Mr. Cashman, You're On
On a warm Monday afternoon in early February, most of the members of Robin Hood Ventures, a Philadelphia angel investing group, are gathered in a conference room in a building in an industrial park in Wayne, Pa. The building is owned by Safeguard Scientifics, a venture capital firm that has co-invested with Robin Hood on a number of deals.
Chris Cashman, CEO of Protez Pharmaceuticals, is in the lobby, waiting to be called in. Dressed in a black suit, blue shirt, and conservative red tie, he resembles a less gregarious George W. Bush. Protez is developing several drugs that fight bacteria that have become resistant to existing drugs. Cashman is putting together a B round of financing that he thinks will total $10 million to $15 million, and he's hoping to get some bridge financing from Robin Hood -- money that will tide him over until the B round is complete. "If all my timing comes together, I'm gonna be fine," he says later. "But in case there's a hiccup that costs me a month or two on the financing, then this is where the Robin Hood bridge could come in and help the company."
Robin Hood was started in 1999 by Rob Weber and George Marks. Weber's background is in venture capital and in management roles at numerous tech companies. Marks is a partner in an architectural firm and runs a real estate investment portfolio. The two started Robin Hood after checking out another angel group and determining that for their taste the group did too much talking and too little investing. One of the basic requirements of Robin Hood, then, is that each member have money ready to invest -- to join, an investor must pony up $125,000 and keep it at the ready.
So far, the group has put $8.3 million into 14 companies. There have been no successful exits yet, but the members are feeling good about the eight companies and one venture fund still in the portfolio. The companies are in software, hardware, Web services, and medical technology. Should members invest in Protez, it would represent their first foray into a purely pharmaceutical business.
Today 16 of the 27 members are here: 13 men and three women. Marks is the only one of the group wearing a suit and tie; the rest are casually dressed -- some with preppy looks, some in plaid flannel, one man with a ponytail. Most of them are successful entrepreneurs who have experience in both start-ups and large corporations. They have the relaxed demeanor of people who are used to proceeding deliberately and thoroughly with an investigation before they make a decision, and thanks to their previous successes, they have all the time they need to do that.
In his short history as a company founder, Cashman has become accustomed to the fact that a large part of his job is going around asking for money, so he is relaxed as he takes the floor -- he stands and works a PowerPoint show; the angels sit -- and begins to tell his story. Cashman founded Protez in 2003 and started the ball rolling by swapping a 25% share in the new company to Influx Pharmaceuticals, a firm spun out of research done at the University of Illinois at Chicago, for some promising technologies Influx had developed. Along with this acquisition came $3.3 million in government grants that Influx had been awarded. Protez also got an $800,000 investment from BTG, a London drug licensing firm with a small venture capital arm. In addition to that money, Protez got the benefit of BTG's relationships with other firms with promising antibiotic candidates.
Occasionally a Robin Hood member breaks into Cashman's presentation. "Why would Influx sell its assets?" someone asks.
"Because the technology needed to be advanced," Cashman replies. "They didn't have the capability to develop the drugs, so they thought the assets were better off in our hands. They were academics." In other words, Protez is a company committed to commercial development while Influx is engaged in pure research.
Cashman talks about the facility Protez has been building in Malvern, Pa. It includes a robot capable of screening 10,000 to 16,000 compounds every week. He describes his background: 22 years in marketing, sales, and management roles in Big Pharma, first with SmithKline Beecham, then with Pfizer. His last position at Pfizer was global director for new product development for animal health. Then he took the reins of a small start-up called Message Pharmaceuticals.
Another question: "What was the outcome of Message?"
"We broke it up into pieces and sold it," says Cashman. "It was a distress sale." This, Cashman's only prior experience with a start-up, will prove to be a sticking point for some members.
Protez is working on four different drug technologies. Cashman believes that each of them represents an annual market of $250 million to $500 million. He describes three of Protez's drugs today, placing the greatest emphasis on the drug whose development is most advanced: Compound Y, a broad-spectrum antibiotic out of Japan that Protez has access to thanks to its relationship with BTG. It holds promise as a drug that could be used by itself to treat infections that currently require multiple drugs to treat.
Cashman describes the B round he's working on: He has a term sheet for $10 million and says that two VC firms have committed to $6 million. The $10 million should be enough to get Compound Y through Phase I trials. He'd like to get a total of $15 million, which would take the drug all the way through Phase II. (All drugs, in order to be approved by the FDA, must go through three phases of human trials: Phase I establishes safety and dosage; Phase II measures efficacy in a limited population; Phase III measures efficacy in a broader population.) He expects to close on the $10 million by late March or early April.
Protez's monthly burn rate is $190,000, expected to increase to $380,000 in the second half of 2005. About a quarter of the current burn rate is covered by the grants that came with the Influx purchase. Protez also has received $800,000 in convertible debt -- it will convert to equity in Protez -- from two entities connected with the state of Pennsylvania, including Ben Franklin Technology Partners, a state economic development agency. Another $200,000 of convertible debt from these sources may be available in another month. In addition, Cashman says the firm can earn $165,000 in the near term from other drug firms, using its robot to screen potential drugs for them from the 500,000 small-molecule-compound library it has acquired. Right now Protez has a cash balance of $157,000. Cashman faces a short-term gap, and he'd like to get $500,000 from Robin Hood members.
