Where's the Money: Raising From a New Regime in 2023 | LSI USA ‘23

Transcription

Henry Peck  0:07  

appreciate you all being here and hope you're enjoying the event. Want to introduce our next panel, the panel is titled Where's the Money: Raising from a New Regime in 2023. The panel is moderated by Allan May, who has been a longtime supporter of LSI. This event and this community, Alan is the co founder and chairman of Life Science angels, which is the largest med tech focused angel group, they've done. I've invested over $70 million in more than 70 deals across biotech, medical device diagnostics, and mobile health companies. And when Alan brought this idea, to us for this panel, the conversation was really about, first of all, who are new investors in the community, everybody knows a lot of the the larger investors who we've seen make tremendous impact, but who's new to the new investors that we should be looking at, and, frankly, who's doing deals right now in this market space that's been so complicated and challenging. And so really, really excited to hear from this group of angel investors, emerging fund managers, family office leaders, moderated by Allan. So Alan, again, thank you for everything you do for the community. And thank you for doing this panel. I'm gonna pass it over to you. Thank you. 

Allan May  1:16  

Thanks, Henry. Thanks, all of you for coming. So he introduced the panel pretty well. And the idea is going to be you know, 10 years ago, whatever number of years ago, we sort of knew all investors in our space. And today we don't every time I read fierce bio, or fierce medical or any of the mags, there's five investors in there, like, who are they? Where did they come from? What do they do? And the point is, you need to ask that, and you need to find them, because deals are being done in non traditional ways. And so what we want to talk to you about, are those non traditional ways. So first, just like where's the volume is enough stuff being done is this are these funds that do one deal a year? So LSA, we have 150 members will do six to 10, new deals this year, and maybe 15 portfolio updates, let's go down the line and just kind of get it just sort of sighs what's available to you here. So Jenny?

Jenny Barba  2:14  

Hi, everybody. Thanks for joining us. And thanks, Alan, and LSI. I'm Jenny Barba. I'm the founder of features capital. We are one of the newest med tech funds in the market. We invest in what we call the first inhuman stage with hardware, surgical tools, implants, very traditional med tech, which I love. And I live in Vermont. So anyone coming up to Vermont, more than welcome to stop on by.

Allan May  2:43  

And how many deals? 

Jenny Barba  2:45  

Oh, started a year ago, and we already have three deals in the portfolio. 

Martin Gershon  2:52  

Hey, everyone. My name is Owen Willis. I'm the founder and General Partner of Opal Ventures. Just a big thank you for everyone, for having us here. And for all of you for joining us. Oppo Ventures is a precede Health Tech fund, we do about 60% of our investments on the healthcare infrastructure side 40% focused around increasing access to care and devices. You know, for us, we're really focused on increasing access to care like that is the goal of the fund. And we're doing you know, our goal is to do another six to seven deals this year. So we are very, very actively looking. And we're, it's really kind of net new conversations for us that were most interested in.

First, I really want to thank Alan, who's an inspirational leader in the area of angel investing. I am Martin Gershon. I am the managing partner and the Chief Investment Officer for Endeavor Venture Funds. We have two funds. The first fund had 69 investments and 55 exits, and was a traditional healthcare venture fund across biotech medtech and health tech. And we have launched a second fund in June of 2022, along with a venture studio, and I mentioned that because the number of deals is influenced by the model that we're using. In the venture studio, we take a very hands on approach to investing in healthcare companies that are specifically looking at outcomes. And I am by training an oncologist and immunologist, a former FDA attorney, and so trying to bring these things together to impact healthcare is extremely important to our core ethos. This fund has four investments, the second fund, we expect another four which in the next couple of months, and we're targeting a total of 20 This year, and somewhere between 100 and 200 Over the next three to four years.

Allan May  5:06  

It's terrific. And Kevin.

Kevin Schimelfenig  5:08  

Thanks, everyone for coming. And thanks Scott and the LSI team. I really appreciate being included. And of course, Alan, thank you as well. And I'm Kevin sulfinic. I'm with the McKeever family office, we're based in North Carolina, must be something about North Carolina, say Raleigh, North Carolina, if anyone from North Carolina always finishes with North Carolina, our focus is medtech, specifically med device and diagnostic, we do a little bit of real estate, we actually made our money in that space. And we continue to do that part of our generational wealth is to collaborate with other family offices. So we've been doing that we actually have a fun where we invest with other family offices that don't have experience in medtech. So we're in the process, help them get educated actually is a great reciprocation. For us. We're getting exposure to deals in real estate in other markets, we don't have knowledge in and we're able to go in and get really good deal terms, we are actively pursuing several deals. Now we'd like to bring together our operations and our investments. So our family office is comprised of a real estate arm, a medical device, commercialization arm, a direct investment arm, and a co investment arm, all those arms are active depending on activity. So there's times where we're working on a deal with a major corporate partner, where we're taking a product and perhaps license again, putting commercial team behind it. Other times we're working with an early stage company where we might be doing a fee for first service relationship to help them figure things out. In consulting, then we'll move into where we may partially fund a commercial, what we call sales, prototyping. And then a lot of times we'll end up where we'll bring in the capital to fund the commercial team and build it for them. Our whole purpose is to move them through the process and actually make them more competitive for acquisition. So that's kind of our world as we plan it.

