Pros and Cons of Creative Financing Approaches for Growth in 2025 | LSI USA '25

Barry Grossman  0:05  
Barry, welcome everybody. We're very happy you all decide to stay this late, so we certainly appreciate that. My name is Barry Grossman. I'm one of the founding partners of Eleanor Grossman and Shoal. We're a New York based law firm, about 125 lawyers. We do corporate work, Scurry's work, M and A, intellectual property, labor, litigation, all the all the fun stuff. We represent probably about 75 public companies, few 100 private companies. And then we also represent numerous sources of capital, probably about 35 investment banks, and, you know, 40 plus funds. So we do a lot of work in the space that's the quick two in the commercial Great.

Luke Duster  0:44  
Hello everybody. I'm Luke deuster, a partner at CRG based out of Boulder, Colorado. CRG is a credit focused firm that provides capital to commercial stage, healthcare companies. We've invested about $5 billion across 80 different companies during the 16 years we've been operating the company.

Kyle Dempsey  1:03  
So I'm Kyle. I'm with MVM Partners. We've been around for 25 years or so, always focused on healthcare, got offices in Boston, London, in the Bay Area, and we really focus on companies everywhere, from PMA study time all the way up through every stage of commercialization. Hi

Suchira Sharma  1:24  
everyone. My name is Suchira Sharma. I'm a principal at elvage Medical. Elvage is a healthcare venture capital firm that invests in devices, tools, diagnostics and tech enabled services between the late clinical to early commercial stages. And we're based in Austin, Texas. Hi

John White  1:41  
there, everyone. My name is John White. I'm a managing director with KCK Medtech. We are a single family sponsored evergreen fund. I think, like these two, we invest in everything from about pivotal stage on forward through commercialization. We are a family office, but we behave, I'd say more like a traditional venture fund.

Barry Grossman  2:04  
Thank you. So Kyle, why don't we start with you debt versus equity financings. I'm sure you've seen a lot of variety, a lot of different creative ways people are doing it. Why don't give us the basic over the loop? Overlook of those? Sure.

Kyle Dempsey  2:18  
I guess just to really set up the rest of the discussion, it may be helpful just to start at the highest level and work down to what a creative financing really is, and what's incorporated in that term at the highest level, what's the objective of any financing? It's really to make sure that a company has sufficient capital to achieve specific milestones that will inflect its value and hopefully allow it to raise capital at a higher price or to be acquired or to go public. And so, you know, when we when we move down the spectrum to what a creative financing is versus just a typical financing, I think the creative financings typically have a couple distinct features. Sometimes they involve things like tranching, and in other cases, it may involve a mix of debt and equity. So, you know, I think there's so many different things that can be incorporated into a creative financing that it's hard to precisely define, but I think the Hallmark features would typically be something with tranching and sometimes thinking about thinking holistically about the capital structure through equity and debt, to make it a bit more tangible. Just as a starting point for the discussion, there was a public company called Inspire MD that did what I would call a pretty creative financing. What they did there was essentially a three tranche equity financing. So basically tranche one was to help it generate clinical data, and as long as the outcome of that data was successful, they would unlock another tranche that would help to get them through regulatory approval. And then there was a third tranche that I believe was intended for early commercialization. And so the general concept of that type of creative financing structure was to provide all the capital needs of the company, from the early generation of clinical data up through the early commercialization, and to have the valuations of those different equity rounds match the de risking of the company as it went throughout that process. There's so many different iterations of in forms of creative financing that I won't go into all the potential permutations of it, but I think that's kind of a classic one, and maybe a good starting point for all of us. And

Barry Grossman  4:42  
is debt any different? I mean, debt really similar to that than what you describe. It sound like more of an equity type structure. Sorry, say it again. It was just, are the debt financing significantly different than the equity structures or they?

Kyle Dempsey  4:55  
I don't think so. Actually. I mean, there's going to be different. You. Are ways in which different there's going to be different pros and different risks that are created by both of those structures. But fundamentally, the idea that a debt provider or an equity provider is going to tranche around different forms of risk is something that I think you'll see will be consistent across debt and equity. What I would say is that the consequence of not hitting one of those, you know, de, risking points could be very different if it's a debt, a debt provider versus an equity provider.

Barry Grossman  5:31  
And Jon, what are some of the more creative structures you've seen in the med tech industry? And I'll put Part B on there. Does it matter what stage the company, is that or commercialization start up? Does any of that matter?

