An Early Stage Investment Framework
money tree
An Investment Framework
by Michael Schmanske

Anyone who knows me, knows I have no choice but to be blunt. I spent the early part of my career in the trading pits yelling orders and competing against 200 of my closest enemies. Those were my calm days. Half-joking aside, I spent my Wall Street career working with complex financial markets and investment instruments. I joined AngelMD because I saw the company was poised to solve some of the hardest problems in the early stage healthcare innovation space and substantially raise the bar in the investment portion of the equation.

I may be biased but I believe most early stage investors are kidding themselves if they think they are going to make money the way they’ve been investing. There are gaps in the process that originate from the very nature of private equity investing. I am including both angel investors and most venture capitalists in this comment. I am happy to welcome any venture capitalist to come on our podcast show and publicly discuss how they systematically source, evaluate and ultimately guide their portfolio in order to generate outsized market returns. There are exceptions, but for most this wont go well for them. My goal is not to prove that anyone is approaching this with half-measures. Rather, I want to help angel and VC investors up their game.

Here is how we do this. Picture a Funnel:

Source companies from the widest possible spectrum of opportunities. To feed the pipeline we need access to deals. Individual Angel investors see a company with an innovative solution to a known problem. But are they the BEST solution? You cannot possibly have an opinion without access to the other possible solutions under development. Institutional investors have access, they may see dozens of deals a week. They have a different problem…

Select the best solutions and opportunities based on detailed knowledge of the problem, solution, team, adoption hurdles, payor/payee relationships, Healthcare distribution and management systems… The list goes on. It is expensive to support a network of experts with the needed background and knowledge in house. Angels generally can’t afford it, Institutions can but are only interested in larger investments to justify their cost structure. Which also explains why Institutional investors are poor at working with small companies post investment. Which leads to…

Support companies after the check is deposited. Investors have networks, and all investors would like to help their portfolio companies succeed. Similar to the selection process, small investors have fewer resources, large investors need to employ their resources efficiently which tends to track with the size of the investment and opportunity. This leaves small early stage companies once again in the lurch. I discuss this further in my post “The funds and funding gap”.

One popular solution to the needs of smaller investors has become syndicates of individuals pooling their resources to invest in Special Purpose Vehicles (SPV’s). Hopefully the investor base is spread over more experts with greater access and greater network effects for both deal discrimination and engagement. But as they say “Hope is not a Strategy”. It would be better if we had a better solution. At AngelMD we have created the better product which I will discuss in a series of several more posts. You can also reference the Managed Syndicates information under the Investor section of the Home Page.

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