Fueling the startup boom that's brought us household names like AirBnB, WhatsApp, and Netflix are a little something called angel investors. Today, I’m going to talk about what exactly angel investors do, why they are so important to medicine, and how you can get involved as a physician.
To do this, I’m recapping a conversation I had with Dr. Shadi Battah, an intensivist and expert in the field of healthcare angel investing. You can find a longer version of that convo on my podcast, White Coat Capital.
What is angel investing?
An angel investor—aka angel funder, private investor, or seed investor—is someone who provides financial backing to businesses, especially startups. In exchange for their financial support, angel investors generally get a stake in the company, including ownership equity, a share of revenue, or both.
They’re called “angel” investors because they’re willing to back up new businesses at a time when many investors wouldn’t even give them a second look.
According to Dr. Battah, the rise of angel investing for physicians is largely a function of changes in supply and demand in medicine. As the U.S. population continues to age, demand has gone up, despite a bottleneck of available providers. This change has fueled innovation and growth in the field, especially in the development of healthcare apps and other tech.
Hence, the rise of healthcare angel investors. These are very often physicians who are looking to float the development of cutting-edge med tech in order to drive improvement in patient care. And yes, they’re also looking for a super healthy return on investment.
What percentage do angel investors take?
Angel investors typically take between 20 and 50 percent equity in the companies in which they invest—a wide range that depends on a variety of factors. Dr. Battah took a look at the numbers, and figures that the internal rate of return in angel investing is somewhere between 22 and 28 percent, versus an IRR of just 7-8 percent in the stock market.
How do you become an investment angel?
Angel investing is largely restricted to accredited investors, who are more attractive to the businesses seeking funds. Accredited-investor status is limited to people with a total net worth of at least $1 million, or an annual income of at least $200,000, a threshold that most attending physicians can meet.
During our conversation, Dr. Battah shared some of the strategies that have worked for him personally as an angel investor:
- Focus on due diligence. It isn’t the most exciting work, but doing your research on a new company that’s going to get a good chunk of your money is really important. Taking the time to do this well will pay dividends.
- Surround yourself with experts. Your friends and colleagues in the medical field can help you suss out good opportunities for healthcare angel investing, a skill that takes time to develop. You might even want to form a group of angels to make informed investments based on clinical experience.
- Diversify your portfolio. Expect that many of the investments you make in angel investing will fail. It’s nothing personal; that’s just the nature of the business. But remember that you only need one or two promising angel investing opportunities to succeed to turn a potentially huge profit.
- Think long term. Angel investing isn't a skill that comes naturally. It's also not something that turns a quick profit. Even the most promising healthcare startups can take many years to make serious money. Expect not to get your money back (let alone the return) for 7-10 years, and invest accordingly.
Angel investing opportunities in healthcare abound. If you want to hear about some great opportunities, leave a comment!