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Main Subject - Strategic Fundraising for Startup Technology Companies
Almost every company goes through it, except for the fortunate few. Some people have gone through it multiple times. While never easy, raising money for the second or third time (assuming success the first time!) is a picnic, compared to the first time.
The questions that run through an entrepreneur’s mind are nearly endless. Do I even need the money? Is my company fundable, regardless? How much do I need? How much should I try to raise? What’s the best time to start raising money? What type of investor should I approach, and what are their expectations? How should I go about approaching them?
I could fill up the rest of a page wit
The questions that run through an entrepreneur’s mind are nearly endless. Do I even need the money? Is my company fundable, regardless? How much do I need? How much should I try to raise? What’s the best time to start raising money? What type of investor should I approach, and what are their expectations? How should I go about approaching them?
I could fill up the rest of a page wit
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
h salient questions an entrepreneur might have. This might be the most daunting process in the minefield of difficult steps to forming and building a winning high tech company.
So you’re a new entrepreneur, with a great idea, a prototype, and a vague notion that you might need to raise some capital. Where do you go from here?
NO COOKBOOK FORMULA Well, like most things that really matter, there’s no easy answer. It depends on what type of company you’re trying to build, your own control and risk/reward mentality, as well as the dynamics of your market.
For discussion purposes, I’ll focus on an embryonic software company. Most of
So you’re a new entrepreneur, with a great idea, a prototype, and a vague notion that you might need to raise some capital. Where do you go from here?
NO COOKBOOK FORMULA Well, like most things that really matter, there’s no easy answer. It depends on what type of company you’re trying to build, your own control and risk/reward mentality, as well as the dynamics of your market.
For discussion purposes, I’ll focus on an embryonic software company. Most of
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
the discussion will be just as relevant to a later stage business, or an early stage manufacturing business. In a manufacturing business, you’ll need to raise more money to fund manufacturing in the ramp-up phase. But the initial fund-raising is very similar.
FUNDRAISING BASICS
First of all, let’s quickly cover the various categories of capital sources. There are many variations and shades of gray with respect to funding sources, but the following are representative of the basic categories available to new software companies:
1) Self-funding
2) Friends & Family
3) Angel Investors
4) Venture Capital
5) Strategic
FUNDRAISING BASICS
First of all, let’s quickly cover the various categories of capital sources. There are many variations and shades of gray with respect to funding sources, but the following are representative of the basic categories available to new software companies:
1) Self-funding
2) Friends & Family
3) Angel Investors
4) Venture Capital
5) Strategic
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
Partners
Hopefully, these categories are pretty self-explanatory. Next, let’s look at what TYPE of company the entrepreneur is trying to build:
A) Lifestyle Company
B) Solid Single
C) Home Run
A Lifestyle company is one in which you are often intermixing your personal life with your company life. There may be family members involved in the business, your write-offs and accounting are more aggressively aimed at reducing taxes than showing profits, and you aren’t interested in or planning to sell the company anytime soon. Solid Singles and Home Runs are similar to each other; the major difference is market size/opportunity.
Lastly, let’s
Hopefully, these categories are pretty self-explanatory. Next, let’s look at what TYPE of company the entrepreneur is trying to build:
A) Lifestyle Company
B) Solid Single
C) Home Run
A Lifestyle company is one in which you are often intermixing your personal life with your company life. There may be family members involved in the business, your write-offs and accounting are more aggressively aimed at reducing taxes than showing profits, and you aren’t interested in or planning to sell the company anytime soon. Solid Singles and Home Runs are similar to each other; the major difference is market size/opportunity.
Lastly, let’s
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
alk about what outside investors look for in a fundable venture:
I) Management
II) Market size/opportunity
III) Defensible differential advantage
The three items listed above are all crucial, but they aren’t equal in importance. Professional investors look for strong management teams, but if there are holes in the current team, it isn’t necessarily fatal for many investors. They’re happy to help you fill out the team. Many, in fact, prefer it this way. But having a large market opportunity and strong differential advantage are non-negotiable in the eyes of investors. They are looking for big returns. It’s a long-held view among institutio
I) Management
II) Market size/opportunity
III) Defensible differential advantage
The three items listed above are all crucial, but they aren’t equal in importance. Professional investors look for strong management teams, but if there are holes in the current team, it isn’t necessarily fatal for many investors. They’re happy to help you fill out the team. Many, in fact, prefer it this way. But having a large market opportunity and strong differential advantage are non-negotiable in the eyes of investors. They are looking for big returns. It’s a long-held view among institutio
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
al investors that their own management time is the limiting factor in their own business. As a result, they don’t feel they can afford to invest in “solid little businesses”. If you don’t stack up as having big potential in both of these key areas, almost every professional investor will take a pass.
