brave angels, they might be interested in that category and maybe I’m one of them. Once you start talking about 20, 30, then you’re probably losing 90% of the audience. I would say my seeds pod is probably between 4 or 10 or 12, that would be the best time that I like to go in. However I like following these companies along the way, you know, over the course of a year or two, and then eventually do it for long rounds. And I think that’s actually a trend. We used to invest just one time only really early stage and kind of wait and see what happens. Now we’re more supportive of our portfolio companies and we go back and invest in for long rounds and maybe a second time, a third time, even a fourth time, over the course of a couple of years. You were talking about what kind of round, whether it is a series A or series B. Those definitions are kind of subjective, you know,


Nick: Yeah


Sergio: but I would say most of them are, the ones that I like are actually series B rounds. If I am allowed to get in off some other company is still at the stage where it has not really taken off in terms of valuation, but it’s getting really really close to the market to commercialization. So I like those kind of companies that are probably close to 10 or 12 million dollars in terms of pre money.


Nick: Instead of calling that a Series B, it would be companies that are maybe in a stage one of clinical trials?


Sergio: Yeah you can say that. Though you can say maybe it’s the second or third round of financing. Not necessarily the early seed stage or the very first time they start raising funds.


Nick: The mix of players that provide capital in this area is a bit different than your traditional angels and micro VCs. Can you talk about some of the players that are investing and providing capital in the life sciences area, aside from just angels?


Sergio: Well, angels are actually very, very predominant. And if you look at statistics, angels are investing in startup companies pretty much about the same amount of money that VCs will invest. It’s about 20, 22 billion dollars a year. And the only difference is that VCs of course will write much larger cheques for a small number of companies. Angels will write much larger number cheques but they’re small cheques. The typical angel investment is about $25,000. So that there will be the standard. If you have somebody whether you have invested or that person has invested in a company, you can assume that investment was somewhere in the range of 25,000, maybe 20, maybe 30 maybe 50. But what I would say is that angels are getting really good at syndicating together. We work with all the most active angel groups across the country. There are some very active in the Boston area, from # Mass Medical Angels to # Boston Harbor Angels, # Cherrystones in  Providence Rhode Islands. # Desert Angels in Tucson, Arizona, they’re really really active, specially in 2015.


Nick: Yep


Sergio: # Arizona Tech Investors, # Houston Angels. Also # Central Texas Angel Network in Austin, Texas, they’re really active. We have co-invested in a company. And it’s working well. So angels are moving maybe even later stages and raising a lot more money than that we used to by syndication. However, angels is not just the only option there are, you need to connect with your investors. So I think that’s what really matters. Specially in life sciences, you want your shareholders to have a personal connection with the company. Some family funds might work really well because they might have a history of a particular disease in the family. Philanthropic funds work really well. There are incubators that actually focus on certain areas based on the expertise of their managing directors. And, of course, there are the small or medium VC funds or the micro VC funds, there are probably in the 2 to 10 million dollar range, so they’re really small funds that will write you a $200,000 cheques. But the benefit of getting those funds involved is that they have, most of the times, they have good connections with the larger VCs. So if the companies follow on financing, then it’s a much easier step to go to the next round.


Nick: Have you found a lot of internal venture arms that are associated maybe with a biotech company that you’ve worked with ?


