Funding Options for Fuelling Your Entrepreneurial Odyssey
According to market analytics, the number of healthcare startups has increased by 68% in 2015. This time is regarded as the “Golden Era” of Healthcare startups with Venture capitalists interested to venture in the healthcare sector and reduced initial investment requirement due to cutting edge technology. However, out of 1000 startups only 8 of them can to grow big. The main reason for this observation is that the entrepreneur does not have proper guidance and knowledge about the funding processes. The main catchphrase of this article is to provide useful information about the various funding process and illustrate the various facts associated with all the funding processes. This information can help the entrepreneurs seek the right kind of funds, to help their business grow and flourish!
Keywords: Bootstrapping, Equity Crowdfunding, Micro VCs, Venture Capitalists, Angel Investment, Legal Constraints.
At a Glance
- The Process of Equity Crowdfunding
- Micro venture capital
- Venture capital
- Venture Capital Firms- The Top Players
- VC Investment in Health-care in the year 2015
- The Process of VC Funding
- Angel Funding
- The Process of Angel Investing
- Legal Constraints Linked With Funding Process
Show me the money! Well if you are an entrepreneur undergoing business metamorphosis, funds will be the first thing you would seek.
According to Gavin Newsom,”Accessing capital to start a business can be a daunting process, especially for entrepreneurs who start out with a great idea but have no real familiarity with the business world.”
Funds are the lifeline of any business. The journey of any new business starts with a great idea and radically passes through several phases of the business cycle. Transition from one phase to another is facilitated by funding generated through various means. These include bootstrapping, equity crowdfunding, angel investors, micro VC’s and Venture capitalists.
Figure 1: Stages of funding in business lifecycle
In a typical business lifecycle, the founder bootstraps the idea with prototype and rolls out the product by generating revenues through angel funding and seeks venture capitalists for future expansion and growth.
Bootstrapping is typically the germinal backing source for the start-up entrepreneurs. It also can be said that the entrepreneurs put their “money on the line” for starting the business. The major corporations like Apple, Coca-Cola and Microsoft started as boot strapped ventures.
Bootstrapping is the most economical and efficacious way of funding, as it provide peerless control to the owner. However, boot strapping may put the entrepreneurs “in the red” situation as most of the money is from the pocket. Since the money is from the entrepreneur’s pocket, bootstrapping requires careful attention to the management of money and the entrepreneur should keep track of the operating expenditure and profit flowing.
Bootstrap ventures are becoming very popular amongst the start-up entrepreneurs. According to a survey by National Small Business Association up to July 2014, more than one-fourth of small firms started with bootstrap funding and only 2% equity stakes were sold to the outside investors.
Crowdfunding is the new-generation philanthropy. Crowdfunding involves a group of investors for backing unlisted companies or projects in exchange for shares or profits. According to the Jobs Act, the equity funding is allowed only to the US Security and Exchange Commission (SEC) accredited investors. So, all the investors should meet the standard set by the SEC to be accredited which includes meeting the income or net worth standards.
Types of crowdfunding:
- Donation-based crowdfunding
- Equity crowdfunding
According to recent market research, there are more than 500 website crowdfunding platforms available which led to the profit of $5 billion by last year. The health entrepreneurs for a small amount of seed funding can approach the crowd funding sites like MedStartr and Health Tech Hatch.
Table 1: Recent crowd funded health care companies/projects
|Company/Project Name||Type||Crowd Funded By||Funds|
|Watsi||Non-profit company financing healthcare in third world countries||Y Combinator co-founder Paul Graham, Ron Conway, and Vinod Khosla.||$1.2 million|
|LinkedMD||Healthcare technology company||Kick starters||$15K|
|Cure Crowd||Medically-guided search engine||Indiegogo||$7.5K|
|IntelliQuit||Mobile health device||MedStartr||$23K|
|MindApp||Mobile App for cancer patients||MedStartr||$61K|
|Cell Therapy||UK based Biotech company||CrowdCube||£700,000|
Source: Tech Crunch, CrunchBase
One of the most successful examples of crowdfunded healthcare project is Scanadu Scout, a medical tricorder device developed by a Silicon Valley-based firm Scanadu. It broke all the records of Indiegogo, a popular crowdfunding platform, as they pooled more than $1.4 million funding for their project.
The Process of Equity Crowdfunding
Micro Venture Capital
Micro VCs are the minor venture firms that principally invest in the seed stage of startup companies that are unable to magnetize the traditional venture capitalist investment. The most common problem faced by any startup is entering into a new market or creating the new market, and the Micro-VCs are much more lenient to these companies and are ready to bear the risks.
