Getting Funded

Earlier this week life science entrepreneurs and life science professionals all gathered at Nutter McClennen and Fish for a half-day bootcamp that was an intense study of everything a life science company needs to know to get started in business.

Topics ranged from building the business model to protecting your IP. For a taste of what our Venture Fast Tracks are like you can see the short video clip below. In the spring we will be hosting another Venture Fast Track that focuses on all high growth startups.

Are you a life science company and missed out on the Fast Track? Join us next week for Accounting 101 for Life Science Companies hosted by Moody Famiglietti & Andronico in Nutter’s offices.

This was originally posted on April 19 by Micah Rosenbloom on his blog. View the original post here

Timing is everything – especially when it comes to raising a round of capital. My Founder Collective colleague Eric Paleyand I discuss (and debate) it often. Here are some observations having been an advisor to two recent TechStars companies and co-founder to three start-ups.

Be weary of the artificial timeline

Both Brontes and Novophage are classic university ventures. They started in labs, later received university and government funding (Deshpande Center, BU’s office of Tech Development).Both companies went on to win or place in the finals of highly regarded business plan competitions at Harvard, MIT, Duke, etc. It seemed opportune time to raise capital, but the businesses were still not ready. While business plan competitions are excellent catalysts for founding teams, and useful for gathering feedback, they do not ensure that a business is ready to launch (even so for winners/finalists).

Any process that sets an artificial timeline – expiration of government or university funding, graduating from school, a business plan competition or the conclusion of an incubator program does not inherently mean it is time to raise money. All businesses need to incubate at their own pace. Early market pivots, prototype development and building the founding team should generally happen on the founder’s nickel.

Fundraising = acceleration not inertia

All too often entrepreneurs approach fundraising as the start of the venture. This attitude often leads to disappointment. A business should be operating as a regular business – with the makings of a culture, meeting routine and infrastructure (Novophage had 6 gigs of in its Dropbox before fundraising)!

Capital is invested to accelerate a business that has initial momentum but has reached a point where only money can get the company to the next accretive, and risk-reducing, milestone. VCs use the terms “traction” flippantly but in essence what investors want to see is momentum before the fundraising. At Brontes, we needed a clear market focus (dentistry) and industry advocates before we were really ready for a Series A raise.

But strike while the iron is hot …

Having said all this, timing truly is everything. The investment community is momentum driven, just like the stock market. You’ve got to have a nose for when the timing’s right. A strong signal from a VC often suggests its time to talk to many and leverage the interest to terms sheets. If your segment is “hot,” find those pre-disposed investing actively in the segment you’re in.

In the end, the sequencing of fundraising often has a significant bearing on the outcome of the process.

Micah Rosenbloom is the Chairman and CEO of Novophage. If you want to hear more from Micah he will be a panelist during the Life Science Venture Fast Track on November 8, 2011. Early bird ends October 26 so so get your tickets now.

Participate in the Pepperdine Private Capital Market Project. This year survey respondents will have access to over $600 in discounts.

What effect will the recent U.S. downgrade have on lending and borrowing? Will lenders choose to qualify even fewer loans to privately held businesses – historically their bread and butter borrowers? Will private business owners experience even more pain as reluctant lenders become more skittish? Pepperdine University seeks to learn how private businesses and lenders view their outlook in these uncertain times.

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Complete the online survey starting August 29 and receive our comprehensive report before its public release in November. Also:

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1. In life sciences, if it’s “viral,” it’s bad. (Web Consumer vs. Life Sciences) @kentbennett #TCNNE

2. Panel 1 is wrapping up. The relevant meat-and-potatoes of dealing with pitching to VCs and the process of raising a first round. #TCNNE

3. #TCNNE: Don’t cold call. If an entrepreneur hasn’t taken the time to contact a VC through their networks, they’re not a true entrepreneur.

4. #TCNNE: The only thing investors know is that you have the wrong answer. What they want to see is that you’ve thought it though.

5. #TCNNE Communication Math 9×1=0, 3×3=1. That is: 9 messages once each- nothing sticks. 3 messages 3 times each- 1 sticks.