Sergio: So there is a little bit of a gap, that is, and you’ve probably heard about that, the fact that the angels can support companies up to a certain stage, and again the first couple of million dollars, maybe 5 in some cases, even 10 or 15. But that’s about as far as you can stretch financing round, specially when you start involving a large number of angel groups. But it takes a lot of time, going in pitching to 3, 4, 5 , 10, 15 different angel groups and getting them involved in the round. It’s just very time consuming for management. So you want management to really focus on building the company, building the business, not necessarily just raising funds. And again, going back to the original concept, the typical cheque for an angel investor is $25,000. So if a company has to raise, let’s say, a million dollars, well you need to convince about 40 investors to write a cheque. If the company needs $2M, then you have to talk about 80 investors and so forth. So when you start discussion rounds that are in the 3 to 5 million dollar range, they are possible through angel syndicates but they are very very time consuming. And VCs are actually going to later and later stages. They really want to see proof of concept, they really want to see market traction, there is still a gap. That’s why I think the smaller funds, the family funds, the philanthropic funds, I think they can play a strong role there. Because they might be in that position to either fill the gap or at least to support the company through that period when it might be a little bit  difficult to get VC funding. So we’ve worked some but there is a little bit of discriminate because VCs are more into later stages and angels are also more with the later stages, but there is still a gap. So they got this money too, maybe the $5M raise, it’s just very difficult with angels. Not impossible but it doesn’t happen every day. But this might be not enough for VCs, specially if the company is not in the market, doesn’t have revenues, doesn’t have customers, and so forth.


Nick: Can you talk about, at a very high-level, why the startup investing model is so different in the life sciences category than it would be for, let’s say, a software company or a B2C app company?


Sergio: Yeah, they are very different because technologies are biotech or high tech, they are very different kind of biz. On the high tech side, specially if you’re developing an app, it’s mostly about adoption and market penetration and how quickly you can grow your user base and how quickly you can apply your customers for very little money. So it’s a very different kind of concept. On the life science side, it’s not really about the market. The market is very well defined, very well established, it’s really about- is the product you’re trying to develop is it going to work? Because these technologies are very complex, there are so many things that could go wrong, and many of them will go wrong. So it takes a lot of years to develop a drug. It could be 10 or 12 years in some cases if you start very early. Again, very capital intensive. So it could be in tens of millions or hundreds of millions of dollars. Starting from scratch, it takes about actually $1.2B to take a drug all the way to market. The angel backed company, they will never take a drug to market, it’s really rare that the company will take them all the way to market, they will try to sell before. But still you will need tens or millions of dollars. So financial risk is very high, longer development time, longer time to exit. There are some positives, so otherwise why would we even buy there. So intellectually and morally it’s very rewarding, because you get to actually deliver real benefits to the health care system and to patients, because most of the times you’re working directly with patients. And the people are just phenomenal. But it’s not charity. They want to do something good. But at the end of the day they still expect some kind of return investment. So the reason why we do that is because once you develop something that actually works, the —16:22 to enter are really really high. That means it’s very difficult for somebody else to catch up with you if you’re 2 or 3 years ahead. And again, it’s very expensive for them as well, and they might not even be competitive enough. Market risk, from my perspective is much lower, because again once you develop your product, then you’re going to be able to enter your market and be successful. And specially if you decide to go after niche markets, you can completely dominate those markets. And at the end of the day, if you end up being lucky, and you end up developing a blockbuster or some drug that will cure cancer or Alzheimers or Parkinsons, then the ——16:58 will be really large, and you’re talking about a 100x plus. But of course, again you need to get there. So none of these, there is interest, there is a lot of activity and because the rewards can be really high. So it really depends on the investment philosophy. Some individuals prefer to go, again, low risk, low reward. Some others prefer to go high risk, high reward. And it depends on why they are investing in angel backed companies. Some people want to diversify. They might have invested already in art, in real estate, in gold. So angel investing is really for them high risk, high reward. For some other people like me, I would say I’m more conservative or my risk tolerance is more moderate. That’s why I try to go as late as I can. I’m not going after the 100x returns. I’ll be fine with the 5 or 6 or 10x. But I want to make sure I get my money back. Some angels will say it’s not about return on investment, it’s about return of investment. I want to make sure I get my money back before I worry about what profit I’m going to make. Usually, we get all excited about the potential profit that we don’t think too much about the chance of losing money, it’s high. And if you don’t build a portfolio, if you don’t screen and evaluate these companies properly, if you don’t do proper diligence and so forth.


Nick: Sure. Sergio can you talk a little bit about the role of regulatory and how do you assess risk when evaluating a life sciences deal with regards to regulatory?


