Russ: Hi I’m Russ Capper and this is BusinessMakers USA Live, brought to you by Insperity, inspiring business performance. Coming to you once again from Seattle, Washington where we’re in front of an audience on innovators and business leaders. And I’m very pleased to have as my guest today the Co-founder and CEO of angelMD Tobin Arthur. Welcome to the show.
Tobin: Thanks Russ, great to be here.
Russ: Tell us about angelMD.
Tobin: angelMD is a software company and it was designed as a marketplace to connect the leading medical startups in the world with investors from all over the world. A vast majority of those investors are physicians that help us to evaluate companies and advise companies after the investment to create better outcomes.
Russ: With physicians being investors it sounds almost like a symbiotic ecosystem. Is that right?
Tobin: They’re a quarter of the whole business. Our premise is we don’t believe in predicting winners, we believe in making winners, and we do that by having the subject matter experts involved that can help shape these companies. So we think we make better decisions up front in terms of how we analyze companies with their participation and we also extend that to obviously scientists and other subject matter experts, but then again we want to build winners. And so they’re involved in these companies deeply after the fact to help shape the companies.
Russ: Okay, but you don’t restrict investment just coming from medical doctors right?
Tobin: No, in fact more and more of the investors are not physicians. They’re coming from all walks; technology investors, real estate investors. We’ve got an office in Houston and we have more and more folks from the energy industry because they like the macro trend of healthcare from an investment perspective. But most people don’t understand; it’s a very complex industry, it’s highly regulated, so they like the idea of being involved where there are physicians involved to help shape this, but certainly a lot of the capital is coming from non-physicians and now even funds and sovereign funds and others.
Russ: You’re kind of moving in to more of competing against or replacing venture capital firms, is that right?
Tobin: There’s some of that, sure. What we’re doing is really disrupting how startups get funded. Our goal full stop was to take early stage investing and turn it into a legitimate asset class really influenced by technology. We’re a Seattle-based company, we’re a software company under the hood. We’re applying what we’re doing specifically to healthcare because we think that’s how you create better outcomes, by having the experts involved. There’s certainly an element of disruption but on the other side though we look at we partner with venture firms and so we’ll syndicate with venture firms and angel groups and others, and so while there’s some competition it’s also some cooperation.
Russ: It used to seem more categorized to me. The venture funds had their hold on it and there was some angel, but you’re kind of all over the map.
Tobin: Well of you look at the industry the challenge with the venture industry is that industry was in its heyday in the 70s, 80s, to some extent the 90s when startups were more expensive to start and they needed lots of capital. And so venture capitalists were able to effectively go out and aggregate large amounts of money from pension funds and other large investors and deploy that capital. But as startups became more and more efficient to start and build they didn’t need the size of capital that most venture firms are deploying.
And so the numbers are very clear, venture firms over the last decade actually lose money; they’ve been known as the kind of “smart money.” So if I’m an LP and I’m getting a -4% on my money I’m going to probably think twice and that’s really happening across the board. Now there’s exceptions to every rule, some of them are quite successful, but the math is that 5% of venture firms return all of the profits.
Russ: Wow. So looking at your platform today how many investors do you have signed up that are paying attention regularly and how many startup companies are they looking at?
Tobin: There’s about 5500 members of the platform and again, the breakdown is roughly 2/3 of those are physicians, the fastest growing segment of that are non-physicians. And on the other side of the equation it’s the largest network of medical startups in the world. There’s about 850 companies that are live with a profile on our platform. About 2000 have applied and we whittled through an initial screening. And at this point it’s about 1 to 2 companies every day apply to the platform and begin to tell their story. That’s where it all starts, to tell their story, and during that journey we then begin to get them exposure to investors and determine if there’s enough interest from the network to participate.
Russ: I suspect that there’s a lot of things that you do that you couldn’t have done before the Jobs Act, do I have that right?
Tobin: You do. The Jobs Act, which was passed in 2012 but took several years – there was various different elements, the FCC had to weigh in – biggest shift in securities loss since 1934. So this was a generational shift for all of us that are in early stage investing in building companies and the ability to raise money. Some of the things we do could have been done prior to this, but the ability to aggregate large amounts of people online is really a new thing, and a piece of that’s the securities rules, but prior to the Jobs Act we saw the power of the crowd. We saw this in the non-equity world with sites like Kickstarter and IndieGoGo and so forth; it showed that you can take large amounts of people and you can create a lot of force in the market. And so we just are simply applying that to the equity side of the world and yes, the securities rules have now enabled that for us.
Russ: Real interesting. So there have periods in my life – I’m a startup guy too so I was growing up and down, there were periods where I would always buy the cheapest wine that the restaurant had to offer – so what’s the smallest investment one could make at angelMD?
