Alternative Financing for Your Startup: Options Beyond Traditional VC Firms & Angels

David H. Crean, managing director for Objective Capital Partners highlights the options available for start up companies beyond the traditional route of seeking angel funds or pursuit of institutional capital through venture firms.

Pitchbook NVCA data for Q1 2019 highlights that the start of the new year picked up right where 2018 left off with $32.6 billion of capital investment recorded in 1Q. Investment is still robust, and the successful IPO market, especially for VC-backed life sciences companies, over the last few quarters continues to give positive momentum. Angel and seed deal value in Q1 2019 reached $1.9 billion, matching the quarterly average over the past two years. While deal count is down broadly, the angel and seed stage has seen the greatest decline, with the annual count falling 44.2% between 2015 and 2018.

Startups face steeper expectations for maturity from investors even at the angel & seed stage, so capital is being concentrated in fewer but more-developed startups. Despite the decline, capital invested has remained at an elevated level as angel and seed investors place ever-larger bets on the most-favored startups. Median pre-money valuation of angel & seed rounds has climbed to $7.5 million, up from $3.7 million in 2012. With more absolute capital available at the angel and seed stage, outstanding startups have been able to increase valuations without sacrificing more equity.

Early-stage VC investments saw strong capital financing in 1Q 2019, with $9.3 billion going toward early-stage startups. The median size of early-stage VC financings grew 36.0% YoY to $8.2 million, and expect activity to continue climbing in tandem with growing deal sizes. On the late stage VC landscape, capital continues to flow with $21.4 billion invested across 538 deals in 1Q 2019—the second consecutive quarter in which late-stage capital investment surpassed $20 billion.

Alternative Options for Financing

Putting aside traditional angel & seed and VC investments, there are numerous other alternate options to consider to help finance your company. I recently had the opportunity of serving on a panel for BIOCOM Los Angeles in which my fellow panelists, Cassidy Cantin and Michael Rivera, and I discussed "Alternative Financing: Startup Funding Options Beyond Traditional VC Firms & Angels". The panel was moderated by Dina Lozofsky, Executive Director BIOCOM LA. Our panel covered numerous forms of funding that you should consider when developing your business plan and financing strategies such as non-dilutive funding (not just SBIRs!), strategic partnerships with larger companies in your space, family offices, corporate venture capital and how they differ from traditional venture capital.

The fundraising landscape for healthcare and life science companies has changed dramatically over the past several years.

Entrepreneurs and business owners in these industries need to look toward emerging categories of investors to provide the funding that is historically serviced by traditional venture capital firms (VC’s). Corporate strategic companies are undergoing drastic strategic changes as they face aging portfolios of current products and an impending patent cliff, companies must restock the pipeline with innovative assets, and many companies are turning to academic research collaborations, licensing, investment—through corporate venture capital—and mergers and acquisitions as an alternative to in-house R&D at the early stage. This cherry-picking strategy of plucking innovation emerging from academia and early stage companies has become a ubiquitous strategy among the top firms globally, especially in the life sciences, biopharmaceutical industry. Big pharma not only offers a huge source of capital for early-stage companies but also provides access to distribution channels for the market, discovery and development expertise and many other resources. And importantly, big pharma's investment provides validation and street credibility to the early stage company.

Corporate venture funds, government agencies, and foundations are all actively investing in these sectors and represent newer, non-traditional avenues for raising capital. Moreover, there is a growing trend with the participation of family offices. Additionally, we are seeing accelerators playing a significant role in life sciences sector. A new Silicon Valley Bank analysis finds that one in four (23%) life sciences and healthcare startups that raised at least $4 million in 2017 and 2018 is currently or has been involved with an accelerator or incubator. Accelerators and incubators do play a significant role by providing early-stage support and sometimes a follow-on round. Overall, life sciences and healthcare startups are remaining in accelerators longer to take advantage of community support, talent and resources and, as a result, may become more attractive investments.

Corporate VC (CVC) investors participated in 316 venture deals in 1Q 2019, totaling $19.4 billion, maintaining momentum from the rapid growth of 2018. Additionally, CVC activity as a share of overall VC activity set a new high, increasing from 52.7% of deal value in 2018 to 59.6% in 1Q 2019. The doubling of this figure over the past six years is a knock-on effect of CVC investors increasingly taking part in large rounds at later stages and contributing to the trend of VC-backed companies staying private for longer than they have historically.

Family offices are entrusted with the money of wealthy individuals and families. There are two types of family office: single-family offices (SFO’s), in which a group of financial professionals manage capital for one family, and multi-family offices (MFOs), which invest on behalf of a number of client families. Despite the large majority of family offices (>80%) that avoid investment in the space, the healthcare and life sciences sectors are still seeing an uptick from progressive family offices for a variety of reasons including unmet need, legacy, control, avoidance of public market risk and passion for certain areas of medicine.

Key Takeaways from the Panel Discussion

• There are numerous alternate sources of capital available to kick start your business (non-dilutive grants, strategic partnerships, Corporate Venture Capital (CVC), Family Offices, Incubators/ Accelerators);
• Have a capital financing strategy and plan;
• Always be raising. I like to plan two steps ahead and think about where the next tranche will come from;
• Understand valuation inflection points of your business;
• Have reasonable expectations on valuation- it must be defensible;
• Warm introductions to investors help tremendously. Be industrious enough to find someone who has relationships with investors. Investors gauge your ability to find a warm introduction as a proxy for your grit, determination and creativity;
• Surround yourself with strong advisors / mentors / Board who can also make connections and open doors;
• As CEO, you should be able to raise money in seed/ angel, pre-Series A rounds without hiring an investment banker or financial advisor. If you can't raise money, seriously consider stepping aside- don't worry, you can still stay involved;
• If you have difficulty telling your business case, think about bringing on the right CEO who has raised money previously and has been to the "rodeo" before;
• Network like you mean it! Getting your foot in the door of investors is a combination of networking, likability, hustle, showing up, following up, persistence, salesmanship, confidence, experience, story telling and sheer dumb luck; and
• Understand your investors. Do your diligence. Ask them questions because it is a two-way street.
• If all else fails and you forget everything you have learned, remember to go back to the primary principle of pitching your business: How do I convince an investor that my business has a chance to be one of the winners that can make them look like a hero!

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?Disclosure

Objective Capital Partners is a leading investment banking 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’s industry expertise includes healthcare, life sciences, business services, technology, and consumer products. 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.