General characteristics of Micro VC firms:
- Predominantly invest at the seed stage
- Investment on behalf of 3rd party partners
- Fund limit $50million
Nowadays, due to modern technological inventions like Cloud and SaaS, the offsetting a new startup is getting straight forward, and micro venture capitalists are playing an important role in providing the much-needed capital. As a result, the Micro-VC’s are gaining much more profit by investing in the next great idea.
Venture capital is a smart investment which financially backs startup firms and small business which are anticipated to have potential for growth but do not have passage to the capital markets. Venture capital according to business language also termed as the “risk capital” may lead to a share of equity, profits, and even some management role.
Some facts about venture capitalists
- Venture capitalists take the high risk but have the chance to reap greater returns.
- Venture capitalists are private funders like an affluent independent capitalist or even investment banks.
- Venture capitalists not only invest in startups, but they also help companies in expansion or even recovery of bankrupt companies.
- Venture capitalists provide wholesome money as well as help to acquire prestige, because if you can get backing from a venture capitalist that means your business or idea has a great amount of potential for breakneck growth.
- Venture capitalists invest in the companies that they expect to go big either by going public or merge with larger firms.
Table 2: Top 5 VC funded companies of United States
|Moderna||$450 million||Flagship Ventures, Invus Group, Merck & Co. , Boston Medical Investors||Healthcare company focusing on messenger RNA therapeutics|
|Intarcia Therapeutics||$200 million||New Enterprise Associates, Venrock, GGV Capital, , New Leaf Venture Partners||Pharmaceutical company developing novel disease therapies|
|Reata Pharmaceuticals||$300 million||CPMG, Cardinal Investment Company, Novo Ventures||Pharmaceutical company focusing on cancer drugs|
|Adaptive Biotechnologies||$195 million||Celgene, Viking Global Investors ,Tiger Management Corp, Matrix Capital Management||Biotechnology company focusing on immunosequencing diagnostics|
|Aurora Diagnostics||$406.4 million||BiologicTx, NeoGenomics Laboratories, Cerberus Capital Management||Laboratory company|
Source: CB Insights, Venture Wire
Table 3: The top most VC investors involved in US Healthcare sector
|VC Investors||Total Funds Investment||Notable investments|
|New Enterprise Associates||$ 3 billion||Galera Therapeutics, FabFitFun, Collective Health, Amplyx Pharmaceuticals|
|Deerfield Management||$ 2.5 billion||Invitae , Kolltan Pharmaceuticals, Arena Pharmaceuticals, Pacific Biosciences|
|Venrock||$ 2.4billion||Lyra Health, KalVista Pharmaceuticals, CytomX Therapeutics, Doctor on Demand|
|Ally Bridge Group||$ 600 million||Otonomy, Shockwave Medical, 3-V Biosciences, PIERIS Proteolab|
|Foresite Capital Management||$450 million||Intellia Therapeutics, Audentes Therapeutics, REGENXBIO, Allergen Research Corporation|
Source: CB Insights, CrunchBase, Data.Gov
Venture Capital Firms- The Top Players
Sequoia Capital is the top most American venture capital firm located in Menlo Park, California, United States. It primarily invests in the various stages of business cycle including incubation stage, seed-stage, startup-stage, and growth stage. Sequoia has a diversified portfolio including companies from healthcare, energy, finance, mobile and technology domains. The most popular and successful investment by the firm includes Apple, Google, You Tube, PayPal, Instagram, WhatsApp, Atari, Cisco Systems, LinkedIn, Zappos, Fire Eye and Alibaba, etc.
The amount of investment varies for different stages.
- Seed-Stage Investment: $100,000 to $1 million
- Early Stage Investment: $1 million to $10 million
- Growth Stage Investment: $10 million to $100 million
2. Cambia Health Foundation
Cambia Health Solution, a premium health solution company, focused on revolutionizing the experience of healthcare founded a corporate foundation named, Cambia Health Foundation in the year 2007. It is dedicated to altering the healthcare system to more sustainable and personalized. To bridge the gap of the healthcare system, Cambia backs collaborative programs. It also encourages the development of novel devices and innovative ideas to amend the healthcare facilities.
They award grants on the program area: Transforming healthcare, children healthcare and sojourn.
3. Khosla Ventures
Khosla ventures based in California, was founded by Vinod Khosla, the co-founder of SunMicrosystem. The firm invests in early stage companies in the domain of Information Technology, Mobile, Clean Technology, and Health. The total assets of the company are worth 1.3 billion. Catalia Health, a health technology company received $1.25 million in seed funding from Khosla Ventures. In addition to Catalia Health, Khosla Ventures has also invested in ZocDoc, HealthTap, Editas Medicine, CrowdMed, Vida Health, Kyron.