Sergio: Well, so that is the toughest part. And yeah that’s really the main reason why a lot of angels walk away from life science companies. It’s actually very simple, and not because the risk is not certainly really high. It’s just that they don’t understand it well. So regulatory is probably the biggest problem in life sciences for a lot of different reasons. First, specially for drug discovery, drug development, you need to have multiple approval steps with the FDA if you are developing a drug. If you are setting up for a sample diagnostic lab, then you need to go through a clear certification process. So that means you need to develop processes to assure quality in your laboratory testing, you need to have certain protocols or operating procedures and so forth. This could be very time consuming. And then there is no guarantee about the outcome, right. So the way you protect yourself about this kind of risk is simply you need to have a strong management, a strong board that really understands these processes, that have the connections with all the regulatory agencies, that has done this before, that can actually really well manage the risk. Because there is risk, but it’s not I mean nothing in angel investing is with no risk. It’s all about understanding what risk is and managing it, from a company perspective as well as from a —19:38 perspective. So the biggest, most important point is watch for your budget because you never know, Raise money when you might not need it, because you will need it in some point in a way that is completely unexpected, and how much money you spend, because you’re most likely going to need more. Because they might ask you to do run even more experiments, more safety studies, more toxicology studies, more data with mice and rats, and then you might need to go back and raise more funds and do those studies before they will allow you to go to the next level. Bottomline is always want to raise money when we don’t need it. And the companies that I have invested in so far have been successful is because they have adopted exactly that philosophy, because it’s very much and known. But it’s not that at the end of the day the company will make it. It just will take a little bit longer, it will take a little more money. But if you have again a strong product or a strong platform, it’s just a matter of time, the deal will work out.


Nick: We probably don’t have time to address this next question for each of the three major components of life sciences, but maybe you could address this at a high-level for us. We recently had # Mamoon Hamid on the program to talk SaaS and investing in SaaS companies, and he highlighted some of the key metrics that they look for and they measure, both pre investment and post, MRR’s and quick ratios. Are there some key data points, metrics, and/or milestones that are critical to evaluate when you’re looking at a startup for investment, and then data points that you look to measure for portfolio companies?


Sergio: So there are not real hardcore metrics. The major milestones, as far as a life science company, there has to be a regulatory approval. As I was saying, multiple steps of approval with the FDA


Nick: Yep


Sergio: So your certification process. But really the most important at the end of the day, what we want to see, what VCs want to see, is what we call clinical validation or proof of concept. But the reality with the life science companies, the proof of concept means does this drive or does this device work in humans? And so, there is no such thing like an early prototype that you can say oh well I’ll develop something, —21:45, see if it works and then if it works then I’ll do something better, I’ll try to scale it. When you develop a drug, you really need to develop the final product. Even if we do all the testing, maybe early testing in mice and rats, will the preclinical data translate very well into humans? Because of course the physiology is very different. And actually so how can we expect the data from rats to actually be similar, the response in human be similar, when actually a rat even is not even a big mouse? In the physiology, a rat is very different from a mouse. So how can we expect that information to actually translate into humans? Most of the time it doesn’t translate very well. Reality is you need to develop a full product before it can be tested in humans, and including maybe manufacturing needs to be full scalable . But these are the things that we typically look for. And those are the major milestones. Again, regulatory approval as well as clinical validations, that will have some of kind of pre clinical data that maybe even their companies, even TCA portfolio companies that are working with the human tissues pre clinically, so the data they produce is going to be much more predictive of the clinical outcomes. So we look for those kind of indications of clinical validation and then those milestones are obviously associated with those particular results. But nothing that we can measure like the cost per clinical conversion rates or things like that. So it’s an art, really drug development is an art


Nick: Yeah


Sergio: You need to be able to again, assess the risk and have a plan B in case your plan A doesn’t work, and then be able to anticipate when a rainy day is going to come before it actually rains. Because it will rain, you just don’t know when.


