From the moment you make a decision to set up and operate a business, you’re in the “business lifecycle.” Fasten your seatbelt before the drive as you’ll journey from idea to startup, and if successful, through to the growth and maturity phases. Each stage of the lifecycle has a unique set of obstacles to deal with and overcome. Being flexible in your thinking and adapting your strategy as you move along will serve you well. This not only applies to a business strategy but also to the financial plans to support the development and growth of the Company. A capital financing strategy should summarize investor targets for outreach by stage of the lifecycle, inflection points and how these will change valuation, and the actions to be taken over a three-to-five year period to achieve the company's goals in its business evolution. Putting together the strategy is hard work that takes time and considerable thought. Raising money is also hard work, so get started today.
Ask yourself, where are we now? Where would we like to be? How do we get there? How will we capitalize the business along the way?
A capitalization strategy is essential for anticipating short- and long-term needs. It ensures disciplined spending, minimizes the possibility of blowing through cash too quickly or not acquiring enough capital that would hinder further progress. Capital plans also help determine the best funding source for each stage of development. The time to create a capitalization strategy is before your business reaches a financing benchmark. Entrepreneurs often fail to recognize the importance of projecting future capital requirements. Don't be in this crowd. Differentiate yourself by taking the time to plan for what's coming up next and you'll be prepared to raise money when the time comes. You are more likely to impress potential lenders or investors if your financial affairs are in order and you have a firm grasp of your company's needs.
Initial Funding Sources to Consider
So, you’ve got your business idea and are ready to take the plunge. But first you must assess just how viable your startup is likely to be. We have heard from several experts that, in some ways, this is the soul-searching phase of “seed”. It’s where you take a step back and consider the feasibility of your business idea, and also ask yourself if you have what it takes to make it a success.
Typically, funding sources at this stage include capital from your own capital and cash resources, family & friends network, Foundations, government funding (SBIR/ NIH), and incubators/ accelerator facility models. You’ll need to raise enough capital to show proof of concept and that you have a viable idea to pursue and acquire additional financing.
Recently, David H. Crean, PhD, Managing Director and head of our Life Sciences and Healthcare Practice Group was requested to provide his insights on the important topic for early-stage companies at a panel discussion with Life Science entrepreneurs, business owners and founders entitled "Show Me the Money: How to Build Your Funding Network to Raise Capital and Move Beyond the Incubation Phase". The discussion was sponsored by the Southern California Biomedical Council (SoCalBio) in conjunction with their event focused on Biotech Incubators and Support Programs in Greater Los Angeles. The event was a great opportunity to network with early stage investors and budding entrepreneurs to learn how to use the incubator and accelerator models to advance start-up companies to the next level.
These two models are becoming more common in today's entrepreneurial financing environment, especially in the technology and life science sectors, as a means to kick-start the business endeavor, allowing entrepreneurs a way to preserve precious capital and allocate it to R&D, and providing a platform for the Company to focus on proof-of-concept activities.
Beyond the incubator and accelerator models for seed and start-up companies, however, entrepreneurs need to craft their financing strategy to align with their business goals and plans for growth. The amount you raise should be at least enough to hit an “accretive milestone” or “value inflection” which allows raising the next round of financing at a significant step up in valuation. This will help ensure you don’t go through the pain of down rounds and that you don’t have to rely on your existing investors to keep bridging the company towards the next real financing round.
Raising too little capital creates a situation where you don’t have enough runway to make sufficient progress until your next financing round. Therefore, you are not able to sufficiently “de-risk” the company and attract higher valuations from a credible investor. Raising too much capital means that you have taken too much dilution since you could have raised some of the capital later at a higher valuation.
Next Level of Funding Sources
Beyond the initial investor pools, as your business begins to mature and you progress through start-up phase and into development and growth phases, you will need to look at Angel funding groups (e.g., Tech Coast Angels, Pasadena Angels, Desert Angels, Keiretsu Forum's angel investor network, to name a few), Accredited High Network (and ultra-high) individuals and possibly start to consider institutional sources such as venture capital (VC), family offices, corporate venture (CVC) and corporate strategic companies as viable avenues. Of course, we are only referring to seeking access to private capital, unlike the public capital markets via IPO or other. Some of the latter private capital sources will be more likely viewed as good targets depending on numerous factors including stage of development of the Company, investor appetite and thesis in the industry sector, level of funding needed relative to level of dry powder available, data generated by the Company to date, as well as investor needs to fill or round out product/company portfolio’s.
