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Matrix Partners

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Milestone Venture Partners

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Venrock Associates

 

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DFJ Frontier

 

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Genesis Partners

 

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As it is becoming harder to raise capital from venture capitalists, existing investors are facing situations where they need to lead new rounds in their own portfolio companies. This presents a big problem for valuations, especially if an investor only has convertible debt. Recently, I've heard a few stories about existing investors promising to lead a round, then pulling out or dramatically changing the terms. Worse, investors will sometimes string you along with a singed term sheet until you are out of cash, and then completely change the deal to take control.

Here are some tips if you think that you are going to need money in the next 18 months.

Know where insiders stand: You need to know where if your insiders will participate or lead a new financing event, and you should also ask them what their specific expectations are for your company performance. Assume that any inside round will be flat.

Pursue other options: Even if your insiders agree to lead a round, you should do your best to have an alternative financing option available. You will never get a fair price for your equity from insiders, since they are pricing, selling, and buying the equity at the same time and since they see all the warts and bruises.

Raise now, not later: Don't wait to raise money. Raising will take twice as long and will be twice as hard in this market. Try to raise enough capital to operate for more than 48 months, if you can.

When in doubt, do debt: If things are not moving fast enough and you have only three or four months worth of cash left, press your existing investors to do a convertible debt round that will give you eight to twelve months of low growth operating capital.

Insider sheet to attract outsiders: If everything else is failing, you may want to have your insiders draft a term sheet with a lot of room for new investors to participate. It's often easier to find outside investors with a "legitimate" term sheet in hand.

Good luck!

More here.

The declining economy and difficult IPO markets have made it increasingly hard for venture funds to price late stage equity. As a result, less and less late stage deals are getting done.

First, existing investors in late stage companies can not easily lead an internal round without a new investor pricing the round to satisfy the appearance of objectivity among their own investors, the limited partners.

Second, new investors have difficulty pricing later stage deals because evaluating the range exit opportunities is impossible right now. There have been no venture funded IPOs in the last quarter, and traditional public acquirers have seen a dramatic decrease in equity values and an inability to raise debt. Without public comparables or reference M&A deals, pricing equity is a guessing game.

On the other hand, early stage investments are largely based on pursuing market opportunities and owning certain percentages of preferred stock. A strong management team with a good market opportunity can raise capital without problem in today's market.

Your best shot as a late stage company is to conserve capital through cost savings and find a "friendly" to price your deal. Once a price is set, there is plenty of money for investment. The price is the hardest part to get. Any suggestions on some ways to land a "friendly""

How are early stage biopharma companies getting funded these days" We have good pre-clinical data and are working to raise funds for a Phase I clinical trial. We've talked to several of the larger coastal funds who (for the most part) have been polite but consistently call us too early, which is consistent with their investment history in the sector. We need to raise between $5-7 million and are not on one of the coasts. This seems like an awkward space. I've had the opportunity to present to several of the top-tier VCs. Most of whom have been interested, engaged and polite BUT the truth is that their track record indicates they are not doing these deals. Their biopharma deals tend to be later stage and greater than $15 million. I understand deal flow but it seems like a waste of everyones time and gets back to the question "who funds early stage biopharma" Advise is greatly appreciated.

1. Generally lack hands-on business building know-how. Provide little if any problem solving capability.
2. Are use to getting into and out of stocks (public) quickly and do not like being in the "roach hotel" when things get tough. Will be hot and cold on investing in future rounds unless they stand to lose alot.
3. They travel in different circles so their networks are generally useless for start-ups.
4. Provide little if any operating advice - recruiting, compensation plans, insurances, MIS, etc. - as they have no resources or experience to draw from.
5. Are generally overcommitted and do not provide the commitment as other board members.
6. Some parade as venture investors but as part of a larger private equity fund, I can assure you they are not.

This post isn't meant so much to learn about investors but is key to starting a company and attempting to not destroy your current relationships and your company in the process. Yes, I'm aware I'm posting this at 12:37AM on a Saturday night (I suppose I have no life so my advice here take as you wish :) ... well, in my defense my gf is sleeping beside me.

But most of us crazy entrepreneurs, myself included tend to get tunnel vision, tune out the world and forget about family and friends and hyper focus while we are in the honeymoon period with our idea (according to my GF, i'm in a relationship with my macbook more than with her - to be honest I'm not sure why she stuck by me during my last venture but that's a story for a beer, not here). So while in the honeymoon period, try to take 15 minutes a day out and kiss your gf, your wife, your mother, your dog, call a friend, LEAVE YOUR LAPTOP and go for a walk and attempt to have a semblance of a life. I'm still struggling with this issue myself but if you're a first time entrepreneur especially, make sure you have an outlet, a hobby, a hookup buddy, anything to leave your computer alone. No, a girl across the country on AIM doesn't count nor does poking random girls on facebook.

One great way to kill a company (and i've done this) is by being so focused on it, you can't see the writing on the walls where there are issues and they blow up when they didn't have too. Too much work hurts more than helps. Life is about balance.

With that said, i think all entrepreneurs (including myself) need shrinks. Now, I've been saying this for a while but I haven't gone to see one so I suppose it's far harder to do than suggest. I do need one, ya know, the frequent highs/low, tunnel vision, ADHD etc...

Maybe attached to term sheets should come a prescription for Ritalin and a weekly appointment with a shrink" (just kidding...or am i" :)

Goodnight folks.

Richie

I feel like I have been suckered into starting LLC's by law firms over and over again, and here is what happens every time: (1) it costs twice as much to get all of the papers done, (2) we start growing and need to layer in complex partnership concepts for the equivalent of employee options, (3) we have to convert to a C Corporation to take any real external financing, and (4) the conversion costs twice as much as you expect since you need to transform a convoluted partnership structure into an equity structure.

Using an LLC structure for a fast growing start-up seems like a trick play to generate ten or twenty times the legal fees. My next company is going to be a corporation, starting with an S corp for preferential tax treatment and migrating to a C corp when the business starts to scale. Any other thoughts on this strategy are welcomed in the feedback.