Nick: Yeah. I used to work for an analytical device company. It wasn’t medical, it was environmental, that tested a variety of parameters in water. And while the EPA asked for a lot of specific data, a lot of third party testing, I found the entire regulatory process to be much more of an art, and much more of a relationship than it was a science, which was almost confounding to me.


Sergio: That is exactly what I was going to say. It’s almost a little bit like the relationship with IRS, or maybe even with the, I don’t know, border patroller, those kind of entities, right. Where, you know, they look scary from the outside, but the reality is they are really trying to help you. So if you have relationships with the FDA personnel, they are really really nice people. They are trying to help, they just don’t have necessarily all the tools in place. They don’t have necessarily the bandwidth, because of course there are so many companies, so many drugs, and so much work, so much data that needs to be developed. So if you have those relationships, if you understand well their process, their concerns, so that’s why it boils down to a really strong experienced management team as well as because the board can avoid you for making really bad mistakes early in the process. And of course that would mean a round of cash and maybe not being able to raise more cash, and that might be the end of the company.


Nick: On the bandwidth side, if I could make a suggestion to the audience if you’re investing in life sciences or anything with high degree of regulatory approval, do not put all your eggs in one basket, the timing and the schedule that you get from the regulatory agency, because those schedules tend to move back.


Sergio: Yeah, exactly. Assume that meetings that you have scheduled might end up being pushed back by a month or two, and assume they will take a little bit more cash to get to a certain point. Assume that they will ask you for more data, that means more work. So have always some cash reserve for those rainy days because they will happen.

Nick: Speaking of rainy days, startup investing itself is a very risky asset class, and life sciences as a category in the startup investing world is exceptionally risky. Sergio, do you have any thoughts on ways that life sciences startups can reduce risk at these early stages?


Sergio: Yeah. So of course if you want to reduce risk, then you’re going to be reducing also your potential, alright. I mean, because they, of course, go hand in hand. And that’s part of the reason why I try to go as late as I can. Still, again, being early stage, but not really early. So, as I was mentioning before, it’s really important to have seasoned management and board. Not just a board of directors but also advisor boards. Maybe clinical advisor boards as well as business advisor boards. But get on your board of directors somebody who is, if you don’t have the  you know, the expertise yourself or in the team, well, get a really strong management team first.


Nick: Yep


Sergio: And the only way to get that first is to actually have individuals that are key in their processes, co-founders. So a lot of entrepreneurs, they feel like well they had a great idea and because they had a great idea they are going to be making a lot of money. But that does not happen. The reality is that they might be very smart scientists, and I thought at some point I was one of them. And as I was mentioning in the beginning, it’s really really difficult to convert a really great scientific idea into a business. Because there are a lot of other pieces of the puzzle. So the product or the idea itself, maybe it’s worth only 5%. So you need to have really strong co-founders, you need to have the collective skills in the management to be able to advance the company. But again, you need to surround yourself with a very strong board, because just one simple mistake, one bad decision can actually kill the company. If you’re not very clear on the target market, the course of action, whether you’re going to develop a drug according to certain criteria or ideas, that might be too late, by the time you realize it was a mistake, it might be too late. But I would say, in terms of advice, I would say typically if you want to lower risk then you need to avoid anything that is new. Whether we’re talking about a new chemical model, or maybe a new biological target, or a new mechanism of action. Anything that isn’t known means additional risk. So I like to focus on those companies that actually, that are still innovative, that are still very good, they are still very strong, but they’re not starting from scratch. So, and I’m talking about, I mentioned before, reformulated drugs. So reformulated means, for example, you have a drug that today is administered intravenously, so by IV. Well, that might not necessarily the best way of delivering the drug from a medical perspective. So you might work on an oral delivery, you might work on a powder form, maybe an antibiotic can be inhaled and go straight into the lungs where the infection is. So a different formulation of a drug that has already been on the market for many years, that the safety profile is very well defined and so forth. Another category of drugs that I like are repurpose drugs. For example, drugs that are the market in other countries or maybe for other indications, and now they can be, new trials can be run for different indications, and, of course, the safety profile of the drug is already well known, so there is a much lower risk.