6. The CEO of @BzzAgent has some salient thoughts on term sheets on the #TCNNE panel. Oh yeah, last week he made millions. http://tcrn.ch/ivkRkK

7. Interesting rule: In Massachusetts, companies that pay employees in ONLY equity are violating the minimum wage law. #TCNNE

8. Think of #VC as a big credit card w/ a 30% IR . . . u are going 2 be careful when u draw down $5M. @kentbennett killer soundbytes #TCNNE

9. Now @TCNupdate Chairman Jeremy Halpern leads a #TCNNE panel on how to craft the perfect pitch. Opening comment: ZOOM OUT! #legit

10. Thanks #TCNNE for a great Venture Fast Track event today. Great panelists and tons of valuable metrics and tools

If you are interested in attending a TCN event, click here to see more upcoming events.

ROYALTY-BASED FINANCING GIVES START-UP COMPANIES A NON-DILUTIVE, ALBEIT EXPENSIVE, SOURCE OF FUNDS.

From this original article by Alix Stuart, Senior Writer at CFO.com. Alix covered TCN’s April 12th Breakfast Roundtable on Raising Capital While Maximizing Founders Equity.

Last year Velico Medical Systems, an aging Beverly, Massachusetts-based start-up with no products and no revenue, needed some money. The company had been “in perpetual funding mode,” CFO Tom Fitzgerald told a gathering last Tuesday hosted by The Capital Network, a Boston-area education and networking group for early-stage high growth startups. It had worked on products related to the handling and storage of human blood without any success. A new effort, which involved spray-drying human plasma, seemed promising, but prospects for a new source of equity capital were not as bright.

As it happens, Fitzgerald didn’t need the equity capital. Instead, he went back to a venture-capital firm that had previously turned down the small life-sciences company and emerged with a fresh infusion of cash through a nontraditional financing arrangement known as royalty-based financing.

In this arrangement, companies agree to pay a stream of income, or royalty, to the investor. The royalty can simply be a percentage of gross revenues or, as in Velico’s case, conventional royalty payments for intellectual property. Velico turned over the rights to royalties it received from a patent-licensing agreement it had with a large biosurgical-products company to the VC firm, OrbiMed Advisors. In exchange, Velico received a lump sum of money, free and clear of any future obligation. The deal closed last October, about eight months after the initial discussions about it.

Royalty-based financing is certainly not common, but it could be an increasingly available alternative for certain types of growing companies with steady cash flows, experts say. “I think we’re going to see more of [it],” says Dan Allred, Senior Relationship Manager with Silicon Valley Bank. “There are a lot of companies out there that may not be high-growth enough to get the attention of traditional equity investors, but still have good cash flow and good margins,” both of which would make them more attractive for alternative structures.

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By Bill Yucatonis, CEO of CoupMe and GoodTwo

As of January 18th, 2011, I had never heard of TCN, which is strange because I consider myself to be fairly connected especially in start-up world. Believe me, I’ve attended countless hours of other so-called entrepreneurial networks in the Boston scene, and I’ve paid fairly for what they delivered - a cheap glass of wine and a cold buffet. Thanks for the heartburn.

Call it fate, but on January 18th my bookkeeper, Smartbooks, introduced me to Michelle Hipwood, Executive Director of The Capital Network. I had just launched a new brand, GoodTwo, and we were raising money to capitalize its success and spin it out into its own company. GoodTwo is a free fundraising platform for fundraisers of any size and structure. We offer deals and rewards to donors who support your mission: the donor buys a deal and money goes directly to your cause. Think of it as your own Groupon fundraiser. In particular we’re helping a lot of run-walk-ride-athons achieve their goals, so if you’re doing this year’s Jimmy Fund Walk or Pan Mass Challenge we’ll be there. GoodTwo - Good Deal. Good Cause.

So I’m the CEO, the guy that’s supposed to know it all, but since I never will, I believe it’s important to surround yourself with smart, passionate people. Thank you TCN for surrounding me, because the minute I was exposed to your group there have been countless, immeasurable benefits. I don’t where to begin, but I guess I’ll start from the beginning:

Chapter 1: Michelle introduces me to Ben Littauer, a TCN Mentor, to offer free mentoring services. Free? Seriously? OK, I’m skeptical but I’ll take it. Fast-forward to today. Ben has spent dozens of hours listening to my spiel, sharing a cup of green tea, and giving me great feedback from an investor’s perspective. Ben has gone above and beyond, and will hopefully become a partner in the company in a greater capacity.