Allan May  6:45  

Super. I'm gonna try some slides real quick. Okay, so just Just a really quick run through I don't want to spend time on this because the panel was much more interesting. But you guys, you guys all know that that that public markets have dried up. Liquidity has dried up when that what does that mean? That means that the LPs and the venture funds don't want capital calls. What does that mean? That means the venture funds don't invest as much and particularly don't invest as much in new companies, and they start to conserve their capital and save it for their portfolio companies. Because they know their syndicates are going to break now going forward, and they're gonna have to be pickup, they're gonna have to pick up rounds that other investors have contributed to. So when that happens, the in these down cycles, the only message that we want you to take home here is whatever you were saying last year to investors, whatever your 2022 pitch was, whatever your KPIs were, your KPI now is be there in 2024. Period. That's it, right? If you don't hit that one, your other KPIs are not going to be important. And so whether it's early 2024 or late 2024, nobody knows. But you need a plan for how to do that. So kind of that's what that's what our focus is going to be about. The time to raise rounds is lengthening, the time between rounds is lengthening the amount of money is less. So there is good news, there is good news. the brunt of this is going to fall on later stage companies with higher valuations. Right, they're going to pare back now as they as they use their their portfolio money more carefully. So the good news is there's much more interest in early rounds and more players coming in early rounds. So it terrific. tailwind there, in fact, seed stage last year, even the chart got missed off here, but the chart is awful for for investment for the last four quarters, you'll see a real collapse in second half of 22 and continuing in first quarter 23. But seed was up seed was up in healthcare in 2024. Okay, but valuations are decreasing, the shift is turning towards terms in in favor of the investors rounds are much harder to get. And in particular, there are a number of of preferential terms that are coming in that are that are difficult for founders, and you guys really need to be careful navigating those, we'll talk a little bit about that. So And just to add a cherry on top, Silicon Valley Bank goes down, people forget that Silicon Valley Bank not only kind of controlled venture debt in our industry, so there goes venture debt drying up, which was an alternative to going into the market and raising equity. We don't have that now. They also had 9.5 billion in venture capital. That was in funds venture funds. They're not going to make those capital calls. Now those venture funds aren't going to have that money. So it's a negative picture. Nevertheless, this will be a terrific year. This will probably be one of the banner years in healthcare investing for all the people on this stage and everyone in this audience, the only question is your strategy, how you get there, how you're going to handle 2023 and 2024. So moving on from there, let's, let's maybe start with Martin. Martin. So I just said, what I said about terms and valuations. How are you thinking about this as you're meeting new young entrepreneurs? And as you're talking to them? Where are you going to start with from a valuation in terms perspective in your mindset?

Martin Gershon  10:28  

Thank you, Alan, I think that it's important to begin with the ethos that endeavor has at its core, we want to work with CEO founder entrepreneurs who understand the importance of collaboration, leadership and partnership. And what this means is an understanding of all the pieces that go into the corporation including valuation. Now, we look at things organically and as a part of a mosaic. That means for us that valuation is just one piece. Typically, we're coming in, in endeavor fund II in the seed stage. And as I said earlier, we are really moving in to those investments as a venture studio model, which means that we typically take a large percentage of equity as a way of incorporating our working model into the core of the company, and then we mature that company, and follow on with a syndicated investment deal. So in terms of the valuation, the valuation of the company really moves away from what many CEOs come to us with, which is comparables, there are no comparables now, what we're looking at now is not what CEOs want us to look at, which is what happened in 2022, and 21, and 20, those terms, and those valuations are not applicable. What is important, is the leverage that the CEOs and companies can get from partnerships and collaborations with large tech, large pharma, large biotech, large med tech companies. And so we look at the valuation question holistically.

Allan May  12:13  

So, let's let's pick up on that. So So Willis, how are you think about valuation?