Much has been written on the topic of VC’s/ Private Equity (PE) as funding sources, as well as seeking to go down the path of becoming public via S-1 or reverse merger and getting access to public capital markets. We will not go into these resources as much has been written by others smarter than us. We encourage you to read up on VC/PE investor types because they may not be suitable for all entrepreneurs and business owners. David generally likes them as a viable avenue because they bring investor and managerial expertise to the table, along with networks that you may not possess. You may have concerns about ownership and taking a haircut on dilution. However, you need capital and they can help you be successful. We find that to be more important in the decision making.
A new pathway for direct investment has also emerged: the family/multi-family offices of wealthy individuals and families. While these investor groups represent good news to startup companies, we encourage you to perform your diligence on this investor type as many may not be sophisticated investors in your industry sector and, as a result, may not be a good fit for you.
Within the pharmaceutical, biotech and life science sector, the existence of CVC has become more common (e.g., Lilly Ventures, Takeda Ventures, Novartis Ventures, and many more). CVC is unique from private VC in that it commonly strives to advance both strategic and financial objectives. Strategically driven CVC investments are made primarily to increase, directly or indirectly, the sales and profits of the incumbent firm’s business. A well-established firm making a strategic CVC investment seeks to identify and exploit synergies between itself and the new venture. Given David's area of expertise in helping life science companies grow, he usually recommends CVC’s as a viable investor strategy.
Bottom line, in today’s market, there is plenty of private capital out there to be acquired and invested in good, innovative product ideas and companies. It takes hard work to identify these sources of capital and to get them interested in an investment. Bringing in knowledgeable advisors and/ or board members to help you with networking and landing management meetings with investors is highly recommended, especially if you lack deep networks in the investment community and how to navigate the waters.
Opening Doors to the Investors on Your List
Finding the right investors and groups is critical. Not all investors are alike. A venture investor’s greatest fear is missing out (FOMO) on a great opportunity in their target sector. They want to review every single opportunity, and this is a fact that you can leverage. Of course, it’s your responsibility as the business owner and entrepreneur to figure out whom the right investors you should target. This is why mapping and building a target list is a crucial first step.
The best way to get a meeting with top quality investors is through a warm intro from someone they’ve done business with or know well. Always secure warm introductions. This may not come as news, but it’s surprising how many entrepreneurs cold-call investors to no avail. Smart entrepreneurs set themselves apart by securing a warm referral. Doing so demonstrates a certain level of resourcefulness and determination. This is an important signal to send to investors who don’t know you.
So where can you get a warm referral?
- Lawyers, accountants, bankers and professional service providers (investment bankers)
- The CEO of a portfolio company of your target investor
- Contacts of the investor on LinkedIn and in other networking forums
The bottom line is this: do whatever you can to secure a warm introduction to the investor you’re targeting. Network like crazy. Do your homework on the investor before meeting them. Ask yourself, why do they make sense as an investor in my business?
Making the right decisions at each stage of the business is important, and that will require your usual mix of gut instinct and practical business sense that supports your goals and objectives. Have a capital financing plan to support the business goals that makes sense and stands up to scrutiny. If you wish to learn more, please contact David at firstname.lastname@example.org. He'd be happy to assess your strategy and capital financing plans.
Article written by David Crean and first published on LinkedIn.
Objective Capital Partners is a leading mergers and acquisitions (M&A) advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. The executive team has a unique combination of investment banking, private equity, and business ownership experience that enables Objective Capital Partners to provide large enterprise caliber investment banking services to companies with annual revenues up to $500MM. Services include sale transactions, equity and debt capital raises and comprehensive advisory services. The firm uses a proprietary process to work to achieve maximum company valuation, premium pricing, and high client satisfaction rates post-sale. The firm’s industry expertise includes life sciences, business services, software and hardware technology, aerospace/defense, IT services, healthcare services, energy services, biotech, consumer products and specialized manufacturing. Additional information on Objective Capital Partners is available at www.objectivecp.com.
This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.