John White  5:43  
Yeah, I would say first and foremost, we which we should all acknowledge how hard it is to raise capital in this environment, full stop. So you know, if you can get capital, sort of like Ray was saying, should get capital. So I don't. I want to preface my comments by saying that, you know, I think that's a great Those are great examples of unusual structures that are, frankly, becoming more normal. I think there are even more unusual things that we've certainly interacted with at KCK. The ones that come to mind for me at the moment are some of the investments we took from sovereign funds. Those investments often come with other strings attached to them. In particular, with a sovereign fund, you often find yourself operating or agreeing to operate your business in their geography, and you know if it's your only source of capital, as I said before, take it if it's not your only source of capital. And you have choices, understand what some of the strings are. You know if you're working with a particular country and you need to place your manufacturing facility there, but they don't have the talent base to do so you have to think pretty hard about that. But, but overall, you know, as I say, if you can get access to capital, you should, you should take it.

Barry Grossman  7:15  
I mean, the number one rules, always take the money. And you obviously want to take the money when you don't need it, because when you need it, you really need it, you're really going to be in trouble. What do you think is the harshest terms you've seen? I don't think if you have one example that's that really made your stomach kind of turn, but they didn't have much of a choice. Yeah.

John White  7:32  
I mean, I think, honestly, it's, it tends to come from equity providers as around some of the traditional some of the hardest terms, which may impact things like valuation and that. But I think some of the like I said, some of the operating covenants that you may get yourself into if you work with a geographically focused source of capital can be really onerous, and you may find yourself really wishing a couple of years down the line that boy, I really wish I didn't have to manufacture in this country, but I do. I have to. And so those are the ones that I think cause a lot of challenges when you're operating. But in the financing moment, I've seen more, frankly, of the traditional equity providers bringing in pretty, pretty challenging terms. And we'll throw one more

Barry Grossman  8:20  
at you or anyone else up here. So we've had situations where the finance provider has, in effect, said, We want to switch out management. We want to switch out part of management. Always a tough conversation. If you guys seen that, how do you handle that?

Suchira Sharma  8:35  
I've seen it in a couple of transactions. Never candidly, formally drafted into a term sheet. Never it's a it's a conversation that you have to have, collaborate collaboratively with the management team and the keyboard members who might be supportive of the decision or might also be looking for an upgrade to some of the core operational function. So I've definitely seen it before, but would definitely encourage both investors and management team members to have a little bit more of a collaborative conversation with all of the stakeholders before, you know, proposing something in a draft form,

Barry Grossman  9:09  
it's always a very tough conversation to have with someone who's been killing themselves for 10 years on a project, and all of a sudden they're told, You're a great scientist, you're brilliant, but I don't know that you're running this enterprise if you want my money. Yeah. What are some of the benefits? Though, you see on these creative financings?

Suchira Sharma  9:25  
Yeah, I think especially at El avage Medical, we have a relatively lean and flexible mandate. We can invest across different asset classes with different check sizes, so we see a good share of potential different structures that come up, I would say at the highest level, though, the biggest benefit to opting towards a more creative path, whether it's for a debt solution or an equity solution, is that it lets you solve one problem at once. You're trying to raise capital, and as John said, That's pretty scarce these days. But while you're trying to do that, you also have to balance who the right partner is. Is, what the right valuation is, what the right quantum is, and ultimately, what are the right milestones you're trying to solve for. So I think in the example that Kyle you brought up, what was really unique was the company probably really only needed a certain amount of capital to get to a certain milestone at which point they could have optionality on how to continue the business strategically, what the valuation of the business would be at that time, so that that's what I feel is the biggest benefit. Everything can be revisited down the road, but it lets you kind of take those four key qualities piecemeal, to address them one by one. And

Barry Grossman  10:36  
how about what through the other side? How about some of the downside, some of the pitfalls of doing this type of financing, creative financing,

