What are the challenges that have held the private sector back from angel investment, particularly outside of Silicon Valley?
MAY: Venture capital has had a significant retrenchment in the last several years, which was caused by a number of different reasons. Today, there is about a third of the venture capital that there was five years ago. At the same time, there is the same, if not a larger, opportunity in early-stage investing. Never in the history of the world have there been so many entrepreneurs and innovators; it is impossible to open a page now and not find some university or pre-university schools offering some courses in entrepreneurship and innovation. There is a tremendous classic capitalistic opportunity, but at the same time, the traditional way to access that opportunity through private equity has essentially collapsed. So, there is a classic dislocation of the marketplace, and what worked in the 1990s and up until 2005 is, essentially, gone. Syndicate risks, and the ability of venture capitalists to form syndicates and pursue them all the way to the exit of a company are severely strained under this system. So, we know the old system does not work, and we know that in a few years, there will be a new system, but we are in that period right now where we don’t know what the answer is or what that system is. It is a classic time for entrepreneurs to experiment with new business models and new financing models, and so now is a time for high-net worth individuals, angel investors, and early-stage investors to experiment with new collaborations, new business models, and new financial models. It is a perfect dislocation of the marketplace, and this is probably the best time to be an angel investor in our history simply because of those dislocations and the absence of a competitor. However, there is a global financial crisis unfolding at the same time as this financial opportunity, so there is a real yin-yang period happening; it is impossible to pick up the paper and not worry about the European financial crisis and how fast China is going to recover. The opportunity is there, and it is unparalleled, but the risks are also pretty unparalleled as well. So how much of one’s net worth to tie up in high-risk, early-stage investing is a serious question for most people, and this will be sorted out in a few years. But the answer is pretty unknown at the moment. The other challenge, particularly for Southeast Asian countries and cultures, is the idea of technology investment, and particularly risk, is a difficult concept. While speaking with investors in Hong Kong and imagining a conversation with a property magnate, explaining early-stage investing, the magnate would probably be shocked that one could lose all of his or her money; that is not a risk Southeast Asian investors are used to. I think in minerals, hard assets in the ground, and property, one does not actually lose one’s money, and we do, but we make better money and larger returns because capitalism works, and high risk/high return works. I think the traditional risk for these Southeast Asian cultures is how to engage this generation of entrepreneurs to accept technology risk as a viable financial strategy versus the more traditional financial diversifications that they are used to.
Do you think that the Facebook IPO is going to cast a negative shadow on investing in innovative new start-ups?
MAY: The decline after the Facebook IPO has certainly gotten everybody’s attention, and it will cast a shadow; there is no question about that. I think it is an example of the exuberance of the financial system more than the individual performance of an individual or an IPO, and that is supply and demand doing what supply and demand does in an overhyped economy. I hope it shifts some of the attention away from the high-technology, networking style of investing to more classic, risk and return rewards. For example, medical devices and biotechnology diagnostics are huge problems in the world, and are straining capitalistic systems in all countries, including a seventh of the United States’ economy. I hope we start spending some of that money in other areas. Instead of creating social networks for animals, we can create cures for Alzheimer’s, and put more of the focus on these alternative investments. I think one thing Facebook did do was suck a lot of capital out of other sectors of investing, and I think as a result of the decline in price, there will be more of a diversification among those sectors now.
What geographic regions and/or sectors are angel investors focusing on right now?
MAY: In terms of geographic regions and sectors, angel investing is remarkable in that it spans probably a much wider array than even venture capital. I was very impressed at a competition in Southern California, where I ran into a number of very successful investors who did not invest in technology at all; they invested in financial services, mortgage servicing, and a number of backhand software projects for large companies – there was very little technology. This is a technology-driven world, and I think innovation is driven by technology. I think the differentiation between countries will be more focused on innovators and innovation, and I think that continuing to invest in depleting resources and minerals is a viable strategy, but not in the long-term. I think that the sectors that are really coming up now are uses; it’s sort of the convergence idea that we talk about every ten years, how convergence is going to change everyone’s lives. I really do think that we are at that inflection point, where convergence really will change everyone’s lives. The ability to do things on mobile platforms, with much less infrastructure, to gain faster information distributed more broadly and have it acted on; for instance, think about that applied in healthcare. There are so many things now that can be done without visits to a doctor’s office, without someone taking time from work to make an appointment, queue up, go to the appointment, and have the diagnostic taken just to say that it was negative, and then going back to work. There are going to be big dislocations caused by that. I would say healthcare IT, which is a very broad field, but basically mobile platforms in the medical device setting is going to have a gigantic impact.
What are the specific challenges that come with being an angel investor in the life sciences as opposed to technology?
MAY: Angel investing in life sciences is particularly more difficult than investment in technology. For example, one trend in the last ten years has been that the cost, the expense, and the time to exit an investment in technology has declined, and, in many respects, declined quite substantially. In that same period of time, the cost, expense, length of time, and risk of investing in med-tech and biotech has increased significantly. So from a capital standpoint, you’re at risk for larger amounts of capital for longer periods of time when there is a more attractive investment for investors to invest in with shorter periods of time and less risk. That has really been the biggest issue for people to get around; it’s still a tremendously good place to invest with great returns. Over time, the returns have been 3x-averaged by the better angel groups and the better venture investors. While that doesn’t compare with a Facebook offering in terms of returns, it’s a pretty handy return that would put you in the top quartile of venture capital returns, and we have been able to return those in early-stage investing. The risk is the capital risk. Generally, these things take more money to get them to an exit point or a transaction point than angels have to put in. We are trying to solve that now with new models of syndication, we are beginning to work with individual angels, angel groups, super angels, there are family offices now beginning to play a role, there are discussions in private equity and LP sessions over whether or not angel investing is an asset class, so entirely new combinations of syndicates are coming forward. At the moment, being able to put in enough capital to carry a life science company to an inflection point is easily the biggest risk that we face as angels.
Venture capital has had a significant retrenchment in the last several years, which was caused by a number of different reasons. Today, there is about a third of the venture capital that there was five years ago. At the same time, there is the same, if not a larger, opportunity in early-stage investing.
Why is the Asian Business Angels Forum (ABAF) important and how did it begin?
MAY: ABAF started several years ago in Southeast Asia and saw a very important niche in opportunity to emulate the practices in Europe and the United States, especially in regard to early-stage investment. Until early 2000, people seemed more focused on venture capital and private equity – venture investing was pretty underground. In the decade, “angels” were coming upstream in terms of professional organizations, best practices, and early-stage investing, like VCs in 1960s and 1970s United States. The advantage was there was now only a decade or half a decade of difference among everyone in the world in an important sector in early-stage investing, and some excellent research had been done in best practices and organizational operations in the United States and the United Kingdom. Professor Wong and the others formed ABAF and saw the opportunity and saw the ability to bring those practices to Southeast Asia and add the particular flavor of the countries here and adapt to the strengths of the region in a way that they could take advantage of the entrepreneurialism and innovation that was being emanated here by universities and by young people coming out of school.