Nick: Interesting


Sergio: And again, better delivery mechanism. So, for example, some drugs cannot be delivered orally, and orally just taking a pill is just the easiest way to deliver a drug, but that is not necessarily the best way of doing it. So if you can figure a better way to deliver a drug or maybe avoid some spikes in concentration of the drug, or maybe avoid a daily dose, give the drug once that over time has a very clear release profile so that you might take your drugs only once a week or once a month or even once a year for certain indication. So I would rather work with those kind of companies. And if you really want to do something new, focus maybe on niche markets. I was talking before about orphan drugs, again those drugs that are developed for maybe a rare diseases affecting only maybe 10,000 or 100,000 patients or so. So the cost of development actually is not that it is cheaper, it is probably about the same. And sometimes it might not even be as good as the market opportunity. However the FDA gives a lot of incentives, not only much faster processing but also there is market specificity. So in the US it would be 7 years, 10 years in Europe , of extra seed if you develop an orphan drug. And these timelines can be even extended if the drug has applications in pediatric patients. Again, if you want to moderate the risk, then avoid things that are either large or new. Don’t look for the next blockbuster but just kind of focus on something smaller, more manageable, and with a much more reasonable budget.


Nick: You’ve talked about some of the sub segments that you’re focussing on. But can you also talk about how life sciences is evolving and where do you see it going within the next decade, and also if there is significant opportunities that you see on the horizon within this life sciences sector?


Sergio: Yeah. So I was mentioning, for example, orphan drugs, that they are becoming like a hot topic. A lot of companies are going into that space, and the reason is because there are benefits from the regulatory perspectives as well as from a market perspective. What we are seeing, at least at this year, we have seen quite a few companies in the gene therapy space or the genetic medicine space. One really really strong company is called # RetroSense and actually was awarded the Louis Villalobos Award at the Angel Capital Association Summit here in San Diego only few weeks ago. As a company, gene therapy is becoming really hot. There are only few drugs that are in the market, and because again, there is a lot to be proven yet, but the potential is phenomenal. But RetroSense is developing an actual therapy to restore vision in blind patients affected by a disease called Retinitis Pigmentosa, which is basically a condition of the retina which over time results in the degradation of the retinal tissue and consequent loss of vision. Delivering a specific gene that is for the senses, RetroSense can actually restore vision in cells that are still intact.


Nick: Wow


Sergio: And so that’s phenomenal. And again, it will take time. But eventually gene therapy will become more predominant in terms of way of delivering certain type of therapy. Regenerative medicines, stem cell therapy, they are also very interesting. We’ve been working with a company here in San Diego called # CardioCreate. They are developing a combination therapy between gene therapy and stem cell therapy. Their goal is to actually regenerate heart tissue that has been damaged during heart attacks, so they can actually regenerate that tissue that is dead. So that’s phenomenal as well. And again, it’s just in the early stages, but eventually they will make it. It just will take capital, will take time, will take another 5 or 10 years before these therapies will start becoming more standard, will get even more visibility. But there are already a very large companies that will act in this space. I see a lot of activities in the next gene sequencing. Probably the first time a human genome was fully sequenced was less than 10 years ago. It took about 13 years to sequence one single human genome and the cost was $3B. Today, $3B and 13 years for one genome, today we can do exactly the same kind of work in about a day and for the cost of about $1000. There are a lot of companies starting up, the way technologies are evolving and the speed is just phenomenal. There are a lot of companies in the genome sequencing space that are developing either sequencing technologies themselves, or which is even more important and even sometimes even more time consuming is the data processing. And null —7:37 genomes. Because you produce so much data, null string processing is much more intense, much more time consuming than the analysis itself. And then you have a lot of applications, starting from personalized medicines to diagnostics, developing new therapeutic approaches and so forth. So genome sequencing has definitely been a hot space in the last few years and I will predict that it will just keep being more attractive as well. So the advice that I would give is that, again as I mentioned in the beginning, all these are really complex technologies, specially if you’re not in this space. Keep in mind that angel investors, they all, the population of angel investors is very heterogeneous. You have a small number of individuals who have expertise in life sciences, but you have a lot more people with expertise in high tech, in real estate, in finance. And those individuals are still interested in life sciences , they just don’t necessarily understand the space. But because these technologies are complex, the only way to minimize actually real risk is to understand that we can’t really minimize the actual risk but you need to understand really well. Be prepared to spend hundreds and hundreds of hours in diligence, and specially technical and IP due diligence, because in some of these spaces could be very crowded, some of them could be very unique and very strong, you could have a dominant position in those spaces, in those areas. But again, I’m responsible to do due diligence, I tend maybe to spend more time than most people. And again, it could be a hundred or two hundred, three hundred, four hundred hours before I make a decision for certain companies. And it’s not just by myself. So we go through that, it’s really the benefit of co-investing as part of a large NGO organization.


