In a world where it seems like startups are created every other day and market economics remain largely unpredictable, securing funding for your biotech startup can prove to be an arduous task. Venture capitalists prefer tested and proven biotech enterprises, government- and NGO-backed funding remain ever so slightly out of reach, and every other funding outlet seemingly comes with its own set of hard-to-match requirements and specifications. What is the fate of the budding startup without experience in the harsh economic climate of today’s biotech ecosphere? As it turns out, it's not quite as bad as one would expect. It’s all down to knowing the ropes and peculiarities of the market.
Channel Your Fund Derivation Efforts In The Right Direction
While the marketability and overall appeal of a biotech company do play an integral part in the fundraising process, it’s important to note that investors will, in most cases, only commit if the biotech company fits their venture capital profile. Different classes of investors provide funding for different categories of companies under specific circumstances. Investors typically have a predetermined indication, sector and stage of development they intend on committing to. Some have a preference for bootstrapping early-stage companies, while others are more for companies already in the late-funding stage.
In the same vein, it will be counterproductive to approach a venture capitalist with a long history of providing funding for a specific biotechnology niche when your company falls outside that niche. The ideal approach would be first to understand what your needs are by conducting a market analysis and then defining your operational mandate before going on to outline VCs that match your needs and have backed up deals similar to yours in the past.
Holding Off On VCs Can Sometimes Prove To Be Beneficial
This year alone, venture capitalists along with angel investors have raised more than $758 million in funding for biotech companies. If there’s one story that statistic tells, it’s the fact that there’s no shortage of VC cash that's ready to bootstrap the next big thing in biotech.
That said, for a small startup that’s still in the process of sinking its roots in the industry, it is usually a better idea to hold off on venture capitalist involvement till much later -- especially if your fundraising goal is less than $1 million. For capital margins of this range, reaching out to private investors or brokering partnership deals are the ideal fund derivation faucets.
Three-quarters of all venture-funded startups are in or near Silicon Valley, New York City or Boston. That leaves plenty of opportunities in the rest of the country. That's where David Hall, this week's guest on Masters in Business, comes in.
Hall is a partner at Revolution’s Rise of the Rest Seed Fund, where he is responsible for investment sourcing, execution and oversight for Revolution portfolio companies. The fund is designed to address this geographical/financial gap. It enjoys backing from the likes of Jim Barksdale, Jeff Bezos, Tory Burch, Steve Case, Ray Dalio, John Doerr, Henry Kravis, Sean Parker, Eric Schmidt and Meg Whitman among others.
Hall discussed why focusing on the areas outside of the coastal urban centers is so promising: not only are costs are lower, but there's talent out there just waiting to be discovered.
His favorite books are here; the transcript of our conversation is here.
You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast and Stitcher. Our earlier podcasts can all be found at iTunes, Stitcher, Overcast and Bloomberg.
Next week, we speak with Francis Greenburger, real estate developer, literary agent, author, philanthropist and the founder of Time Equities, where he became known as the co-op king of New York for converting prewar apartment buildings into occupant-owned residences. He is also the author of "Risk Game: Self Portrait of an Entrepreneur."
You’re looking to start a new business. You have a great idea, see an unmet opportunity, and know you can execute on it. You just need to get started, and capital would certainly help. So you need to go talk to angel investors and venture capitalists, right? It’s just how things are done.
As a long-time investor, I get approached all the time by entrepreneurs looking to raise such capital, and asking for advice as to how to pitch to angels and VCs. And I always stop them and ask them one really basic question: Why are you raising venture capital in the first place, instead of another capital structure?
This is a really basic question that all entrepreneurs need to ask themselves, instead of just making the assumption that they need their funding to be structured in this way.
Because such funding almost always comes with a particular structure – “preferred equity”. And while that structure can be the right fit for some startups, for many great business ideas it can have long-term implications that are not so great. Although it may be more painful in the short-term to bootstrap or raise capital via “common equity” structures, it may very well end up saving your business in the long run.
Okay, before we get into the trade-offs and the reasons for asking yourself this question, what are these terms I’m talking about?
Venture capital is classically structured as “preferred equity”, which means the dollars come in to buy a new class of shares with special rights (versus the founder shares or other common shareholders). Those rights typically involve a lot of protections, so that even as a minority-stake shareholder, the preferred equity holder gets some input into decision-making. That can be a good thing, in my experience, because if you’ve raised capital from an experienced professional investor, hopefully they can bring a lot of acquired wisdom and other benefits to the table. Making sure they’re in a position to be listened to can benefit the right entrepreneurial team.
