Cytonics (April 2019)

Editor’s Note: I am temporarily unable to invest in new companies on SeedInvest due to investing too much in the last 12 months. (“Based on your previously inputted financial information, the maximum Regulation CF investments you can make in a twelve month period is $3000 and your current total is $3600. This means you will not be receiving investments for companies raising under Regulation CF until your twelve month Regulation CF investment total is under your current limit.”)

In the meantime, while I will continue to write deal memos (and experimenting with the format,) I also wanted to give full disclosure that decisions at the moment are hypothetical. I will note the reactivation of my SeedInvest Auto Invest account once the 12 month period passes this summer.

Now, back to your regularly schedule programming…

Deal Abstract

https://www.seedinvest.com/cytonics/series.c

Biotech firm raising Series C round of $1MM at a $32.4MM pre-money valuation. Recently received patents for Alpha-2-Macroglobulin (A2M) a protein injection for ameliorating the development of osteoarthritis, and CYT-108, the synthetic and v2 version of A2M. Has been in business for 10 years and founding team primarily does surgery and teaches Jiu Jitsu.

Decision

No.

Why Investing/Passing

  1. Really high valuation, at this point no longer capitalizing on any advantage as an individual investor (larger institutional money is happy to beat out individual investors, dollar for dollar, on safer deals.)
  2. The leadership in the team and aligning of incentives isn’t what I’m used to in early stage startups. Spending less than $200k in salaries tells me this is more a mature business than one for fast growth.
  3. As a general rule, I should probably not be investing in biotech companies, the exception being great investment terms or models/problems being addressed that I’m more familiar with.

The 11 Calacanis Characteristics

Passed on 6/11.

CheckPass/Fail
1. Syndicate lead has >5 years investing and >1 unicorn investmentFail
2. A startup that is based in SVFail (Jupiter, FL)
3. Has at least 2 founders Fail
4. Has product in the market Pass
5. 6 months of continuous user growth or 6 months of revenue.Pass: $294k for 2018, $219k for 2017
6. Notable investors?Pass: Synthes (Johnson & Johnson), NIH
7. Post-funding, will have 18 months of runway Pass: 2018 burn is $45k/mth (542k/12 mths), $772k cash on hand, extra $1MM gives them an additional 22 months.
8. Proprietary technology?Pass: company just got granted patents for A2M and CYT-108.
9. Network effects?
Fail
10. Economies of scale?
Pass
11. Great branding?
Fail

The 7 Thiel Questions

  1. The Engineering question:
    • Good: “I [have] suffered [from] prolonged pain from a partial tear in my right Achilles tendon… After almost eight months of therapy and various treatments, R. Grossman, MD told me about Cytonics and the available A2M treatment. I received my first injection in April of 2018 and within weeks the large nodule in my Achilles had shrunk significantly… The A2M therapy has given me my life back.”
  2. The Timing question
    • Bad: not seeing why this is a particularly good time to start a capital intensive, highly regulated biotech company. In fact, this company has been in business for over a decade.
  3. The monopoly question
    • Bad: It’s a literal painkiller, but besides these products, not seeing any defensive moat against other companies creating similar solutions.
  4. The people question: 
    • Bad: As SeedInvest itself wrote: “The founder of the company, as well as the previous CEO are no longer full-time employees of the company” and “The CEO is not a founder of the company and has been employed with the Company for approximately one year.”
  5. The distribution question
    • Bad: Again, quoting SeedInvest: “The Company depends on the performance of distributors and other resellers.” and “The Company depends on a limited number of distributors for a substantial majority of its revenue.”
  6. The durability question
    • Good: if built the right way, this business is definitely durable. That said, the cost to build it the right way makes it not ideal for venture.
  7. The secret question: 
    • Bad: perhaps Cytonics believes that because everyone who lives long enough will get osteoarthritis (OA) so their market is very large. The problem is, given a decade and only $300k in revenue to show for it, they’ll run out of money before the alleged market gets osteoarthritis.

What has to go right for the startup to return money on investment:

  1. A2M, Cytonic’s flagship product, is really the only biotech solution to Osteoarthritis.
  2. Osteoarthritis cases surge in both frequency, duration, and time of first incident.
  3. The company develops either high pricing power (because of the deepness of the pain its products cure) or distribution power (using the Tesla example of opening its own dealerships, which caused a lot of pushback.

What the Risks Are

  1. The company runs out of money.
  2. The market doesn’t exist nearly as Cytonics describes.
  3. The company dies/exits as a cheap IP acquisition giving investors pennies on the dollar.

Updates

2020-05: looks like they’re raising again, pre money $46MM and raising $19MM: https://www.seedinvest.com/cytonics/series.c?utm_source=sendgrid&utm_medium=email&utm_campaign=single_deal_launch-Cytonics_Why_We%27re_Back_-_5%2F11%2F20-5%2F15%2F2020. Not confident they created $14MM of value in last year, but if interest I’ll take a deeper look.

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

Notice trends in how you think

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