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By Dan Allred, Senior Relationship Manager at Silicon Valley Bank and Board member of The Capital Network

These are exciting times for the Boston start-up community. New entrepreneurs, new investors and new companies are everywhere, and experienced entrepreneurs and investors are lining up to mentor them. Nowhere is this dynamic more clear than in Kendall Square, and the Venture Café at the Cambridge Innovation Center is quickly becoming the nexus of much of that activity.

I’ll give you an example of what I’m talking about. I went to an event at the Venture Café one evening last week, and as I walked out of the elevator I immediately ran into one of my clients who is also a fellow BOD member at The Capital Network (TCN), a non-profit focused on addressing the “capital gap” for early-stage start-ups. As she and I caught up, a contract CFO who works with at least a dozen venture backed companies (including her company) approached us and joined in on our conversation. From there, I proceeded down the hallway and ran into ANOTHER client of mine, this time a semiconductor company. I chatted with that team for a few minutes and then FINALLY made it to the Venture Café event, which was attended by over 50 entrepreneurs, most of whom I had never met before. There were several VCs and angels in the crowd that evening as well.

Clearly, good things are happening at the Cambridge Innovation Center, and the Venture Café is quickly becoming the place to meet the next generation of entrepreneurs. With that in mind, I’m very excited to announce the launch of TCN UpStart Roundtables which will feature CEOs with many years of experience to help mentor brand new entrepreneurs. This initiative is a collaboration between TCN and the Venture Café, and we at Silicon Valley Bank are pleased to leverage our network to make sure that there are always experienced entrepreneurs and CEOs on hand to lead discussions about start-up war stories and the decision making process inside of a start-up as well as to provide insight on what keeps these entrepreneurs and CEOs up at night.

Our line-up for the first three sessions of the TCN UpStart Roundtable is as follows:

• Thursday March 31^st: Panos Panay – founder & CEO of Sonicbids
• Thursday April 28^th: Leslie Williams – serial life sciences entrepreneur and current CEO of ImmusanT.
• Thursday May 26^th: Doug Levin – founder of Black Duck Software and founder & CEO of Ayeah Games.
• Thursday June 23rd: Eric Giler - CEO of Witricity and former CEO of Brook Trout and Groove Mobile

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On November 9th, over 50 entrepreneurs gathered at Nutter McClennen & Fish LLP for a full day of panels, discussions, networking, and mentoring with some of the best known entrepreneurs, investors, and service providers in Boston. The TCN Venture Fast Track is a bi-annual event designed to provide entrepreneurs and investors an in-depth understanding of what it takes to raise early stage capital for a start-up. The Fast Track is a full-day version of TCN’s comprehensive Roundtables and Expert Lunches.

Check out what the participants thought of the event! (Most soundbites taken from Twitter)

• Venture Fast Track 1 day boot camp. Impressive intro, great energy.
• Good time speaking at the TCN bootcamp. Boston entrepreneurs never cease to impress me.
• I’m impressed with the depth & quality of the information on VC deals, valuations & equity today
• Killer lunch-mentor session at The Capital Network Fast Track session. Networking anyone?
• Skip the MBA, just go to a TCN venture Fast track boot camp, save $80k.
• Speakers at TCN Venture Bootcamp proving that the analogy between dating and investment never grows old!
• Beth Marcus is dropping some very practical advice at tcn venture fast track, thanks!
• Good to see several MassInno companies here today at Venture Fast Track - good content for startup founders
• Fast track event by TCN was the most educational event I’ve been 2 so far in the startup scene here in Boston. Thx MassInno & TCN!!
• Thx MassInno & TCN for the awesome educational and networking experience today. Looking fwd to more!
• My favorite part was definitely the lunch session. Being able to have 2-3 mentors at our table that we could pitch to was invaluable. They gave me great feedback and asked me some thought-provoking questions. I also enjoyed meeting all the other entrepreneurs and hearing about their ideas. There was great energy in the room.

Are you following us on Twitter?

Want to experience the quality TCN programming? Check out our upcoming events.

Lastly, a big thank you to Nutter McClennen & Fish LLP for their generous sponsorship of the TCN Venture Fast Track, and to our wonderful speakers and mentors.