Luke Duster  10:43  
I can start there's all sorts of pitfalls with every financing, but the biggest pitfall is not raising the money. So, you know, raise the money is step one. As a credit investor, I'm very aware of the pitfalls of credit. One of the key things about credit versus equity is you have to pay it back. So you should really never take on debt until you see, within five years, an opportunity for an exit. If your exit is beyond the terms of your debt, then you have a problem. The day you sign up for the debt deal with equity, you set the standard of what you sign up for today for the future. So if you sign up a deal that has a three to 5x liquidation preference, expect a three to 5x liquidation preference the next time from your new investors. If you set yourself up with a very high valuation and a large equity raise, and you fail to maximize expectations, or you you minimally perform, you're going to have a lot of trouble. So at the end of the day, if you perform well, all these financings really become easy to deal with. So it's a combination of what's your structure and how do you perform, whether you're public or private, it's the same. I'll also add, because I know that there's a number of really early stage companies in here that all of us are kind of coming in beyond sort of a seed stage investment, some of the crazier things I've seen in the seed stage. Obviously, rich friends. Rich friends are a really good way to start. Otherwise, one of our largest companies started on Shark Tank, not for everybody, but it happened. Crowdsourcing company I'm looking at right now, actually crowd sourced to a significant amount of commercial revenue. Strategic deals. Won't name it, but John, I know a company that early in its life, did a very large strategic deal, brought in $70 million that strategic never has to buy the company. So you've taken out a buyer, but you save the day, you Brad yourself to another thing. So there's a lot of non equity, non debt, non traditional capital out there to think about, and I would especially think about it early on, because that will help you gain a base. The other pitfall is just the complexity of the capital table. Very few equity investors, these guys are super nice. They will never tell you that the reason that they're not coming into the cap table is because they don't want to be the bad guy. They don't want to have to tell you that your cap table needs a complete grenade and has to be reset at zero. But the reality is that needs to happen. And so if you're if you're looking for financing, you have a complicated capital structure, whether it's debt, equity, license, agreement, strategic, whatever you got to uncomplicate it to attract capital.

Barry Grossman  13:27  
That's where the lawyers come in. We get to be we get to blow things up.

John White  13:31  
Sorry. Maybe add one more thing, which is, I see it earlier stage companies, it can be really tempting to collect a lot of physicians, surgeons, as investors on the cap table. And again, if this is your option and you have to take it, you should take it. But those can be complicated down the line. Strategic acquirers in particular don't like to see that. So you know, if you, if you think hard about keeping your cap table neat and you can avoid that source, that's a good idea. You know, we will, we will try to be straightforward with you about your cap table. But there are sometimes we look at it and we say it's just too much work. You've got all these doctors over here, you've got, you know, couple of rich friends over there, sovereign wealth fund over here, like, it's just too much. And I've got a lot of things I'm looking at, and that's going to put, you know, when I look at your deal, that's going to put a strike in in one of the columns here. That's

Kyle Dempsey  14:41  
right. And I'm sorry, go ahead, yeah. And I think just one other lens it had been alluded to, is just when you go to exit, if you have a lot of cap table complexity, what that can create, one of the final stages of any acquisition process is going to be a detailed review of all the legal documents, a detailed review of who. Owns every share and in what context, and in general, strategics don't like it if there's a dispute around who's supposed to get what, in terms of proceeds and how many shares each person owns. And the more structure you add, and the more complexity you add, the harder it is to keep track of that. And I've seen many, many companies that it's not possible to actually get to the bottom of the complexity of really, like even those companies, they'll hire a third party to try to sort out exactly who sits where in the cap stack. And so it creates a problem in exit and then, certainly as an incoming equity provider in situations like that, it just makes it really difficult to even model what should be the parameters of and what is a fair set of terms for a deal. So, you know, going back to an earlier point, which is like no one likes to be the bad guy, sometimes the answer to those situations is that the cap table's got to be simplified. And it sort of is complicated and hard in the short term, but in the long term, it's helpful for attracting future capital, and then it's also helpful when you go to exit to have those things sorted out. But

Barry Grossman  16:07  
I think when you have an early stage company, someone comes to you with a creative form of financing, and then the next guy comes to you with a different creative form of financing. Are you going to say, no. I mean, what are you supposed to do in that scenario? I that

Luke Duster  16:23  
scenario? I'd say it depends. If you've caught lightning in a bottle. It doesn't happen very often, but it does happen. You have to be very careful about what you do. So if you are an owner of a business, either you're the founder, you're the equity owner, and your business is now catching hold, you have triggered a response from the market, just like raise company at axonix. I actually will disagree, like the more equity you raise, the more money you lose. That's when you want to get creative. That's when you want to start thinking about any way you can raise capital that doesn't dilute your ownership position, because if the person who owns the most at the exit wins, right? It's not who raised the most money, it who owns the most of the company at the exit. And we see that with the big public companies, who are the trillionaires gonna be it's the guys who continue to control 40 to 50% of their stock at the point of the exit. I think a lot of entrepreneurs miss that. I actually watch a lot of entrepreneurs go from start to finish and make no money through delusion. So I'd say if you've got Lightning in a Bottle, make sure that you're keeping an eye on dilution. That's where creative financing come into place, if you are. We heard the last panel talk about this in a pivot. And listen, most companies pivot at some point. Then you also have to pivot your financing sources. You might have to take some pain along the way. That's 90% of med tech. 90% of med tech is survive in advance. You know, I didn't get it right the first time. I try a second time, a third time, a fourth time, a fifth time, and then I get it right. And then you're back to, you know, being a beggar as opposed to a chooser. But begging wins. You know, you still bring money in by begging.