VC Investment in Health-care in the year 2015
According to market research, the total amount of investment by Venture Capitalists in the healthcare sector touched the highest record of $3.9 billion. Among the different sectors, the biopharmaceuticals topped the chart with around $2.14 billion investment which accounts for 55% till the mid–way of 2015.
Source: Dow Jones Venture Source
The Process of VC Funding
Classical example of VC funding in healthcare industry
Venture capital can be miraculous for startups. One of the best real-life examples, for this statement, is Flexus Biosciences INC which is a privately held immunotherapy company founded in the year 2013 by Terry Rosen. It pooled around $38 million over two rounds of backing from Venture capitalists Kleiner Perkins Caufield & Byers, The Column Group and Celgene. It also struck a deal in February 2015 with Bristol-Myers Squibb and transformed from a startup to a $1.25 billion company in just two years. The chief investors Kleiner Perkins Caufield & Byers are reaping more than ten times the amount they have invested in the company.
Angel investors are upscale individuals who invest their money in startup companies or small businesses in exchange for profit shares or ownership equity. Originated from the Broadway Theater, the term “Angel” has become popular in the capital funding markets. The angel investors sometimes organize themselves into networks and form angel groups that invest the collective capital in to new ventures. Angel investors are much more tolerant and encouraging to the startups. The prime focus of angel investors is a brisk growth of the company’s business rather than procuring higher profits.
In the United States, the Silicon Valley monopolizes the angel investing market. An angel investor invests somewhere around $25K to $100 million.
Traits of the companies that the angel investors look into before investing are:
- Novel technology or product
- The quality and liability of the founders
- Chances of the company becoming the next big thing
- Well stratified business plan with some evident profit
Angel investors are classified into two broad groups:
- Affiliated Angel: An affiliated angel can be someone with some association with the entrepreneur or the business in which he they are investing but may not be related or a close acquaintance.
- Non-affiliated Angel: A non-affiliated angel is someone without any connection to the entrepreneur or the business.
Table 4: Top 5 angel investors in healthcare industry of the United States
|Angel Investors||Notable investment||Funds|
|Life Science Angels||Zogenix||$60M|
|Queen City Angels||Airway Therapeutics||$4.6M|
|Tech Coast Angels||Immuno Gum||$1.2M|
|Pasadena Angels||Savara Pharmaceuticals||$4M|
|The Angels Forum||Zephyrus Biosciences||$1.5M|
Source: Angel resource institute, Forbes
The Process of Angel Investing
Legal Constraints Linked With Funding Process
Though getting funding for business is exciting but every rose has its thorn. Funding comes with some legal constraints. And as budding entrepreneurs you should be fully aware of legal constraints of different types of funding.
1. Equity crowed funding: The “Jumpstart Our Business Start Ups Act” also known as JOBS Act passed by the Congress in 2012, was aimed to help startup entrepreneurs to start or expand the business by advertising online, and any common average American can purchase the stakes of business they envision to have potential growth. The JOBS Act is still not implemented, so the state agencies and law makers are implementing laws and regulation for crowdfunding. According to market research, the District of Columbia along with twenty- two states has implemented crowdfunding rules and regulations. The rules vary for different states, however in most of them the crowd funding limit is $1million to $2 million and individual funding can be up to $10,000.
2. Venture Capital: The VC funding will put some restriction on the peerless control the entrepreneurs have, and the investor’s opinion and consent on the major decision will be needed. It is better to be careful about the equity percentage. As some VC firms ask about 50-60% percent of equity that in other words makes them the major controller instead of the owner. ROI percentage should be taken into consideration. In case of innovative business idea, signing of nondisclosure agreement by the VC firms should be encouraged. The VC invests in any firm for four to six years and after that they demand the closure of the deal. So depending upon the time a business plan requires to amortize, VC funding should be sought.
The legal constraints of Micro VC funding are similar to that of VC funding.
3. Angel Funding: Though angel groups are referred as angels in the startup business market, but there are some legal facts to be understood by budding entrepreneurs about angel funding. Angel groups invest in startups and in exchange they want shares, but depending on the startup valuation they can demand convertible notes. Convertible note signifies that the money invested by the angel investor will be transformed to equity in the series A round of investment.
As there is a proverb that “Nothing worth having, comes easy”, same things applies to all these funding processes that has certain legal constraints and the entrepreneurs should be aware of it. So having a great idea and starting a new business is a good thing but grasping all information and making the business the “Big Thing” is commendable. The bonding between the investor and entrepreneur is very salient, and it is not less than matrimony, may be even more important. However, with increasing number of funding choices the selection of one is cardinal for the success of any business. So, all the blooming entrepreneurs should take their time to choose one funding process and enjoy the business journey ahead. Bon voyage!
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