CFO Studio Magazine, 4th Quarter 2012
By Bert Marchio, CFO of Edge Therapeutics
If you face the challenge of raising money for an established company, you can generally rely on your firm’s numbers to make your case.
For example, an investment-grade company can use its earnings and credit ratings to prove its worth. A company with a non-investment-grade credit rating or no rating can focus on its EBITDA multiple or assets such as accounts receivable, inventory, real estate, and intellectual property.
But if you’re working with a company that’s just starting out, one that hasn’t generated any revenue yet and has no tangible assets to borrow against, it would seem that your options are significantly limited. In such a situation, how do you raise money?
Start by Selling Yourself
If you don’t have trailing EBITDA or assets to offer, you will initially be selling your management team and your vision.
Who’s likely to buy your story? Your best candidates are:
- You and the other members of your management team.
- The people most likely to believe in you: your family and closest friends.
So get ready to use a home-equity line, dig into your savings, and buttonhole your rich uncle or father-in-law as soon as you can.
Your Next Steps
As your company grows, you’ll need to find new sources of funding to fuel that expansion. Possibilities include:
- Angel investors
- Government or foundation grants
- Venture capital firms
- Hedge funds
- Private-equity investors
- Strategic investors
You’ll need more sophisticated tools to convince these sources to invest: an elevator pitch, a mission statement, and a very refined PowerPoint presentation summarizing your company’s unique features.
Your ability to sell your vision and your management team will be critical to your success. Just as important will be your ability to show your investors how they will benefit from your success. Understand that financial return may not be the only consideration for every investor. If you have a potential investor who lost a child to a fatal disease, the fact that your company offers the hope of a cure for that disease might be key. Similarly, a new field treatment for soldiers wounded in combat might help you land a Department of Defense grant.
When courting investors, review things that reduce the investment risk, such as:
- Your management team’s previous success in similar enterprises.
- Your team’s focus on minimizing the company’s “burn rate” and spending only to drive value growth while preserving resources (e.g., reducing overhead by operating as a virtual company).
- Unique technology your company offers; regulatory barriers or other obstacles that will hinder the success of or eliminate competitors.
- Established market demand for your company’s offerings.
- Multiple exit opportunities for investors.
Attracting leaders in your industry to your board as key early investors will greatly help you bring others into the fold. These high-profile investors provide a “Good Housekeeping seal of approval” and give others the comfort of knowing that there’s “adult supervision” on your board.
Finding These Investors
Network, network, network, and not just with Financial Executives International (FEI) and the Financial Executives Networking Group (FENG). You’ll need to get out of your FEI and FENG finance-focused comfort zone and get involved with organizations in your industry, government-sponsored groups that support early-stage companies, and other centers of influence (for example, lawyers, accounting firms, consulting firms, etc.) with connections to high-net-worth individuals and investment firms.
Beggars can’t be choosers. Nevertheless, you’ll want to know whether potential investors bring anything to the table besides money. For example, are they opinion leaders? Do they have reputations for being able to identify good investments at an early stage? Do they have great track records?
As your firm and story develop, presenting your company at an investment conference or an industry association meeting may help you attract larger investors or strategic partners that may wish to buy into the economic promise of your product. A big pharmaceutical company or a tech giant, for instance, might want to partner with you if you’ve developed something of interest in their field.
And don’t neglect to cultivate key vendors who may benefit significantly from your firm’s success. For example, contract research organizations may deeply discount their services in exchange for an equity stake in a pre-revenue company.
Finally, get to know the investment bankers who specialize in your industry and focus on early-stage companies. The best ones will understand your vision, present you with good ideas and honest feedback, and help you raise capital. The ones you want to avoid will focus on “doing a deal” regardless of whether it’s in your best long-term interest.
What About Borrowing?
If you’ve successfully raised equity and are not rapidly burning through your investable cash, you now have an asset that banks can lend against. But you will pay to borrow your own funds.
If your firm’s intellectual property has progressed to the point where a secured lender (e.g., hedge fund) may be willing to lend against that asset, carefully consider the terms of the loan: What if Murphy’s Law holds and timetables slip? Generally you’ll find yourself using equity or equity-like products to capitalize a pre-revenue company even though they are more expensive than debt instruments.
That’s how it is when your company is young and has yet to make its mark in the marketplace.
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