By Lauren Celano, Founder and CEO of Propel Careers (a TCN sponsor)

On October 26^th 2010, I attended a TCN Life Sciences Breakfast: Opportunities, Challenges and Traps for the Unwary. I wanted to learn about how early stage life sciences companies can negotiate and leverage interests in their Intellectual Property (IP).

I was impressed with the panel of experts:

• James McArthur, Chief Scientific Officer, Synovex Corporation (Entrepreneur)
• Steve Gullans, PhD, Managing Director, Excel Venture Management (Venture Capitalists)
• Paul Sweeney, Partner, Foley Hoag LLP (Lawyer)
• Bob Creeden, Managing Partner, Partners Innovation Fund (Moderator)

Throughout the panel discussion a number of interesting themes emerged:

1. IP is Essential to Raising Capital: Companies should properly document their IP to protect their research, since the state of a company’s IP protection can have a big impact on how their technology or assets are perceived. Investors will do thorough due diligence on the IP and a lack of faith in a company’s IP is one of the easiest ways to stop a deal. Companies with a strong IP strategy can enhance the probability of success. IP is critical to the valuation and eventual monetization of technology-intensive companies and can often directly translate to an exit. One exception to the IP rule is IT- and service-based companies which are likely to be valued more on their revenue base than on their IP.

2. Challenges of In-licensing: Challenges of in-licensing technology often arise from differences in expectations for upfront costs, annual payments, or royalties between the licensee (i.e. tech transfer office) and the in-licensor. This can be due to differences in the perceived value of a patent, expectations to protect and, if needed, prosecute claims, or lack of trust between the parties. In order to increase the probability of a successful negotiation, both parties should do their due diligence and start with reasonable expectations, lay out objectives and limitations, and focus on the end goal. For those companies looking to license or sell their IP to a large pharma/med device company, realize that these latter companies have tremendous resources to confirm your IP value. Having a clear understanding of the organizations and people at the other end of the table should assist in negotiations.

3. Ensure You Know Who Owns the IP: Since IP is the lifeblood of most technology based companies, failure to ensure ownership of the IP could compromise the viability and success of the company. In seeking to protect their IP, companies should make certain that all research and data generated through collaborations with CRO’s or academic institutions are owned by the company. If you are a researcher working at an institution that receives federal funding, familiarize yourself with the Bayh-Dole Act which often gives ownership of IP to the university rather than the researcher. Companies should implement written agreements to protect ownership rights. Always use a CDA/NDA before disclosing anything to employees, consultants, and third parties. Once exception here is that many sophisticated investors won’t sign NDA’s – but don’t worry, this is standard industry practice. As a licensee, be aware of the potential conflict between publication and protection: in Europe companies need to be protected before disclosing anything while in the US companies have one year to file after disclosing information.

4. Read the Patent Literature to Understand the Space You Are Working In: This may seem simple, but some companies and individuals don’t do a thorough job ensuring that they understand the entire IP landscape around their technology. Read the patent literature to ensure that there is not something already protected in the space you’re working in. As I mentioned earlier, an investor’s lack of faith in your company’s IP is one of the fastest ways to stop a deal.

5. Patents Do Not Mean Automatic Cash Flow: Just because you have a patent, doesn’t mean you’re going to become wealthy. Very few patents actually translate into a substantial technology breakthrough which translates into a large revenue/royalty steam. Most patents see value at years 15-18 and this knowledge is an important consideration for someone looking to gain financial value from their patent. Make sure you find strategic partners who also see the potential value in developing the assets under patent from year one to years 15-18.

6. Understand License Agreements: Ensure you know what terms you are committing to in licensing agreements since these agreements will have an impact on your company as it develops. For example, some agreements include a first of right refusal or a sub-license approval which could complicate future financing negotiations. A sub-license approval requires you to get the approval of the institution before licensing the technology. Also be aware of payment provisions which may include upfront payments, minimum annual payments, sales based royalties, milestone royalties, and royalty stacking. In particular royalty stacking can make situations complicated and can undermine the value of the patent’s backend royalty stream.

In general, the key to smart IP Licensing is doing your homework! Make sure you understand who all the players are and where their interests lie. It is also imperative that you work with a lawyer who is familiar with these topics, such as TCN sponsors Foley Hoag and Bingham McCutchen. The cost of being informed will ensure that you are protecting your IP and building a strategic company!

