Raising Early Stage Investments

Raising Early Stage Investments was a panel topic at the Medtech Showcase in January.

Among the points that caught my ear:

• Joseph Gulfo: When you raise public money, ask (1) What is the maximum percent of a company the investor can own and (2) What is the investor’s minimum bite size? These help you determine if you’ll get their money.

• Justin Klein, NEA: Raise an amount of capital that funds a substantial risk reduction in your company, that sets up the next phase in the company’s development for existing investors, new investors, and your management team.

• Lara Abbaschian, Lightstone Ventures: For every thousand introductions, we will take 300 meetings. From those, we will do diligence on maybe 75 and maybe 4 deals. She invests 10-15MM in an average deal size over the course of an investment; it depends who we are syndicating with, how many additional rounds we think will be necessary.

• Derrick Li, TPP Healthcare: China throws a wrench into how traditional venture capitalists make valuations because the typical Chinese company wants to find a hot commodity and make a ridiculous valuation. But the traditional US venture capitalist brings a lot of non-quantitative assets to the table.

• Gulfo: Having strategic partners and having a concept within the investor’s specialty will help your case.

• Abbaschian: A small market with a straightforward trial to run de-risks your investment, making a smaller market more appealing. When you’re talking about a big market like Type II diabetes, you increase the investor’s risk.

• Klein: It’s harder to predict when an investment will mature versus the price for which it will mature. The best outcomes come when you’re not trying to sell a company to achieve some number but when you can generate competitive interest from multiple potential buyers. An average investment from us is $30MM and our goal is a $100MM gain, a 4x multiple. Anything less than 3x is not going to fly and our bandwidth is an issue when you consider overseeing the company.

• Abbaschian: We might talk to a company for a year before investing. You don’t just want someone to write a check, you want good partners, those who will add value beyond the check.

• Klein: When talking Friends and Family (non-institutional money), do it in the form of a convertible note that gives an appropriate discount to convert into a price per share at your next equity financing and this will avoid a down round.

Klein expects we’ll see regulatory loosening and up to 10 IPOs this year, each doing at least $25MM in revenue.

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