Suchira Sharma  18:02  
That's actually something we look for when we're evaluating any kind of creative financing. A lot of times, what will happen is, again, of the four attributes I mentioned, sometimes management team members will really want to prioritize valuation, and they'll do so at the cost of taking a structure that might kind of bury them under the preference of of the share of other shareholders. So sometimes, when we're evaluating those types of structures, we'll say, Hang on, this doesn't make a ton of sense. You know, management's not going to make money until, you know, there's a crazy exit that won't take place for well beyond a period we're comfortable holding for. So how do we change like is that something we want to step into as investors, typically, we'll try to opt for something that's much cleaner, where management does stand to make money in the, you know, time frame and the valuation exit that we think makes sense for the company,

John White  18:52  
because undoing that structure is just can be a lot of work and a lot of really tough conversations with, you know, earlier stage investors, or you're a trend, or whoever, or the doctors that are using your products, and you know, you've promised them a very high valuation. And you know, again, I have other things I can do than to fight that battle. So Help, Help me ahead of time, if you've taken on some of these sorts of financing sources by trying to get that square away.

Barry Grossman  19:23  
I mean, then it almost sounds like the creative financings, or early stage financings are certainly a detriment to the latest stages. I mean, is that what you're in effect, telling us

Luke Duster  19:35  
you can't get to the late stage if you don't do the early stage, I go back to survive in advance, it can be a detriment. But if you, if you run out of money and die, then you run out of money and die, right? And we have seen many of our portfolio companies. I'll use an old one decipher which died and the capital structure died. It killed it. And. We resurrected, it ended up selling for $600 million a few years later. So you know, if it had truly died and it hadn't been resurrected, you would have gotten nothing. But if you can survive a near death experience, and most of you will need to, it happens, then you're going to be okay. And so I think at the end of the day, we deal in complication, because it exists. You're willing to do the work if the underlying thesis and market opportunity is good enough, right? I push you guys on that. If you see something that's good enough, you're going to do the work. Yeah, you're going to hate it, but you're still going

John White  20:34  
to do it. We're going to do it exactly. We might. We might be begging you out there to make our lives easier, but you probably shouldn't listen to us on that point anyway. Yeah,

Kyle Dempsey  20:44  
well, we can also clean those things up, right? So if something happens early on and it's it's absolutely necessary to take something that's, let's say, too creative to live to see another day, a lot of what a new incoming equity provider can do is, in some ways, right the wrongs of the past and simplify things such that, going forward, you have a company that's easier to finance and ultimately easier to acquire to take public. The one thing I would say is that a lot of times when people get into those complex, creative financings early on, and when there's a needed reset at some point in the future to simplify things. I think there's this visceral reaction of like, oh, wow, but shouldn't we be valued at whatever this prior valuation was? But when you're changing structures and you're reducing structure, it may mean that a new incoming equity provider, even if a company's made a lot of progress, may see the equity value is very different than someone saw it when they had a whole bunch of creative elements that they've added that, you know, improve their economics beyond just the valuation. So so I say that only as a caveat that you know, these things are all solvable, but it's just to be mentally prepared for when that day comes that you don't feel a visceral reaction like, Hey, I made all this progress. Why is someone recommending that the valuation may have to go down in some circumstances? And it's because solving that complexity does come at a cost, typically at some point.

Luke Duster  22:12  
Yeah, and in this market where there's a lot of 2021 valuations, we've made some 2021 valuation mistakes as well. This is actually a use case for debt. You don't have to have the valuation conversation. You can bring in debt. You don't have to have it. You actually see equity doing this as well with converts, safes and the like. And so the equity groups are using debt instruments as well to avoid the equity valuation conversation. On the other side, whether it's debt or equity, we've used debt to buy back some of those early investors who are just hanging around the hoop, or physicians like you can, you can do secondary primary to clean up the cap table once you get on the glide path. And you can use, you know, a combination of debt and equity do that as well. So I think once you get on the glide path, you have to do the work to clean up the sins of the past, but you can right, but it's about putting yourself on that glide path.

John White  23:05  
One of the more interesting experiences we had at KCK, we had a company, took some early stage venture. Money went over to Europe, took some sovereign wealth. Money went public in Ireland, came back, went private, came back to the US, and look, this company is is thriving, so it's because they've got great underlying technology. They're going to move the ball forward. But think of all those steps. Think about all the different times that that CEO is probably like, we're dead. Like, who's going to help us de list from the Irish Stock Exchange and move back to the US. Well, the right investor saw the right vision, and they did it so it can't, it can't be done and and certainly, when it gets done, it's incredibly gratifying to be a part of the new, sort of cleaned up structure. Moving forward, you feel like you've got a fighting chance. You're not fighting against your your capital structure.