Nick: Sergio, can you talk about what you’re currently most focussed on over at Tech Coast Angels?


Sergio: Oh it’s been probably very intensive the last years with the diagnostic company here in San Diego. I’m on the board of # Pediatric Bioscience. It’s a diagnostic TCA portfolio company. They are developing an early diagnostic test for autism. As you know, autism is really really difficult to diagnose. Typically diagnosis happens based on behavior by age 4 or 5, and by that time it’s very difficult to have any real effect, and behavioral intervention is not, again, not very effective. This company is trying to develop a really early diagnostic test, and actually they are testing the mother, not necessarily even the son. They had the most treated that the largest sub type of autism is actually caused by some antibodies in the mother, they will cross the placenta during pregnancy and might cause defects in the brain development of the child. The company is basically based on science coming from UC Davis. We’ve been able to raise about $3M over the last 15 months or so. And they’re doing really well. They’re getting ready to commercialize the test, they’re ready for launch by the end of the year. So it’s been very intensive, it’s been very rewarding as well. We had built a really large syndicate for this effort, not only TCA had invested, # Pasadena Angels, # Golden Seeds, # Chemical Angel Network,


Nick: Oh wow


Sergio: # Mass Medical Angels. We are really pushing, many of us, and pushing in terms of making sure the company is solid, the company is strong, the company is well funded. It’s going well. But it takes a lot of time. And again, as I said before, it’s not just management, they can’t do it by themselves. They need all the help that they can get from their board advisors as well as shareholders. So we try to contribute and to support our company as much as we can. And hopefully things will go the way they plan to, but so far all the indications are positive. Crossing our fingers for launch by the end of the year.


Nick: In my very first professional job, I was a biomedical analyst studying autism. I’m curious, is this startup focused on the diagnostic side or the treatment side?


Sergio: So, at this point they are focusing on the diagnostics, and if this sub type of autism really ends up being the most predominant and is abundant or as common as they believe it is right now, eventually based on the mechanism of action, they will be able to develop therapeutic solutions. They have, of course, the IP from UC Davis, both for diagnostic applications as well their clinical applications. Because you can potentially block these antibodies, either block them from binding, from crossing the placenta and develop drugs around that.


Nick: Wow


Sergio: A lot of TCA, I can tell a lot of TCA members that have invested actually, they are even more interested in the therapeutic applications, not just the diagnostics. But having the combination would be really exceptional. If we could combine diagnostic tool with a therapeutic approach, that would be really the best.


Nick: I’m really excited to hear that you’ve invested in this company and you’ve partnered with so many other angel groups, and I, I really hope for the best for them and for their ability to help those that are suffering with autism. But, Sergio, if we could cover any topic in venture investing, what do you think should be addressed and who would you like to hear speak about it?