YOU HAVE TO LIVE WITH THEM, TOO
Another important consideration that many entrepreneurs fail to consider is how well potential investors fit with the company’s management. Management teams are often so focused on “getting the money” that they fail to consider that you “have to live with them”, as well. It’s a bit like getting married
YOU HAVE TO LIVE WITH THEM, TOO
Another important consideration that many entrepreneurs fail to consider is how well potential investors fit with the company’s management. Management teams are often so focused on “getting the money” that they fail to consider that you “have to live with them”, as well. It’s a bit like getting married
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
You may be thrilled to attract the most prestigious investor (like the best looking potential spouse), but end up with business philosophy and personal conflicts that severely retard the company’s development. This isn’t a used car transaction, where the sale is made and the parties walk away. You and your investors are now intertwined, but may or may not have the same interests.
So ask yourself: Is this a good match?
Are you seeking a “hands off” investor, or someone that will get involved with the details—providing business guidance and contacts—for better or for worse? Many VCs, for example, have successful business backgrounds and networks tha
So ask yourself: Is this a good match?
Are you seeking a “hands off” investor, or someone that will get involved with the details—providing business guidance and contacts—for better or for worse? Many VCs, for example, have successful business backgrounds and networks tha
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
can make them invaluable as advisors. There’s another group, however, that don’t have the background or skills to run a company. Yet their arrogance leads them to believe they are eminently qualified to drive even the most strategic of decisions. Are they going to be so involved that it will take up much of your scarce management time that is needed to build the business? On the other hand, are the investors so busy that you won’t be able to get their attention when you need them? Which type do you want on YOUR board?
It’s true that the money that you raise is a commodity—but the people relationships that come along with it can make or break your c
It’s true that the money that you raise is a commodity—but the people relationships that come along with it can make or break your c
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
mpany. Early stage fundraising, taken as a whole, is NOT a commodity function.
THE LIFE STYLE COMPANY
Now let’s look at the simplest case study. An entrepreneur has conceived a software business using his knowledge of a particular, very specific, vertical market. It’s a market he knows well, and there’s almost no direct competition. Unfortunately, the market, while attractive to him, is not large by software category standards. Yet the market is plenty big enough to support a very profitable company, particularly since there is almost no competition. He’s proven to himself that he has a solution that the market will embrace, allowi
THE LIFE STYLE COMPANY
Now let’s look at the simplest case study. An entrepreneur has conceived a software business using his knowledge of a particular, very specific, vertical market. It’s a market he knows well, and there’s almost no direct competition. Unfortunately, the market, while attractive to him, is not large by software category standards. Yet the market is plenty big enough to support a very profitable company, particularly since there is almost no competition. He’s proven to himself that he has a solution that the market will embrace, allowi
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
g the building of a business. Yet he thinks he needs a little additional capital, to ramp it to the point of the business being self-supporting using it’s own cash flow. What should he do?
This is the classic example of a lifestyle company in the making. Sophisticated outside investors will have no interest, unless it’s for personal/hobby reasons. And since there is little competition, and as a result, little time pressure—fund it yourself. Take out a second mortgage, use lines of credit, or get an SBA loan. If you really have to, raise some money from supportive friends or family members.
This example makes up the great majority of software compan
This is the classic example of a lifestyle company in the making. Sophisticated outside investors will have no interest, unless it’s for personal/hobby reasons. And since there is little competition, and as a result, little time pressure—fund it yourself. Take out a second mortgage, use lines of credit, or get an SBA loan. If you really have to, raise some money from supportive friends or family members.
This example makes up the great majority of software compan
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
es worldwide. There are many, many solidly profitable software businesses that will never be on the radar screen of the investor community. These companies often exist quite nicely, enjoying solid and relatively stable profitability with revenues in the $1-10M range. That’s fine—the problem lies when the entrepreneur doesn’t know what he has, or won’t accept it. He thinks his baby needs to grow up to be a fast-growing player. But it’s generally the case that the market is too small. There is little need to be distracted by trying to raise funds from outside investors—and it’s fruitless to try. It will only be a waste of time for the company and inves
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
tors. And if by some chance it IS funded, there will end up being a lot of turmoil and hard feeling when the company doesn’t meet the lofty expectations that were needed to sell the funding deal. I’ve seen many great little companies screwed up in the attempt to become something they’re not.
THE SOLID SINGLE
Now we’ll examine the next step up—the solid single. This opportunity often presents as a bigger vertical than the life style company is attacking, or possibly a horizontal, yet still niche, product. These are often the situations where the most difficult strategic decisions reside. And in fact, the great majority of software c
THE SOLID SINGLE
Now we’ll examine the next step up—the solid single. This opportunity often presents as a bigger vertical than the life style company is attacking, or possibly a horizontal, yet still niche, product. These are often the situations where the most difficult strategic decisions reside. And in fact, the great majority of software c
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
mpanies who seek outside funding probably fall into this category. The market size is just on the edge of what the professional investors will consider. And while there is a differential advantage, it’s not at the level that you’ll be able to “knock their socks off” in your slide-show pitch. There’s worrisome competition, but it’s not over-crowded, with 75 venture-funded companies. What’s a management team to do?
