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HIStalk Interviews Andrew Farquharson, Managing Director, VentureHealth

Posted Jul 17, 2013


A lot of life sciences venture funds have been failing. The supply of venture capital dollars for life sciences innovation is, shall we say, challenged and at the same time there’s a strong demand from accredited investors who are not traditional angels and don’t know how to source or invest in these deals.

Tell me about yourself and VentureHealth. 

I’m a venture capital investor and entrepreneur focused on healthcare investing and company building. I began my career in life science when I graduated with a BA from UC Berkeley, and went right into the research side of Genentech. After Genentech, I went to Harvard Business School and founded my first company there. I returned invested capital back to investors. I didn’t make a killing, but learned a lot.

After that, a friend and I took over a company called Operon that makes synthetic DNA and built it up into the world’s number one provider of DNA. At Operon, I ended up running the entire demand side of the business: sales, marketing, customer support. My friend Nathan Hamilton ran operations, R&D, and reinvented the way they make DNA. We ended up selling that company for a $150 million in June 2000 without taking any venture money.

After that, I became an angel. As an angel, I realized that one of the challenges is getting access to the very best deals; getting access to venture-quality deals. I joined a small venture fund and then I met my current partner Mir Imran. Mir is one of these rock star innovators in the biomedical space. He’s founded about 24 companies and has returned billions to investors. He invented the implantable defibrillator, among many other things, which has generated over $200 billion in revenues. Not bad. Mir is one of these guys where 80 percent of the things that he does return money for investors. He’s very good at what he does.

VentureHealth was not an idea that came out of nowhere. When we were raising our second venture firm, a number of folks wanted to co-invest with us because of our previous successes. Mir had lots of success. There are many healthcare professionals who would like to get involved in healthcare startups, but don’t know how to do it. Those are the folks who initially began reaching out to us.

Our initial response was really kind of uncertain. Investing is very risky, and we didn’t want to encourage people to partake in investments they didn’t understand. But as we kept chatting with high net worth individuals, we realized that there’s a large pool of financially sophisticated folks who want access to venture capital deal quality deals in healthcare, but who don’t know how to do it and don’t have a time to figure it out. We help them get access to venture quality deals in ways that were consistent with SEC guidelines.

Then the JOBS act came along. The future is going to become very interesting. The future is going to allow groups like ours to expand our investor base and publicly disclose when we’re raising capital. We can’t do that yet. The SEC is being thoughtful and measured in how it goes about regulating the JOBS Act. 

For right now, everything we’re doing is within the confines of the current law and the current regulations, which is why we’re doing what we’re doing with accredited investors we personally vet who really understand the risk. But if and when the SEC begins to actually implement the JOBS Act, we’re watching that carefully and we plan to respond appropriately once the doors are wider open.

Could you provide a quick summary of the JOBS Act and what it means for angels, accredited investors, and the general public?

The JOBS act will allow potentially hundreds or thousands of investors to invest, a true crowd of individuals who have much less money to write much smaller checks and get involved in a venture capital deal or any kind of startup deal.

But we’re not there yet. The SEC is still ironing out the details. It’s something that the SEC wants to move slowly towards that because they really want to make sure folks who invest know about what companies are doing and they understand the risks of investing capital. The SEC particularly wants to protect individuals against fraud, which we agree with.

For VentureHealth, we see the JOBS Act having an immediate impact on high net worth individuals as soon as  the next 12 or 18 months. We’re going to be thoughtful about how we begin to open up to a true crowd.

Right now, VentureHealth is only focused on accredited investors?

Exactly. Healthcare equity crowd-funding is very new. There are companies mushrooming up trying to make equity crowd-funding platforms real. One of the most successful that’s focused on the consumer space is called CircleUp. If you’re an entrepreneur raising money yourself, you should probably have a look at CircleUp’s model just to understand what they’re doing. They’re venture backed. They’re doing deals every month. Like us, they’re focused on accredited investors for now, but are trying to open up to the general public when it becomes legal.

You’re not taking any cash from the startup.

That’s right. The VentureHealth portal takes no cash from startups. That approach may be attractive for entrepreneurs, but does not necessarily make sense from an investor’s perspective.

This can be counterintuitive until you think through the incentives. We’re compensated along with the investors like any venture firm. In the case of VentureHealth, the individual investors make the decisions. The money flows from them. They’re the ones who own the equity through a fund structure. If the company returns cash to investors, we participate as members of the general partner. 

In contrast, if you’re a broker-dealer, you make money every time cash flows into a startup, so your incentive is to drive as many transactions as you can regardless of quality. Whereas for us, the incentive is to only take deals if we’re going to ultimately make money for investors. We’re aligning with the investors to try to find companies that are going to have successful outcomes as opposed to just driving a whole bunch of deals.

What separates VentureHealth from AngelList?

AngelList is a successful, creative approach to crowd-funding at high volume. AngelList has allowed lots of startups to put their wares up on the website and allowed lots of individual investors to look at those deals. It enables connection between the investors and startups. AngelList does not have a model, as far as I know, where it makes money by charging the startups or the investors.

I think they’re providing a really valuable service to everyone. As an angel myself, I appreciate what they do. I think they’re a great company and they’re well off. But what we do is very different. We curate our deals and only select investment opportunities that meet our criteria. As our exits this year reflect, our approach seems relatively robust. We curate our deals and will post far fewer than AngelList.

Conversely, AngelList does not try to protect investors from bad deals, just like Kickstarter doesn’t either. It’s really up to the investor. Investor beware, which is the case with many robust marketplaces. In the case of healthcare investing, however, investors often don’t have the clinical, regulatory, and business perspectives to bring an opportunity into the proper focus. 

I think that there’s a lot of value in their model, but the model does require a lot of understanding on the part of the investors. That does not always translate well into healthcare.

Our model is simple. We do our best to protect our investors, unlike AngelList and Kickstarter and most of the other equity crowd-funding platforms. Another way of saying this is we try to find the most attractive opportunities run by the best entrepreneurs. Our assumption is that, over time, this will prove successful for everyone.

What stops you from taking all of the best deals for yourself?

We manage about $72 million right now, which is really small money in the big picture of things. Our fund is not going to be able to fund all healthcare innovation. Far from it. We sit back a little bit and think about what’s happening in healthcare.

A lot of life sciences venture funds have been failing. The supply of venture capital dollars for life sciences innovation is, shall we say, challenged and at the same time there’s a strong demand from accredited investors who are not traditional angels and don’t know how to source or invest in these deals.

You’ve mentioned life sciences explicitly a few times. Is VentureHealth only focused on life sciences such as pharmaceutical and biotech or are you also looking at software, hardware, services, wellness, PRM, and medical devices? 

For us it all begins with clinical outcomes. If we can see a way to really dramatically impact clinical outcomes, then we begin to get excited. That said, our history has been medical devices, and we have recently been moving assertively into biopharmaceuticals.

How big is the team curating deals?

The answer is a little complicated. There are three of us who are co-founders of the portal — Mir Imran, Talat, and me. We all had a lot of experience making and curating deals. But there are another 30-plus people inside InCube Labs — who are great friends of ours  — who actively work in forming companies and doing research. In a sense, we get a free ride from a much larger group of people, primarily PhDs. They’re from pharmacology, engineering, protein science, material science, implantable sensors, Wi-Fi technology, and even guys in social media and web development.

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