1. Bring a starting line-up, not an entire soccer teamBringing too many people from your startup team to a VC meeting sends subliminal messages – the team isn’t busy with other work, they are slightly desperate, they don’t entirely trust each other. While none of these impressions may be fair or true, you aren’t given an opportunity to refute them. Plan to bring at most three people to a partnership presentation. The CEO and founder should be present, along with another cofounder, if applicable, and the chief technical person. The person who understands the market opportunity and the competition best should attend. Some startups bring their chief financial officer, which is not necessary. Your CEO should be able to speak to financial questions from memory this early in the business’s development.
2. Sell the company, not the productThis presentation should look very different from the pitch you give to sales prospects. The venture firm is not buying your product, they are buying your stock and your partnership in success. To win the sale, you need to demonstrate how great your team is, where your company fits into the world, and how well your group is suited to capitalize on the opportunity. And remember, the objective of the first meeting is not to close the deal, it’s to get a second and third meeting. Don’t go into every detail during an introductory meeting.
3. You, not your presentation, should drive the meetingCome well prepared with a compelling deck, but don’t let the presentation and the plans you have for this meeting take over. A robust two-way discussion leaves the best impression. Do not forget that you are a buyer as well as a seller, and often the best way to sell is to buy. Ask about the venture firm, its strategy, and its portfolio, and listen well. They will tell you what they are looking for, and then you can sell what they are buying.
4. Demonstrate your managerial skill by running a good meetingHow well you run the meeting shows how well you can run the company. Be organized and timely, but with a light touch. It’s important that the meeting not run over its allotted time, typically an hour and a half. Therefore, your deck should take no more than 30 minutes to deliver when not interrupted; with introductions, questions, and discussion, you should be right on time. The CEO should deliver the bulk of the presentation, with others responding to questions.
5. Don’t reveal too muchMost VCs will ask who else you have been talking to and how far along you are in the fundraising process. Your goal is to create enough urgency for them to dig in now while not making them feel they are too late to bother. So, the best response is, “We have had a number of initial meetings with high quality firms, but we are still in the initial phase of the process.”
It all boils down to one key takeaway: Any initial meeting is a two-way street — you are trying to gauge the VC firm’s fit with your organization. You should imply that you have choices and are being selective and thoughtful. Come prepared, not just with information about your company but with what you are looking for in a financing partner. A second meeting will be your reward.
A capitalization table (or cap table) is an important part of your private placement memorandum (PPM). It lists the shareholders of the company and shows their corresponding ownership shares along with voting rights and other specifics. It is typically shown in chart format with accompanying notes.
Pre-Money and Post-Money Ownership
The cap table can be used for your own purposes to better understand how your percentage ownership will change with the current capital raising round. This is important to understand, especially if the financing results in the original owners losing the necessary 50% of voting rights which gives them control of the company. A lawyer may be so focused on protecting you from legal liability that they do not adequately explain how you can keep this control, even through a significant round of funding.
If you can raise a smaller amount and spend more time proving your business model with this limited amount of financing, you can avoid giving up controlling interest in your company both now and in a future round of financing. By the time of the second round of financing, you will likely have sales revenues history and greater demonstrated interest from customers, all supporting a higher pre-money valuation of the company.
Common, Preferred, Options, Warrants
It is important that the cap table dig into the specifics, by differentiating between common stock and preferred stock. Preferred stockholders generally hold no voting rights but are paid dividends before common stockholders. Therefore, to keep control over the company, issuing preferred stock may be the way to go. However, savvy investors may want the control that comes with voting rights more than additional dividends if they believe their influence can help improve the value of the stock overall.
The cap table should include lists of options or warrants that have been issued or will be issued as well. This gives both management and prospective investors a full picture of potential future changes in ownership if and when the options or warrants are executed.
Every day, there are around 650,000 emergency service callouts via 911 for medical, police and fire assistance in the U.S.; and by their nature these are some of the most urgent communications that we will ever make.
But ironically for the age of smartphones, connected things and the internet, these 911 calls are also some of the most antiquated — with a typical emergency response center still relying on humans making the calls to tell them the most basic of information about their predicaments before anything can be actioned.
Now a new generation of startups has been emerging to tackle that gap to make emergency responses more accurate and faster; and one of them today is announcing a significant round of funding on the back of very strong growth. RapidSOS, a New York-based startup that helps increase the funnel of information that is transmitted to emergency services alongside a call for help, has raised another $30 million in funding — money that it’s going to use to continue enhancing its product, and also to start pushing into more international markets.
The opportunity internationally is greater than the U.S. alone: while the U.S. sees 240 million calls per year to 911 numbers, globally the figure is 2 billion.
