In Part 1 of this series, we highlight what investors want to see in a company’s business plan and hear in the pitch in order to invest. Here we delve more deeply into some thoughtful funding strategies to raise capital and make it last and when and why convertible debt and reverse mergers make sense. Speaking on these topics are:
Carolyn Green, Executive Director of Strategic Investments at Pfizer, Laurie Halloran, Founder of Halloran Consulting, Maria Berkman, Director at Broadview Ventures, Brian Polzak, Managing Director at Aquilo Partners
1. Is an equity round of family and friends still the typical first funding?
Berkman: It’s very useful for her young companies’ first funding strategies to be convertible debt rather than an equity round from friends and family. That way nobody loses their friends and families money. And there isn’t a need to define a valuation, which is really difficult with young companies anyway. It really streamlines the ability to then go into a true series A round.
2. Any proven ways to make your money go further?
Halloran: Start-ups may not know how they can be more practical and leverage clever ideas that those experienced in drug development have seen work in the past. Use experts to develop your clinical and regulatory plan. This not only helps funding strategies, but may also make a favorable impression with the FDA.
3. Is it better to raise a small amount or a large amount?
Berkman: Young companies often present a budget based on a burn-rate, for example, we need this amount of money for the next two years. “Here’s our monthly burn rate.” This is not a satisfying answer to investors. What they want to see is a clear value inflection point, typically a data set. Budgets should be set based on how much money is required to get to an inflection point significant enough to then warrant additional money being raised or strategic partnerships.
4. Any suggestions for when there is not enough money left to finish a study or hit a milestone?
Green: It so often happens that companies have not hit that inflection point and are running on fumes and need more money. In this case, they need to go to investors with how they will use the limited amount of money they have (or going to receive), to show why their technology or their solution is a big leap from and in comparison to current and known therapeutics, technologies or solutions. Because paying more money to show that something is similar to or as good as is simply not going to be a story that investors are interested in.
5. Any other comments about money?
Polzak: Most importantly, CEOs and companies should be thinking about money all the time. The whole planning exercise should be around starting with the end in mind. What’s our exit? Do we want to have an IPO? Do we want to be bought by someone? Are we going to be doing licensing deals? Start with the goal and work backwards from there to the beginning to make a plan for development, milestones, and funding requirements. How will you appeal to the funders in the size of dollars you need at those different points. The plan should always be around sustainability or strategics.
6. How about reverse mergers? When might that be a good option?
Polzak: Reverse mergers could be okay funding strategies for groups with a known and successful management team who actually has been on the public markets before, where public investors know and trust them and have made money with them in the past. With the reverse merger the team and the company has access to these investors who are willing to put money in again. With a green team that does not have those established relationship, using this strategy to go on the public markets and believing that you’re going to get public investors interested in your story is going to be very, very hard. By the way, a reverse merger changes the type of investor when you go from VC private funding to public. It becomes more interesting when companies like that are being acquired by or invested in by the big corporates (like Pfizer). Trends in the marketplace are influential. Your company needs to be at a sustainable place – or the place where the big strategics have an interest at the time.
All investors agreed that there’s three things that are important for the company to gain interest from investors
- the technology
- the industry or space that it’s in and
- the management team
Of all of those three things, the most important thing is the management team. Investors would rather put money into a team that they believe can be successful even with a mediocre technology, than a really terrific technology with a team that does not have relationships to build the funding or to execute the strategy.
Companies need an A team.
But this doesn’t mean they need to hire full time employees. Look for gaps in experience and expertise that can be filled through outsourcing to experts and incorporating respected advisors. Create a blended A team. Investor’s like to see when companies use their money wisely.