Valuation Strategies Larry O. Blankenship Evergreen Research, Inc. February, 2015
Many Levels, Many Approaches Seed, early stage and pre-revenue valuation is different than mezzanine or growth funding Medical Device companies have different risk/ reward profiles from Biotech/Pharma companies, and are valued differently accordingly This talk is from the perspective of startup/early stage Medical Device companies February, 2015 2
The Role of Valuation For most startup/early stage firms the objective is to obtain funding Not all funding approaches require a valuation Examples: Grants (NIH, NSF, AIA, etc.) Are they right for your company? If so, they re attractive, non-dilutive sources Convertible notes for accredited private investors A common way to obtain from hundreds of thousands to over a million dollars in early investment Eventually we all need an exit, however, so valuation must be considered at each stage February, 2015 3
Sources of funding for startups (before the economic downturn) Non-Dilutive Grant Funds (e.g., NIH) SEED FUND VC PRIVATE INVESTORS (Conv. Note) ANGELS February, 2015 4
Sources of funding for startups (shifting, shrinking, changing) VCs are still there, but fewer and much more risk averse: Non-Dilutive Grant Funds (e.g., NIH) SEED FUND VC Once you have your product on the market with strong revenues, come back to see me! PRIVATE INVESTORS (Conv. Note) ANGELS (Now Syndicating) February, 2015 5
Sources of funding for startups Shifts continuing. You need to ask: Who Cares? Non-Dilutive Grant Funds (e.g., NIH, AIA) Family Offices & Philanthropic Investors Strategic Investors SEED FUND PRIVATE INVESTORS (Conv. Note) VC VC ANGELS (Now Syndicating) Who Cares? Someone who says I can make money on that! or That s us! Strategic Investors More active but be careful of strings attached. Private investors: Dealers/distributors can be good options, but again, look for strings. Family Offices & Philanthropic VCs offer new alternatives February, 2015 6
The Objective of Valuation The objective is to obtain funding And do so at minimum cost Cost has several components Equity percentage Interest rates and equivalent Debt load Entanglement/strings (e.g., on IP, buy-out, distr.) Culture and control (a big deal) Go into any deal with your eyes open Maximize your valuation/minimize risk February, 2015 7
Building Value Step-by-Step (7 Steps to Higher Valuation) Build Key Relationships Get the Word Out 6 Make Tangible Progress 5 Find & Use Comparables 4 Address the 4 Key Risk Areas 3 Protect Your Ideas 2 Choose Fundable Ideas 1 VALUATION 7 February, 2015 8
February, 2015 9 1. Choose Fundable Ideas Make yourself an expert on trends in your market area what s getting funded and not Position your company/project as a leader in new, exciting trends, not re-treads Example: Founder of one of the most successful heart valve companies in history and one of the most successful pacemaker companies has had trouble getting his new CABG company funded Drop or out-license projects that don t fit Adapt yourself and your company 70% of successful startups had to change their product or market strategy from their original vision (Domain VC quote emphasizing importance of adaptability)
2. Protect Your Ideas A good idea will look good to others who will try to get there first or beat you at your game Create barriers of entry for your idea Examples: Patents, including provisional and PCT filings Regulatory strategies Presence in the market Strategic alliances February, 2015 10
3. Address the 4 Key Risk Areas Market risk if you build it, who will buy it? Are you sure? Why? Competitive landscape? Technology risk will it work? What makes you think so? Who else agrees? Management risk can your team execute the plan successfully? What makes you think so? Regulatory risk many companies have been significantly delayed by this risk (or put out of business). Why won t this happen to you? February, 2015 11
4. Find and Use Comparables What other funding events might relate to your current stage or exit potential? Be creative! If you re truly unique, there will be no direct comparables, so look for events in related therapies, markets, or domains Example from the ValveXchange project: While no heart valve is 2-part & exchangeable like ValveXchange, 6 small heart valve companies have acquired in the last 10 years for $155 850 million February, 2015 12
5. MAKE TANGIBLE PROGRESS Talk is cheap. You won t be funded on your 1 st visit. Watchful waiting is a common and effective strategy for investors at all levels they have the money and the time to see what develops By working hard and diligently over time, and showing REAL, TANGIBLE progress in achieving your milestones (and more), you ll gain their respect, their confidence, and increase your value February, 2015 13
6. Get the Word Out (tactfully) Nobody wants to be bugged, but if there s interest, everyone wants to be up-to-date Keep your company and your progress in the face of your potential investors without being objectionable Examples: Press releases or similar about upcoming presentations, important milestones met, new people, etc. Interesting periodic newsletters demonstrating you company s knowledge and leadership Use LinkedIn better than a website for direct contact! February, 2015 14
7. Build Key Relationships People invest in people! VCs, Angels, etc. They re all people. Someone at the VC firm must champion your company, which means championing you As interest is shown in your idea, get to know the people. Understand their background. Take interest in their priorities. Then respond to them quickly, professionally, completely, and whenever possible, proactively February, 2015 15
7. Build Key Relationships, Part 2: WHO CARES?! People invest in people! With more wanting funding from fewer sources, you must differentiate your company Proactively answer the question Who Cares?! Who s on your board? Who are your investors? Who are your Medical/Scientific Advisors These lists should read like Who s Who In most cases institutional affiliation counts more that individual reputation February, 2015 16
8. Manage to Persevere (yes, 8!) You must stay lean while making progress From a recent talk by a major VC: In today s economy, cash is more important than your mother! To thrive, you must first survive. Plan your cash flow to last as long as you possibly can and run your operations and yourself accordingly Outsource to competent, flexible resources February, 2015 17
Building Value Step-by-Step ( 7 Steps to Higher Valuation) Manage to Persevere 8 Build Key Relationships Get the Word Out 6 Make Tangible Progress 5 Find & Use Comparables 4 Address the 4 Key Risk Areas 3 Protect Your Ideas 2 Choose Fundable Ideas 1 VALUATION 7 Tell Your Story! February, 2015 18
Key Elements to Your Presentation Who Tell about yourself and your team Why Why will someone part with their $$ - Get buy-in on the problem What The product that solves the problem How How does it work, how is it protected When - Timeline to revenues with milestones How much The full picture, now and later February, 2015 19
When You Finally Get The Money DON T SPEND IT! Most common mistake after funding is to increase burn rate too rapidly Use the money as if it is the last you ll get Stay lean and focused Many companies have stumbled badly by not preserving their new-found cash, resulting in a down-round at next financing, or worse February, 2015 20
Somebody Finally Wrote the Book! The Life Science Executive s FUNDRAISING MANIFESTO By Dennis Ford Just published July, 2014 Practical how-to advice Pharma, Biotech & Device First such book focused on today s Life Science market Note: I have no connection to Mr. Ford, his company or his book. I ve just found it useful! February, 2015 21
First and Finally: Have Fun! Nothing is more satisfying than seeing your startup grow and succeed It s good for you, for your customers, and for our economy It s a legacy you can leave Entrepreneurs are the backbone of innovative growth. Most can t do this. Good for you! Good luck and good business! February, 2015 22
Thanks! If I can help, let me know! Larry O. Blankenship lblankenship@evergreenresearch.com February, 2015 23