Now it's time for the formal question session. Mike Levinson, who built a successful computer training and support software business and is now a full-time investor, is first. "Can you just give us a little more background with your last company: Were you a founder? When did you get involved? What were you hoping would happen? What did happen?"
"When I left Pfizer," Cashman replies, "one of the first meetings I had was with Brenda Gavin, who was [then] the president of SR One [a health care VC], and we talked about what opportunities were there. She said, 'Listen, I've got a company, the CEO walked out, it's in a tough situation, but if you really want to cut your teeth, step into that and see what you can do.' And I did." Eventually it was determined that Message's drug platform was so broad, covering everything from Alzheimer's to bacterial infections, that it had to be broken up and sold in pieces.
Weber asks, returning the discussion to Protez, "How entrepreneurial is management?"
"I think two of the four are very entrepreneurial. The two others are getting there. They're out of Big Pharma, so they're learning."
The inquiries range around for a while. Then a key question: What kind of exit will there be for investors?"
"The exits are multiple. I think once we get our lead through Phase II, get it into Phase III, it opens up a lot of avenues for M&A."
"Are there any operational guys on staff?" asks Levinson. The VP of technology has operational experience running labs at SmithKline. Cashman has been taking care of the financial stuff himself, with help from a consultant and a board member.
"How much experience do you have bringing drugs to market?" someone asks. The chief scientific officer did that with several antibiotics while at Glaxo, and another board member has a good background there as well.
After a few more questions, Cashman gets a round of applause and leaves the room. The whole thing has taken about 45 minutes. He thought the presentation had gone well enough, he says later, but he considered it unlikely that Robin Hood would invest. He had been told that the group had little appetite for life science deals. Nevertheless, he was encouraged by the quality of the questions, which indicated that the group at least understood what his company was trying to do.
Now it's time for the members to, as Rob Weber puts it, get out their bows and arrows. With Cashman headed to the airport to fly west for a couple of days of R&R skiing, the group tries to shoot holes in the deal.
Robin Hood has an unusual setup: It asks companies seeking funding to identify the group member whose expertise best matches the company's business. (Members' bios are on the Robin Hood website.) That member does the initial research on the company and, if he or she finds it promising, agrees to introduce the company to the group. Maria Maccecchini, a small, elegant woman originally from Switzerland, who started a biotech firm in the early '90s, is this deal's sponsor.
Weber asks Maccecchini to start. She would personally be willing to invest from $50,000 to $100,000, she says. "I think that they're not hyping their numbers. I really think that these drugs might have a quarter of a billion market apiece."
For the bridge financing he is seeking from Robin Hood, Maccecchini says, Cashman is offering a 20% discount. That's a discount on what participants in the next round, the B round, will pay. So if the B round players pay a dollar a share several months from now, Robin Hood members would pay 80 cents a share investing today. Maccecchini says she has told him that she thinks 20% is not very good. If he really does close on the B round in two months, then 20% is reasonable. But she's skeptical. What if it takes six months, a year? Then, he's said, it's negotiable.
Mike Levinson returns to the issue that concerns him most: Cashman's lack of experience in running a successful start-up.
A member of the group notes that Cashman is looking for half a million, "but he'll take what he can get." There's some laughter.
Someone points out that Cashman did run a sales force at SmithKline and that he ran a division of Pfizer. Maccecchini says that his management of Message "really wasn't that bad. I think he did a wonderful job of salvaging whatever was salvageable, which really wasn't a lot." She notes that Cashman is looking for half a million from Robin Hood, "but he'll take what he can get." There's some laughter.
Now it's time for the members to go on record as to how much, if anything, they'll consider investing. A spreadsheet with all the members' names is projected. There are two blank columns, representing the minimum and maximum each member would commit. It's standard practice here for the members with expertise in the field in question to go first. Maccecchini reiterates her range of $50,000 to $100,000. Two biotech people put in $25,000 as both their minimum and maximum, and another says zero to $25,000. Then all the other names in attendance are called; two members, including George Marks, say they'll invest $25,000; the rest are split between those who will invest nothing and those who will consider zero to $25,000. At the end, the totals show that Cashman is looking at a minimum of $150,000 and a maximum of $375,000.
Marks asks to hear from those who weren't interested. Why not? Rob Weber is one. "I just don't get it," he says. "I get electronics; I get the Internet. I don't understand biotech, and I don't want to invest in something I don't understand." Mike Levinson says he's not comfortable with Cashman's experience level.
Marks determines there is enough interest to proceed to the next step. They'll want to talk with the VC firms Cashman has said are onboard. They'll put together a SWAT team to do further due diligence on Protez. That's it on Protez for today.
Fast forward to May. It looks like Protez will receive $500,000 from Robin Hood, in the form of convertible debt, in a matter of days. As of presstime, the deal documentation process was under way. Members who weren't at the meeting have come in, and Rob Weber and Mike Levinson decided to invest after all, having received, as Weber says, additional "comfort and enthusiasm" from other members. The B round still hasn't been nailed down, but the amount has increased to $13 million after one of the VCs decided to up its investment. If everything stays on track, Protez should get that money the next month. Chris Cashman and his investors are just starting to get to know one another.