March 19, 2018 Vital Signs - Raising early money II - Appropriations bill, opioid dealers
Last week I wrote the following about early-stage capital and my advice to three entrepreneurs:
"The cost of capital for institutional money is much higher than friends and family and founder money. Funding start-ups is risky: VCs expect a return commensurate with the risk. I advise founders to get and use as much of friends and family and their own money as they can before going to outsiders.
One positive point to the high cost of institutional money is that it clarifies to founders that they should only raise what they absolutely need to create value (emphasis - JHL). If a $100 of capital results in $90 of value, why do it?
The other positive part of only raising what you need for the next 12-18 months, if you're successful the next raise will not be easier, the company should have a higher pre-money which means owners will have to give up less of the company for every new dollar raised. That's the way it should work.
I advised all three founders not to use bankers for a nominal capital raise. First, investors were investing in them and the market they'd identified. Early-stage Investors don't like to invest in folks who can't market themselves and their companies. If a founder needs an agent, even an articulate one, it's not a great sign. Second, investors hate to see any of their or the company's money going to bankers. Grudgingly they make exceptions at later stages for larger capital raises or for a sale assignment, but they view payments to advisors as leakage.
The above should be pretty easy to understand. I'm never smarter than when I say what the client is thinking. Then again, genius is the ability to perceive and understand the obvious. I try not to forget those points.
In the next VS, I'll outline some situations which seem to be exceptions to the above, but which really aren't. They came up in my conversations with the 3 founders."
One size doesn't fit all. Thus it is with advice, too.
Why would you raise more capital than you think you need given its cost? One reason surfaced in my conversations with these three entrepreneurs/founders. While all three had decent, fundable ideas, two had solutions without intellectual property which can act as a barrier to entry or create a sustainable competitive advantage for some period of time. Their competitive advantages were that of a first-mover and industry knowledge, both of which can be replicated or overcome. If that's what you've got, a deliberate building process may not be your best bet. Said another way, get big or get gone (I'm in TX now). Think Uber, Lyft, or eBay.
So, think about what you've got and what you want to end up with, other than getting rich and/or making the world a better place for all. Your best bet may be come up with a plan to get big as quickly as possible and dominate the market segment you're targeting. It may sound as if you're rolling the dice, but growing gradually may be its own death knell. And get some decent advisors that will think of more than getting a fee.
The optimal path forward is usually less arcane than you think.
ONWARD EVER
Money everywhere - it's a 2,232 page bill which will be voted on by tomorrow. Details to follow but here's some of the initial healthcare impacts:
"Total HHS appropriation: $88 billion
Winners:
Insurers that fought to keep a new policy that phases down their share of the cost of prescription drugs not covered by Medicare while raising it for drugmakers.
The National Institutes of Health, which received a $3 billion boost in funding, bringing its total budget to more than $37 billion.
Opioid addiction abatement efforts, which received $500 million to develop alternative pain medications. HHS also received $3.6 billion to fight drug abuse.
Rural communities, which will see a hefty $135 million increase in healthcare program funding, including $100 million for drug addiction treatment and prevention.
Telehealth in rural areas will get a boost in grants and HHS' total spending on rural communities will be $290.8 million.
Community health centers will receive a $135 million increase over last year to expand addiction prevention and treatment services as well as access to overdose reversal drugs.
Providers would see a quicker resolution to their Medicare appeals as Congress funnels $182 million toward reducing a backlog of more than 500,000 appeals.
Children's providers will get a boost in their reimbursement rates under the Child Care and Development Block Grant, which got a major $2.4 billion increase over last year. The Children's Hospitals Graduate Medical Education Payment Program will get a $15 million boost to support pediatric medical training.
Abstinence-only sex education gets $25 million in state grants.
Flu prevention. Congress is increasing funds to combat the flu by $218 million, a 68% boost, to improve the response to pandemic flu and ramp up research to develop a universal flu vaccine.
Losers:
Insurers that had been optimistic following the weekend's negotiations for CSRs and reinsurance.
The Affordable Care Act, which now faces several attempts to limit data or grant opportunities related to the legislation.
Drugmakers, who wanted to offload some of their newfound financial liability for the Medicare Part D donut hole back to insurers.."
URL: https://www.modernhealthcare.com/article/20180321/NEWS/180329972?
Death before lowering revenue forecasts - I hope that this doesn't scoop up pharma execs whose companies distributed 21m painkillers in a town of 3,000 in WV over an 8 year period. URL:https://www.npr.org/sections/thetwo-way/2018/01/30/581930051/drug-distributors-shipped-20-8-million-painkillers-to-west-virginia-town-of-3-00
And the doctors who wrote these prescriptions and pharmacists who filled them? Rest In Peace.
"President Trump suggested threatening drug dealers with the death penalty would help the U.S. "get tough" on the opioid epidemic. But key members of Congress and industry experts see better potential in increased federal funding.
A White House briefing statement outlined the Trump administration's three-pronged effort to stem the opioid epidemic through increased awareness and education, stemming the flow of illicit drugs and better access to addiction treatment. The president's speech at an event in Manchester, New Hampshire, emphasized efforts to "get tougher on drug dealers," mentioning the death penalty for drug dealers six times."
OBITER DICTUM - Smart people are funny. Humor tends to be insightful.
I believe alien life is quite common in the universe, although intelligent life is less so. Some say it has yet to appear on planet Earth. - Stephen Hawking
I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones. -Albert Einstein
I have noticed even people who claim everything is predestined, and that we can do nothing to change it, look before they cross the road. -Stephen Hawking
If aliens visit us, the outcome would be much as when Columbus landed in America, which didn't turn out well for the Native Americans. -Stephen Hawking
Intellectuals solve problems, geniuses prevent them. -Albert Einstein
People who boast about their I.Q. are losers. -Stephen Hawking
Honky-tonks: win-win situations for losers. -Anonymous
See you in a few weeks.