Editor’s Note: This is an unabridged version of the story on the SeedStep Angels that appeared in the July 30 editions of The Oklahoman. The story was cut for length in the newspaper edition. Click here to read that version.
By Jim Stafford
As a serial entrepreneur with three previous life science companies to his credit, Craig Shimasaki, Ph.D., raised millions of dollars of investment capital for his past ventures. He’s successfully pitched business concepts to individual investors, venture capital groups and fund managers.
In May of 2012, Shimasaki found himself standing before a group of investors who comprise the SeedStep Angels investment group. It was his first time to pitch a concept to an organized angel investment group comprised entirely of fellow Oklahomans.
Shimasaki had 15 minutes to make the case that his latest venture, Oklahoma City’s Moleculera Labs, has an answer for the devastating challenges that families and health care providers have in diagnosing a neurological condition within the autism spectrum called PANDAS, which afflicts thousands of children across the U.S. each year.
When the presentation was over, four of the SeedStep Angels members were sold on its potential. They invested a collective $155,000 in the company as part of a $600,000 overall financing round.
“I was excited to see an Oklahoma group come together and be a part of what we are doing,” Shimasaki said. “It’s always a pleasure to present business-based opportunities to Oklahoma investors, because the goal for us is to grow and build organically in Oklahoma.”
Angel investment was crucial to Moleculera Labs. Capital was needed to develop a certified clinical laboratory housed at the University of Oklahoma Health Sciences Center as a site to begin implementing a diagnostic test for PANDAS. A series of tests for the condition were developed by company co-founder Madeleine Cunningham, Ph.D., director of the Immunology Training Program at OUHSC.
In addition to the SeedStep Angels investments, co-investment included out-of-state investors and $300,000 from the StartOK Accelerator Fund managed by i2E, Inc., the Oklahoma-based not-for-profit economic development corporation.
“That was a critical investment,” Shimasaki said. “Without that $600,000, we wouldn’t have been able to open the laboratory, begin clinical testing or develop the regulatory protocols. We wouldn’t be starting.”
Founded in 2009 and managed by i2E, the SeedStep Angels group is composed of successful Oklahomans who make investments in innovative, high growth companies such as Moleculera Labs. The group was created to address the “capital gap” that exists in Oklahoma for startups that are typically too risky to attract traditional bank funding, and too early stage to raise larger venture capital dollars.
Now the longest running angel investment group in Oklahoma, SeedStep Angels has grown to 27 members in three chapters — Oklahoma City, Tulsa and Ardmore. Its members are attracted to the organized investment group in part because the deals brought to them are pre-screened by i2E’s investment professionals.
i2E’s investment professionals provide deal flow, due diligence and best practices for the angel group. With funding from both state and federal agencies, i2E manages $40 million across five staged funds that typically invest alongside the SeedStep Angels.
“It is sophisticated deal flow, which you don’t typically get if you are doing angel investment on your own,” said Michael Kindrat-Pratt, who manages the SeedStep Angels for i2E. “By the time the angels are seeing the deals, most of the negotiated terms have been settled by i2E. It makes it a lot easier on the angels from a due diligence standpoint.”
In a typical year, the angel group receives about 100 applications from entrepreneurs. Out of those applications, about 12 companies actually get the opportunity to present in front of the group each year. Since the group was founded, 35 companies have made investor presentations.
SeedStep Angels members have invested in 17 companies totaling $2.69 million since the group was launched.
“We are an active angel network,” Kindrat-Pratt said. “We encourage our investors to make at least one investment each year. No doubt about it these are risky investments, but you have to put money out there and build a portfolio if you ever want a shot at making high returns.”
The impact of the SeedStep Angels investment is magnified for the new ventures because each deal is joined by i2E and other entities as co-investors similar to the investment round in Moleculera Labs.
All 17 companies that received SeedStep Angels investment are still in business, which means each has the opportunity to eventually provide investors with the “home run” of up to 20 times their investment through some type of “exit,” most likely an acquisition.
Historically, only about one in 10 investments in high growth startups are home run deals, although some portfolio companies may return one to two times the dollars invested. Often, angels lose their entire investment in a deal, so they need that one big hit to cover the losing investments
“You have to kiss a lot of frogs to hit a few princes,” said Rod Whitson, President of Oklahoma City’s Bank2 and a SeedStep Angels member. “But if you shake them out, it works pretty well. I think where SeedStep Angels and i2E add value is, one, you get to see pre-screened deal flow from i2E. And the other part is i2E’s due diligence – the paperwork, checking the state of the patent, all of that stuff that is really difficult for an angel investor to do.”
Whitson became an active angel investor during the early 2000s while living in San Diego, where he was President of the Townsend Agency, a marketing and public relations firm for the high tech and life sciences industry. When he returned to his native Oklahoma in 2008, he brought the means and interest to invest in startups with him and signed on as a founding member of the SeedStep Angels.
Whitson has invested in four ventures through the SeedStep Angels, with a fifth investment pending. Most are life science companies, including Selexys Pharmaceuticals, the Oklahoma City company that is developing a promising treatment for Sickle Cell disease.
Last year, Selexys received venture capital investment of $26 million, with an acquisition by Novartis Pharmaceuticals that could be valued up to $660 million pending successful results from a Phase 2 clinical trial.
That’s the home run he is seeking as an angel investor.
“I wouldn’t make an investment if I didn’t think they were going to be profitable and have a strong return,” Whitson said. “By investing almost exclusively in life sciences, the majority of the companies I fund can do a lot of good and have a significant impact if they make it — if they get their products out there.”
Fellow SeedStep Angels member Tra Pippin offers another benefit from angel investing. Pippin is a long-time business coach and owner of Infinite Solutions Group, LLC, in Oklahoma City, which specializes in buying and turning around troubled companies.
“There are a couple of things the angels bring,” Pippin said. “Not just the financial capital, but they also bring a lot of wisdom and a lot of experience that can help these young companies get started. To me that’s as valuable if not more so than the money that’s invested.”
Pippin has been a member of the group for about two years, attracted to it in part because the deals presented to the angels have been vetted by i2E, he said.
“Not all the deals I have seen in the past have been scrubbed like this,” Pippin said. “i2E does a great job of promoting qualified investments in very promising companies.”
Another member of the SeedStep Angels, Tom Evans of Enid, represents a group of investors from the Private Partners Opportunity Fund in Northwest Oklahoma. They were motivated to join the SeedStep Angels by the opportunity to see more potential deals across a wider area of the state.
“We’re up here in Northern Oklahoma, where we have primarily oil and gas, agriculture, and different kinds of small business,” Evans said. “But we rarely have the opportunity to see a medical deal or a software deal or technology.”
Membership in SeedStep Angels opened that door to Evans and his fellow investors from Northwest Oklahoma.
In the wake of the investment round that included the SeedStep Angels, Moleculera Labs has established a certified laboratory and received 300 orders within the first 60 days to conduct its PANDAS tests.
Now the company is raising a new round of $1.5 million to $2 million that will include angel investors and groups from out of state. Shimasaki points to the SeedStep Angels investment as the trigger for the avalanche of test orders and further investor interest.
“I think it’s very important that there is an organized group in Oklahoma that is consolidated under the umbrella of i2E,” he said. “The likelihood of any one of the angels alone being able to do the due diligence that i2E does and check all the boxes to see if the compliance is there probably would not happen without the SeedStep Angels.”
It’s a domino effect that ultimately benefits investors, entrepreneurs and all of Oklahoma.
For information on joining SeedStep Angels, contact Michael Kindrat-Pratt at (405) 813-2418 or mpratt@i2E.org.