The funding — which comes only about six months after RapidSOS’s href="https://www.prnewswire.com/news-releases/rapidsos-raises-16m-to-provide-life-saving-data-to-first-responders-300631998.html">last round of $16 million — is being led by Playground Global, the VC firm and “startup studio” co-founded by Android co-creator Andy Rubin.
Others in the round include a mix of previous and new investors (and a lot of illustrious names): Highland Capital Partners, M12 (Microsoft’s Venture Fund), Two Sigma Ventures, Forte Ventures, The Westly Group, CSAA IG, three former FCC chairmen and Ralph de la Vega, the former AT&T vice chairman and CEO of AT&T Business Solutions and International. It brings the total raised by the startup to $65 million.
Michael Martin, CEO and co-founder of RapidSOS, said the startup is not disclosing its valuation, but he did point me to the company’s stunning growth over the last year. “We went from 10,000 users to 250 million,” he said, noting the range of agencies and other partners the startup is integrating with to provide more detailed information across the emergency services ecosystem.
Partners on the two sides of RapidSOS’s marketplace include, on one side, Apple, Google, Uber, car companies and others making connected devices and apps — which integrate RapidSOS’s technology to provide 911 response centers with more data such as a user’s location and diagnostic details that can help determine what kind of response is needed, where to go, and so on. And on the other side, you have the emergency services that need that information to do their work and organize assistance.
RapidSOS offers a few different products to the market. Its most popular, the RapidSOS NG911 Clearinghouse, works either with a response center’s existing software, or by way of a web application. This product now covers some 180 million people in the U.S. in terms of the number of people touched by those different emergency response services, the company says.
The RapidSOS API, meanwhile, is used by a number of device makers and apps to be able to channel that information into the RapidSOS system, so that when a response center is using RapidSOS and a caller is using a device or app with the API integrated with it, that information gets conveyed.
The startup also offers a rescue and recovery app called Haven, and found its profile getting a huge boost after Haven went viral in the wake of a succession of natural disasters in the U.S.
The company generates revenue in different ways across that range of services. On mobile, the service is free to consumers, with licensing for the integrations paid for by large tech partners like Apple, Google, etc. In the areas of safety and security (including integrations with home security, digital health, medical alert, personal emergency response (PERS) and vehicle crash response providers), RapidSOS is “typically bundled in with the service offering,” Martin said.
Martin — who co-founded the company with now-CTO Nicholas Horelik (respectively Harvard and MIT grads) after Martin said he was mugged in New York City — said that he sees a big opportunity for RapidSOS, and indeed emergency services in general, once we start to join up the dots better between the trove of data that we can now pick up with connected objects, and conveying what’s important in that trove in order to make emergency calls more effective.
“Most emergency communication today uses infrastructure established between the 1960s and the 1980s, and it means that if you need 911 but can’t have a conversation you are in trouble. 911 doesn’t even know your name when you call,” he said in an interview. “But there is all this rich information today, and so our job is to help make that available when you really need it.”
(I should note he spoke to me while driving on a freeway, but he noted that the car he was in was part of a RapidSOS pilot, and so if he did have an accident, at least the responders would be more aware of what happened… Not a huge comfort, but interesting.)
When you consider the number of connected wearables, connected cars and other inanimate objects that are now becoming “smart” through internet-based, wireless controls, sensors and operating systems, you can see the strong potential of harnessing that for this particular use case.
RapidSOS is not the only company that’s addressing this gap in the market. Carbyne out of Israel raised a growth round earlier this year led by Founders Fund in its first investment in an Israeli startup, also to build systems to provide more data for emergency services responders.
(Carbyne, by coincidence, was also borne out of the CEO getting mugged: necessity really is the mother of invention.)
“We are completely different from Carbyne,” Martin said of the other startup. “They are trying to provide more modern software to the industry” — where companies like Motorola have long dominated — “and it’s great to see new innovation on that front. But when we looked at industry, we found the challenge was not software but the data that was being provided. There is a lot of information out there, but no data flow, which is limited by the typical emergency response system to 512 bytes of data.”
He says that RapidSOS, in that regard, works with multiple vendors, including Carbyne, to transmit that data.
And it’s that platform-agnostic approach that interestingly caught the eye of Playground.
“RapidSOS is on the forefront of emergency technology, working with companies like Apple, Google, Uber, and Microsoft to transform emergency communication,” said Bruce Leak, co-founder of Playground Global, in a statement. “We see endless opportunities for connected device data to enhance emergency response and are eager to work with RapidSOS to expand their life-saving platform.”