Tobin: Most of the investments, most of the companies we have a $5,000.00 investment minimum, there’s a few where it’s $10,000.00 or $25,000.00. And really the only thing dictating that or that’s germane there is that there is a cap on the number of investors in a given deal of 99. There is a legal limit around that. So you do the math around that; if we’re trying to raise $10 million we’re not going to be able to do $5,000.00 investments. But for the most part most companies are not looking to raise $10 million on our platform, they’re looking to raise a half million, a million, maybe $2 million, and so the math is low buy-ins. And we love that, we want more people participating.
Also with the lens of the investor oftentimes the investors – and I’ll use the physician as an example – might have $100,000.00 in a 401K that they’d like to invest in some startups and invariably people will invest. In this particular scenario they might make two $50,000.00 investments or four $25,000.00 investments, and the math on that is that they’re almost assuredly going to lose their money. And so what happens then is the spouse will say stop investing in startups, you’re flushing our money down the toilet.
Russ: I’ve heard that before.
Tobin: And you hear the startups are risky and all kinds of things and all those things are true, but that risk can be managed and one of the ways to manage that is to have a portfolio. The math is also very clear on the other side; when people make between 8 and 12 investments somewhere in there is the breaking point they start to get a very positive IRR in early stage investment. So they’ve got to have the staying power to do that, so the math is if you’ve got $100,000.00 of invest well money you’re much better off making ten $10,000.00 investments as an example.
Russ: So do you have to be though – what’s it called – an accredited investor to be on your site?
Tobin: On our platform we do. At present you have to be an accredited investor, which the basic definition is you have to make $200,000 a year or more for 3 years in a row or you have to have a liquid net worth of over $1 million, not including your primary residence. The Jobs Act did facilitate non-accredited investors can participate in early stage investing; there’s a lot of rules around it. There’s a lot of things that have to be managed and we’re not ready to go there yet, but we would like to open that up at some point because you’ve got a lot of people.
A good example in our world is there’s a lot of scientists that may be the leading scientist in the world in a particular category and they don’t meet that definition of accredited investor and yet they’re the biggest expert in the world in a particular area so it’s absurd they can’t participate. So we want to facilitate that. And there’s also the misnomer that the proverbial plumber, as an example, doesn’t know what they’re doing and in fact sometimes they’re the most savvy business people there are. So we want to be able to facilitate for anybody that wants to participate at whatever level that makes sense.
Russ: There must be people asking you all the time for recommendations. You have a window…
Tobin: I don’t even tell my mom. But the fun part about our business is we’re seeing smart entrepreneurs everyday and we always say the story’s not us; the story are the entrepreneurs that are out doing very interesting things. And I mentioned earlier that a company – roughly one or two everyday – are applying to the site. And they’re starting to tell their stories and sometimes we sit back – we’ve got members of our team here Scott, our COO and Stephanie Carl in our marketing team – and we go holy crap, these people are just so smart the stuff that people are thinking about.
So it’s exciting, it’s fun, but a lot of rigor has to go into that. The other challenge around startups is there’s a lot of shiny things, things that are cool but they’re not necessarily going to be good businesses. And so we really are rigorous about looking at these companies because we’re in many ways representing our network to make sure that they’re getting analysis that you just can’t replicate. Even a venture firm that does this professionally can’t replicate the analysis that we do on these companies.
Russ: Funding plays such a key role in the success of these companies, it probably does more today than it ever did, but in my era too it just took sheer determination all the time. But I know I heard you talking one time about Dr. John Fogarty – not the guy with Creedence Clearwater, but the guy at Stanford – who is a very successful cardiologist as well as an inventor and an investor, share that story with our audience.
Tobin: Dr. Fogarty was an investor in a company I was involved in and has been very, very successful financially. And so I picked his brain a lot over a couple of years’ time and he really broke down his success to a couple of basic principles. It’s funny how it’s usually nothing really – it’s not rocket science, it’s some basics. And the first thing he said was when I invest in what I know my batting average goes up. And as a physician he said I get asked to invest in real estate and restaurants and all kinds of things. He said there’s nothing wrong with any of those things, but I don’t bring anything to the table other than a check. I can only eat so many dinners at the restaurant, I’m not going to influence the success of the restaurant.
But when it’s a medical company I can make introductions, I can give product feedback. And he says and across a portfolio still a majority of these companies are going to fail, that’s the mathematics behind it. However, more are going to succeed because of the involvement of people – in his case like him – than otherwise would have, and as a result of that he’s really crushed it. So that was critical, it really got me thinking about the fact that if we could build this network of subject matter experts we could have that kind of influence and create more successful outcomes as a result.
Russ: There’s so many things going on right now, artificial intelligence, the genome, all of those things, I’ve heard some of these disruptor specialists say the practice of medicine is just going to be completely different. We might not even have general practitioners; we have iPhones, we can do all these tests. How do you see the future?
Tobin: There’s a lot of very exciting things in the medical space, there’s also a lot of nonsense and this is true everywhere. For example, I swear every company today that we see is somehow claiming that they’re an AI company because it’s so trendy. It’s sort of like 2 years ago very company claimed they were a big data company and if you ask them what the hell that mean they have no idea, but it sounds really cool. So there’s a lot of that kind of nonsense around AI and robotics and genetics, certainly there’s some very, very interesting and compelling things and part of our job is to separate the wheat from the chaff in that process.