This is a tough call. Every situation is a little different, but my general advice is to work your way up the 5-part funding tree discussed earlier. Fund it yourself as long as it’s not crippling your progress. Then do a round starting with
This is a tough call. Every situation is a little different, but my general advice is to work your way up the 5-part funding tree discussed earlier. Fund it yourself as long as it’s not crippling your progress. Then do a round starting with
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Friends and Family, as well as Angel Investors that are easily approachable via your immediate network. Once you go through this funding, hopefully you’ve built a rapidly improving business with good growth prospects.
It is at this point you may be able to attract money from a VC or private equity firm that has a later stage, more conservative risk/reward profile than the typical early stage VC. Professional investors might see in your company one that may not be a 10X return, but one that may be a 2-5X return in a shorter timeframe, with less risk. And this later funding may work to your benefit, because the opportunity in front of the company may
It is at this point you may be able to attract money from a VC or private equity firm that has a later stage, more conservative risk/reward profile than the typical early stage VC. Professional investors might see in your company one that may not be a 10X return, but one that may be a 2-5X return in a shorter timeframe, with less risk. And this later funding may work to your benefit, because the opportunity in front of the company may
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
e such that you need to manage dilution of your stake carefully, to ensure that at the end of the day, it’s been worth your while. A strategic partner may be even a better fit here. Often a company in this situation may be able to attract funding because their product is important to the prospects of a larger partner company, filling out a total solution or providing a key technology the larger company can’t quickly or easily replicate. In this situation, the company may even get a richer valuation that the “Home Run” scenario which we’ll look at next.
THE HOME RUN
Lastly, there’s the classic Venture-funded company, the one with “H
THE HOME RUN
Lastly, there’s the classic Venture-funded company, the one with “H
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
me Run” potential. These are the companies that VCs are out seeking to fund. These are the hot young companies that you often read about in the newspaper or trade journals. A high profile engineer, or someone else well known has started the company, with some cache in their field. The technology of the company appears to have breakthrough potential. The market is new, expected to grow to be very large, and is very newsworthy. But the competition is expected to be very intense, both from established players and a spate of new startups. This is obviously a very different situation than the two discussed above.
In this situation, you’ve got to go get t
In this situation, you’ve got to go get t
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
e money. Time is of the essence. Getting established in the market early is crucial, and economies of scale usually become important as well. So a company in this situation typically needs to raise as much money as possible, as early as possible. All the steps are compressed here; and the time between funding rounds may be only a few months in extreme circumstances. It’s best, if possible, to skip the more casual funding sources and go very quickly to where you can raise large amounts of money very early—the VCs, and possibly strategic partners. Care needs to be taken on how you approach VCs, however. Unless you know them personally, never approach t
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
em directly. It’s one of the peculiarities of the VC community, and considered perverse by most people outside the VC community. The VC community has their reasons, although their rationale is certainly arguable. But no matter--it's one of the rules of the game. Always approach them through a service provider (Accounting firm, Law firm, etc.), or another entrepreneur who has been successfully funded by the VC firm in the past.
Until you can get a commitment from institutional investors, however, take money from wherever you can get it, within reason. Self-fund, friends and family money and Angels may all come into play if there is a delay in getting
Until you can get a commitment from institutional investors, however, take money from wherever you can get it, within reason. Self-fund, friends and family money and Angels may all come into play if there is a delay in getting
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
the institutional money to buy in. Don’t worry very much about dilution in this case. The choice is often one of potentially ending up with a small, valuable percentage of a company with a large market cap, versus a large percentage of a failure. As you can see, the advice in this scenario is almost the complete opposite of what I’ve recommended in the two previous examples.
A STRATEGIC DECISION
But it’s all fund-raising, right? Why such different advice?
The advice varies because fund-raising is one of the most strategic activities facing an early stage high tech company. Many entrepreneurs view raising capital as a generic ope
A STRATEGIC DECISION
But it’s all fund-raising, right? Why such different advice?
The advice varies because fund-raising is one of the most strategic activities facing an early stage high tech company. Many entrepreneurs view raising capital as a generic ope
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
ational activity, like choosing a bank or leasing office space. It's viewed as just a necessary evil, because every business needs money to survive and prosper. This discussion was intended to demonstrate that raising money should be viewed as one of your most important strategic functions--a decision that is taken with an eye for its effect on your competitive position, no differently than choosing the best technology platform to adopt, or what marketing mix to use to outflank your key competitor.
I know that there are many of readers out there who have run the fundraising gauntlet—give us the benefit of your wisdom! Contact me with the info. below
I know that there are many of readers out there who have run the fundraising gauntlet—give us the benefit of your wisdom! Contact me with the info. below
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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