Barry Grossman  24:05  
I mean, this conversation somehow has become very negative. I mean, with creative finances, we thought we're going to help people. I mean, there must be examples of things we can talk about, where, when you get to the next level, when you come in, you've seen things that, Wow, that's great. Well, you know, that was a really good idea. Who came up with that one? I mean, what's the other side of the world here?

Suchira Sharma  24:24  
I'll start maybe two examples that I saw where I think creative financing worked really well. One is similar to the example Kyle shared. I think the company that I was looking at wanted to raise a lot more money than maybe they needed, but wanted to be extra prepared and extra secure to like run through the entirety of a pivotal study, whereas its investors were much more focused on just funding until that interim analysis, because that was the real card flip that changed the valuation. So they used a tranching structure, which worked really well. The interim look was positive. All the investors wanted to put in more money, and the company was well. Funded to PMA approval and then raised on a much higher valuation when they launched commercially, and has been doing really well. The other example where I saw it work really well was also around that milestone. I think what you're hearing from a lot of us here today is like, once you identify the right milestones that are worth prioritizing, it's all about building alignment across your investors and your fellow team members. So an example I saw was there was a little bit of back and forth over the option pool, or, you know, set a different way the amount the management owns in a company. And instead, we decided to also tranche the incremental expansion of the option pool on a milestone such that we felt confident that, yes, the company is going to be motivated to hit that, and we have no problem if they do hit it, making the valuation of the company on a post money basis higher than we thought. So definitely. A lot of ways to use tranching or use milestones to, you know, both adjust for the risk profile on the investor side, but also help management achieve goals and ultimately become successful.

Barry Grossman  25:59  
And are you doing all this by yourself? I mean, how hands on are your organizations? Are you bringing in auditors or your friendly neighborhood attorney? I mean, who's doing which portions of the work here,

Kyle Dempsey  26:12  
for cup for actually legislating the creative structures and things that come up? I think at the term sheet stage, it is somewhat bespoke. So sometimes we've seen enough creative situations where we have sort of, you know, language that has been used before, and language that we've seen, but certainly when it comes to actually drafting it in a in a definitive way, in terms of moving forward with a with a deal that definitely needs to be brought to brought to legal counsel, it's easy to mess something up when you're getting into some of these creative structures. There's a lot of considerations and a lot of unintended consequences and ambiguities that can be created legally. And so it's super important to have good counsel on all sides. Yeah, I agree.

Barry Grossman  26:53  
And are the auditors involved at that point? Are the accountants involved? When do they come into play here? I mean, you're talking about the cap tables. Obviously they're an important play here you're laughing. I guess they're not as important as I thought, not

Luke Duster  27:04  
not as important as you think. Okay, yeah, it's usually some poor analyst, you know. So, yeah, the accounts come in later. I think most of it's negotiated, yeah, right, between the parties, between the principles at the investment firm and the principles of the company, and then, frankly, the poor lawyers and accountants have to figure out what was discussed, yeah, and they have to make it make sense, which is why it gets very creative. I think, though, that the main part I see as the positive for creative financing. Back to your question is, if you can maintain more of your equity for longer. Again, you can have a bigger exit for yourself, right? It's one thing to get to a billion dollars, but it's another thing to take 2 billion to get there. No one makes money, right? It's a lot easier if you own a big share of that billion when you get there. And how you do that can be philanthropy, it can be grants, it can be all sorts of other mechanisms. Equity and debt are a key component of sort of the regular way piece of it. But I think you have to think about that. The best thing you can do, though, is have a product that has a high margin that doesn't cost a lot to sell. So I'll leave you with that piece of advice. Write that down that yeah, the companies that can produce early cash flow from their operations win, right? That's the best part of creative financing. Do it yourself. Have the internal business model set up day one so that you're not burning $100 million a year. Set up your business model to be highly cash effective, be your own ATM machine. That's the best way to avoid any of these complications and pay Luke back too. Yeah.

Barry Grossman  28:53  
Um, we have about 4030, seconds left. Any final words of wisdom from anybody, I

Suchira Sharma  29:00  
would just say, ask questions a lot of times. You know, we're looking at a solution for the first time as well. I've always found anytime you're doing something creative, it's best to just have an open dialog before you start to put pen to paper on what something could look like. So be collaborative, get alignment, and just ask all the questions. 

Barry Grossman  29:19  
Yeah. Thank you everybody. 

Luke Duster  29:20  
Thank you. 

Kyle Dempsey  29:21  
Thank you.