And it’s not necessarily – one of the things we talk about, we’re not looking at science experiments. That’s for granting organizations, the government, universities. When people are putting their money to work in our network the average person in our network is a working professional and they’ve saved up enough money to put $25,000 into some companies, so we take that extremely seriously. They’re not interested in investing in a science experiment, this is money that they’re trying to build a nest egg for their kid’s college education, etcetera, etcetera. So we look into these things, we hear the term moonshots. Once again moonshots are great, there’s a lot of very tough problems out there; that’s for somebody else to solve. We love base hits and doubles. We hate a thesis where we’re trying to hit a homerun in the bottom of the 9th to win the game. I don’t know why I brought up that metaphor but you get the point. So there’s some very, very interesting things; genetics and personalized medicine, it’s incredible the stuff that’s right around the corner.
I had some knee issues recently and one of the fun side benefits of what we do is we work with some of the leading physicians in the world, and we don’t like to take advantage of that, but this one particular time I was talking with this famous orthopedic surgeon, this was late on a Sunday night and I said I’ve got this little pain and I don’t like to bring it up. And he says all right, here’s what you need to do, you need to fly into such and such city, we’re going to do this whole workup.
And when I went down there he says I’m going to give you the real story, they screwed you over where you were there in Seattle, those bozos in Seattle. And he said here’s the thing, where artificial knees are going in the next 5 years your goal is to not have to have knee surgery in the next 5 years, because in 5 years you’ll be a bionic man so just hold out. But that’s really where a lot of these technologies are going. The stuff that’s coming around the corner in the next 3, 4, 5 years, whether it’s genetics, biologics and even devices is astounding.
Russ: That makes me feel good about holding off on my knee so I’m going to try to make it 5 more years.
Tobin: Hold off baby.
Russ: Did I hear you right a while ago, that you said you had 850 companies but you had like 2,000 try to get on? So are you not allowing certain companies to get on?
Tobin: The basic criteria is very simple, it has to be a technology company. We get, for example, real estate companies – medical real estate is a great space, just not where we focus. We get services business – pure services businesses once again can be very good businesses. But our expertise is technology in simply put, three categories, health IT or software, or devices, or biotech or drugs, kind of in that order. And we look at where is the expertise in our network and we also look at our buyers.
There’s four groups in our network; you’ve got the startups, the physicians and scientists, the investors, but the fourth group is critical and that’s industry. Who are the buyers of these companies? And we spend a lot of time understanding that. Now the interesting in the healthcare space is that it is a very clear ecosystem. If you’re successful – let’s just use devise as an example – you’re going to get bought by a Medtronic or a Smith & Nephew or a Zimmer and these companies are sitting on tens and tens and tens of billions of dollars. They don’t do internal R&D anymore; they grow their technology portfolios through acquisitions. That’s great for entrepreneurs that understand that and it’s great for investors that understand that.
So we increasingly work with those organizations because just like investing is very inefficient, very analog, it’s also very inefficient how they source companies. They have people trapesing all over the world, these conferences and kissing babies and shaking hands, and instead we’re giving them access to say here, you tell us what your thesis is. And they’re very forthright about it; they’ll say here’s the six categories where we’re looking to make investments or to acquire companies this year and we’re looking for these criteria. And we can give them a dashboard that shows them those companies and track them until they’re at the point wher eit’s interesting for them to acquire.
Russ: Really cool. So before I let you go, best case scenario what would angelMD look like 5 years from now?
Tobin: 5 years from now it’s hard to say, but I can tell you over the next couple of years there’s some very specific goals for us. We have three offices, Seattle is where we started, we’re in Houston at the Texas Medical Center, and we’re in Denver where a new campus is being built that’s going to be the center of digital health in the United States. It’s an amazing campus that opens May 1st. So we’re in those three markets; we’re primarily in Denver because Denver is actually a huge recipient right now of the challenging costs in Seattle and San Francisco. So development – there’s a U-Haul that are just lining up down I90 to Denver and we’re benefiting from that.
We’re going to be opening up some small offices in New York, Boston and Los Angeles, primarily to serve the investor markets in those cities. Next year we’re going to start moving internationally. So we’ve got investors in some key parts of the world and so we’ll be international at this point next year, and we’ll just keep growing from there. Our goal is to really dominate and create a much more efficient marketplace for early stage investing. We’d like to do – just mathematically our goal is to do $100 million across the platform next year and then we would like to do 300 to 400 the year beyond that. At that point it sounds like a lot of capital and it is, but it’s still a fraction of the industry. There’s about $22 billion a year just in the U.S. alone invested in early stage companies. So we’d like to just grow organically.
Russ: Tobin I really appreciate you sharing your story with us today.
Tobin: Thanks Russ.
Russ: Let’s hear it for Tobin Arthur. And that wraps up our discussion with Tobin Arthur, the Founder and CEO of angelMD. And this is BusinessMakers USA Live.
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