Sergio: I love angels, they tend to get excited about the companies they invest in and specially the first few investments, they don’t necessarily worry too much about exit, but then very soon, and maybe I was one of them at my early days. I think it will be nice to hear about how do you really properly position a company for an exit. And maybe you don’t want to put the sales sign right outside saying I’m trying to sell the company. Keep building your company, really try to build it and then but at the same time you want to be in position for an acquisition any time the opportunity comes along. And should you engage an investment banker. Maybe not. I heard all kinds of conflicting opinions about that. IPOs sometimes you hear this presentation and say well we can exit the acquisition and we’ll go IPO. But they are dangerous in going IPO because you see companies, they are excited, they can raise maybe 80 or 100 million dollars in IPO and then the stock goes down and down and down. And of course you know that as angel investors we are locked from selling our shares for a certain number of months


Nick: Yep


Sergio: It will be nice to actually define how you structure an exit, how you get ready for it, how you would actually build a company in preparation for an exit. And of course there are few individuals here in San Diego that are very strong and experienced. For example, # Tom Gardner, you know, he is probably very busy. But he has been the chairman of multiple pharma companies, of drug development companies, including one that was called # Elevation pharmaceuticals. They sold the company in 2012 for $130M. It was a phenomenal exit. I think he is probably the most successful life science entrepreneur in San Diego. He is co-founder of many speciality pharmaceutical companies, and had a very large number of exits. # Bill Gerhart was the CEO of Elevation Pharmaceuticals. So it would be nice to hear the story from either one of them, if possible. But of course, they are busy individuals, so it’s going to be hard to get a hold of them.


Nick: Well, excellent suggestion. Certainly if I can get one of them, then getting someone like # Basil Peters or # John Houston on the show to talk about exits would be. So, Sergio, what’s the best for listeners to connect with you?


Sergio: Oh well, I mean, I am on Linked In, that will probably be the easiest way. I’ll give my email if you can spell my last name. That’s going to be the hardest part. There are a lot of r’s, a lot of i’s. So I give it to you. It’s sergio, which is my first name and my last name, gurrieri. So  sergiogurrieri AT gmail DOT com . If you can’t spell it right or you know, for some reason you don’t find me or you get an error message, then you’ll find me on Linked In. But I would suggest write a note to me, mention this podcast, to make sure that I will pay attention to you and definitely reply.


Nick: I thought you were quizzing me on how to spell your name there Sergio.


Sergio: That’s the biggest challenge, to spell my last name with the right number of r’s and i’s and e’s. And definitely I would encourage everybody listening to have a look at our website techcoastangels.com . There are a lot of resources, a lot of templates, a lot of guidelines. And for both angels as well as for entrepreneurs. And for angels, we say don’t be in a rush writing your first cheque, just come in as a guest, we’ll be happy to walk you through our process, we’ll be happy to invite you to our screening dinner events. And even if you join as a member, just spend the first few months just watching and interacting with people who’ve been around for few years. Because there is a lot of learn and it takes about a year and a half or two to actually get comfortable, define very well your investment philosophy, hear the specific niche. And so it takes a while. So nobody can resist the temptations. Within a couple of months we’ll all write our first cheque because that’s how it works. But try to be, don’t rush if you cannot just not resist that temptation because you’re not going to be able to, but don’t try to somehow manage it.


Nick: Yeah, the tagline for the show is – Over prepare, choose carefully and invest confidently.


Sergio: Exactly. But it is very addictive. I could tell you that once you get started, it’s a nice feeling, again it’s all rounded, its very rewarding intellectually, professionally. You get to meet a lot of really phenomenal people. And it’s never boring because you go from one topic to the next, and of course you’re not focusing on company or areas that you’re most of the time personally interested in. So please get to do a lot of reading, to do a lot of education around topics of today. Most of the time you have a regular standard job, we simply don’t have time to catch up with.


Nick: Well, if you’re in southern California, you’re interested in due diligence process or if you just want to learn more about life sciences investing, I can’t think of a more knowledgeable and gracious person than Sergio here. So, thanks for joining us on the show today, Sergio, and look forward to reconnecting with you when I’m out in your area.


Sergio: Alright, thank you very much Nick, I really enjoyed it.