Entrepreneur to Entrepreneur: 5 Questions to Look for When Raising Capital
Editor’s Note: Cambia Grove is proud to partner with the innovation community to amplify their perspectives on topics applicable to the larger health care ecosystem. This guest post from Brian Glaister, Conflux Innovations, dives into five common questions entrepreneurs navigate when seeking funding.
The views expressed in this article are solely those of the author and do not necessarily reflect the opinions or positions of Cambia, Cambia Grove, or any other entity or organization.
1. Who invests in healthcare startups?
There are plenty of resources around to source investors. For health care-specific investors, Dreamit maintains a great list of health care venture capital funds, AngelMD helps entrepreneurs access health care-focused angel investors, and Life Science Nation maintains a large database of angels, VCs, private equity, and family offices focused on health care. Furthermore, incubators and accelerators like Y Combinator and Techstars are increasingly interested in health care startups and host demo days to help connect their portfolio companies with investors. JLABS and MassChallenge offer health care entrepreneurs access to non-dilutive capital and may provide connections to other sources of capital. MATTER offers co-working space in Chicago and now New York City and affordable remote memberships and can provide introductions to financial and strategic health care investors. AngelList and Gust connect entrepreneurs with general angels and angel groups, respectively across multiple sectors. Finally, Pitchbook and Crunchbase are the gold standards to research deals in your space and build your own list of potential investors interested in your sector. Some tools are free. Others are not. But these are and other resources exist to help you identify potential investors.
2. How do I meet with investors?
The best way to land a meeting with a potential investor is to get a friendly introduction from someone the investor trusts. Ideally this is someone who led a successful exit for that investor in the past, but it can come from many sources. This can be particularly difficult if you are just starting out and don’t have an extensive network. In recent years, funds have sprung up to make it easier for underrepresented founders to pitch without friendly introductions, but these are still few and far between.
Buy them coffee and talk to them about what you are working on. If they are impressed, they may introduce you to the investor in question who will appreciate that you have gone through one layer of filtering to land the meeting. It is an incredibly inefficient process for entrepreneurs, but it is relatively efficient for investors and they are the ones with the checkbooks. If you need capital to get your company off the ground, sadly you will have few options other than to play the game.
3. Why don’t I get investor responses?
Again, it is all about doing your homework. Investors are bombarded with investment requests, but few of them are actually within the investment thesis of the investor. If you are looking to raise a $2M seed round, you are wasting your time trying to talk to a VC who has billions of dollars in assets under management focused on taking a company from $10M in revenue to $100M. If you are just starting out, you need to focus on early stage investors but this is challenging as the definition of early stage capital differs greatly among investors. For some it is as early as having a team and a PowerPoint deck. For others, it means some demonstration of product/market fit. Build your list of potential investors early, reach out to portfolio CEOs for friendly introductions, and figure out which investors are truly interested in companies at your stage of growth. It is a lot of work to cultivate an investor lead list, but doing the hard work early on will save you a lot of unnecessary frustration from barking up the wrong trees when you really need the money.
4. Am I raising enough money?
I have worked with countless first-time entrepreneurs over the years and the amount of the first raise is almost always a topic of discussion. There is a curious reluctance among many new entrepreneurs to ask to raise enough money to enable them to be successful. Equally curious is that it can often be easier to raise seven figures of investment than six and you will often give up the same amount of equity in your company either way. Those that do go forward with small raises often find that they do not have the resources needed to meet milestones that will make the company more valuable and raise the next round and then both the entrepreneurs and early investors end up in a pickle. When you fall short with your small raise,
they will simply note that you raised a round regardless of the size, did not accomplish what you set out to do and move on to the next deal. Furthermore, most fundraising rounds take at least six months to close and you need enough money in the bank to meet your milestones and still keep the lights on while you raise the next round. Don’t be shy with your fundraising ask. Both you and your investors will be better off if you raise enough capital to be successful.
5. Should I cash the check?
This might be the most important question, but it is one that frequently goes unasked particularly for first time entrepreneurs who are thrilled to find someone willing to write a check to fund their dreams.
Your investors are going to do their due diligence on you, and you need to do your due diligence on them. I recently heard several prominent health care investors speak on a panel and brag about how on average they get the founding CEOs of their portfolio companies fired within 22 months of closing an investment, most of those CEOs end up divorced (yes, actually divorced) at the end of it all, and those that are able to get their companies acquired often find out upon closing that the terms of the investment deals cut founders and employees out of any financial gains. Clearly you want to avoid this type of investor, but most will not be so public with their toxicity.
Particularly those companies who crashed and burned or those who took longer than expected to find traction. Ask about their experience with said investors and learn how they supported the entrepreneurs through the tough times. It is incredibly hard to build a successful company under any circumstances. You want to find investors who will help you do so rather than fight you along the way.
Raising capital for your startup is not easy and it is rarely fun. Furthermore, there are many other things to consider when raising capital for your startup. For instance, read “Venture Deals” by Brad Feld and Jason Mendelson cover to cover several times to learn all the legal ins and outs of startup investment deals. By answering these five questions, you will be on a good path to minimizing the pain and raise the capital you need to get your company to the next level.
About Brian Glaister
Brian Glaister is the Managing Director of Conflux Innovations, a boutique consultancy that operates at the intersection between product development, sales & marketing, and operations to grow innovative companies to the next level.