If you have any comments, please leave them below! For more information about TCN, visit www.thecapitalnetwork.org.

They say taking venture capital is like getting married. That’s true with all of the possibility for amazing success and radical failure that it implies. So how do you avoid staring deeply into a partner’s eyes (that once, maybe not so long ago, held so much affection and promise) and seeing disappointment? Or worse, seeing the desire for you to move out? Well, like any good relationship, it all begins with a few critical things: Passion, Leverage, Dating and a Good Lawyer.

Passion –When looking at a sea (okay, maybe a pond) of potential investors, you definitely want to start with the ones who are as passionate about your venture as you are. Early stage investors should show you some love on your first date. If they don’t get you, you shouldn’t want them. Just like dating, you can’t logic your way into someone’s heart. While you can definitely act in ways to eliminate the passion, there is very little you can do to convince someone who is “just not that into you.” So find a date with an investor who cares about your sector, or who loves your customers, or who loves your technology, or who at least loves you. If you don’t share the passion, it will be hard to weather the storms that are likely to come.

Leverage – Let’s face it – everyone would rather be chased by prospective suitors than to have to do all of the chasing. If you have identifiable customers with significant business pain, a killer solution, a fantastic value proposition, a proven business model, a large and growing market, a defensible competitive advantage and are led by an experienced team, then you WILL have investors coming to you. The stronger your venture, the more you can select marquee VC firms and have better opportunity to keep valuations high, and draconian performance milestones low. You will be able to resist deal terms that may leave you vulnerable to firing, or which may be painful to your Angels who backed you from the get-go. In Seinfeld-Language, who’s got more “Hand” will tell you a lot about how your potential relationship is likely to play out. So just like before dating, get a haircut, buy some nice clothes, think about your profile, and above all, create a valuable business that is in high demand — because being one of the pretty ventures definitely has its advantages.

Dating - You should definitely date. Even if you are very young startup – go date. If you are desperate and marry your first investor suitor, you won’t know much about your new partner – and you won’t know how they compare to other possible investor mates. If you wait too long until you are in financial distress, you will wind up in the disempowering world of the arranged marriage (also known as the recapitalization) – not something likely to turn out well.

So, date! Find out if your potential investors have good reputations around town. Ask around – just like you would of your friends about prospective life partners, fellow entrepreneurs, lawyers and angels will have useful information about the reputation of your potential venture mate. Do they support their investments? Are they financially strong? Are they in fact smart money providing you leverage and reach into your customers or strategic partners? Will they step up for follow on investments? Do they work with and help grow Founders, or do they have a pattern of bouncing the founders at the first opportunity? Do they value the risks taken by your Angels? Does your venture fit into their long term portfolio strategy or are you just the soup-de-jour? By spending time comparing possible mates, you ensure that you understand how your partner will likely act when the inevitable hard times arise. Because they will.

Lawyers – Okay, so without an excess of cynicism, I hope you will agree that things do in fact go wrong. Didn’t you ever look back and think: “but s/he seemed like such a good fit at the time – they were passionate, had a good reputation and offered a great partnership.” And because you didn’t want to scare off this once oh-so-desirable partner, the mantras were “trust me” and “we’ll work out the details later.” And then, of course, things went wrong. In fact, in business, things ALWAYS go wrong – it’s a question of how often and how bad. Like the old military parable, no business plan ever survived contact with the marketplace! So unlike in love, your lawyers are not just useful – they are a necessity. Because there is a thin line between love and corporate warfare.

Lawyers will help you understand the deal, the risks, possible solutions (the Solomonic opportunity of splitting the baby), and your obligations to your team, angels, customers, lenders etc. By the time you actually enter into the partnership you should be crystal clear on issues such as voting control, employment termination scenarios, dilution, board seats, performance milestones, strategy, compensation and when and how the company will be sold.

So while many will tell you that marriage to a VC or angle investor is a terrible thing – I think just the opposite. The relationship can be an amazing matching of capital, skills and knowledge with your venture’s opportunity, passion and team. Make sure that you spend the time and gain the leverage to find the funding partner that is right for your venture and that you flush out the details of the relationship. Because in the land of venture capital, there is no annulment.