Martin Gershon  12:19  

Yeah, so you know, I'm investing a little bit earlier than Martin, where it where it precede. And, you know, I think a big part of when I speak to founders is making sure that they are separating valuation from ego, right, because I do think that when you're building a company, when it's your thing, when it's early on, it's it is a marker of success to raise a certain amount of money at a certain price, versus it being a tool that you can then use to actually execute on the business that you want to build. And one thing that we think a lot about when we're talking to founders is, you know, as they're raising their pre seed round, you know, making sure that they're raising at a valuation that they can then fill down the road, and then raise at a higher valuation for their seed round, right? Because, for us, and for the founders, it's making sure that you're able to tell that narrative and that story, even in a market such as this, where things are just more difficult for everyone.

Allan May  13:19  

So let's just emphasize that. The point is, everybody at every round has to make money. Right? We're looking for entrepreneurs who have that mindset. This is going to be a long slog, there are going to be multiple raises, you're going to have multiple partners and stakeholders. Everybody needs a win here. You need to work on that and be able to articulate that. Jenna in in in companies coming to you what's what's the best way to get your attention? How do you take companies seriously coming in?

Jenny Barba  13:50  

Oh, gosh, well, I love skiing. So you know, heli ski trips, you know, big boondoggles? Probably not. These days. All jokes aside, you know, it takes us quite some time to really get to know companies. For example, one company that we invested in we've we knew for two years before making the investment, another company nine months. Our fastest was, I think, April to December. Our next deal that we have lined up, I met in July 2021. A couple of our in deals just to give success stories. Were actually introductions from angels that invested early on, and we know we trust and we share deal flow together through networks. We are unique. We're not, you know, we haven't been around 20 years. We have to get to know the innovation centers and the incubators and go to pitch competitions and run pitch competitions and You know, just, I guess be a little scrappy, we know what it's like to be in your shoes. Starting a venture fund is they say six times harder than raising money for your startup. So just to give you a sense of what it's like, we know what you know, what it feels like. And in that sense, my partners and has been an operator. We're always thinking about, you know, obviously, the clinical outcomes, but who are our customers? What are our customers needs, we spend a lot of time with the surgeons and physicians and understanding how this workflow fits into their daily procedures, how it creates efficiencies, the outcomes for the patient, and primarily reducing costs. I'm on the board of a hospital. That is the number one thing right now, in addition to staffing, and, you know, thinking about in terms of your mission, your values, what Wait, what, why do you wake up every day to do this? You know, did you quit your day job to start your startup? You know, these are the little things along the way that we look for, in building relationships with founders and getting to know you so

Allan May  16:18  

terrific, Kevin, you get a ton of plans across your deck every day. What how do you handle that? What what do you do with a with a stack of stuff on your deck? How do you get to what you take seriously.

Kevin Schimelfenig  16:33  

So he just give me a magnitude we get about 50 to 60 deals a week, inbound unsolicited, I happen to be very fortunate work with a bunch of people that are really good at filtering them. But we actually are very deliberate. So we'll be looking for something based on our relationships. So as I said earlier, we kind of go up and down the ecosystem, we might be working with a corporate partner. And they have a gap and a portfolio that we see that perhaps they don't realize, and we think we can nurture an early stage company, we'll get involved with that. We also filter through we kind of you know, we have three fundamentals Is it a deal that we can grow and help bring value to so this is something we personally in our group, have skill sets that actually complimentary and can help a startup get there faster. The second is the deal has to work. And mathematically, when you have that many deals coming through. It's like the stock market we like we have a lot of companies we watch when they're down there on sale, and you try to make sure you know about the company before it goes on sale. So making sure we get a good deal. But we also believe that the you know, the founders knows people know they need to be taken care of and not taken advantage of, you know, if you haven't covered a payroll of your own pocket and explain to your spouse while you're doing that, and draining your own savings, you're not an entrepreneur. And then the third one is be kind of a no jerk rule. And the reality is, it works really hard. This is a tough job. This is brutal. And Jenny's kind of that was really insightful as well. On the other side, raising capital is just as bad as it is doing a startup. But working with people that actually solution oriented, focused and dealing with stuff. I mean, we deal with difficult things every day, if it was easy, we wouldn't you wouldn't need anybody's investment, you wouldn't do it. So making sure you're partner with people that are willing to work really hard, and really invest in it and be able to go and what we refer to as violent agreement, I think go get a beer or go to dinner with someone is really important for us.

Martin Gershon  18:17  

Well, and these are these are long term relationships, right, you're building this relationship over time. And I do think that a big part of the de risking for a fund or for family office is making sure that these are people you want to be meeting up with for many, many years. And I think that's a piece of it that I think people miss when they're going out and raising. Obviously, it's there's venture math, the math has to work. But you also want to make sure that you're working with people that are going to be aligned and what both what you believe in and how you think things should operate within a business and really

Jenny Barba  18:51  

being that first call. You know, I'm on a texting basis with all my founders. And it's so fascinating. I spoke to two people yesterday, and they said, I never hear from my VCs. I thought oh my gosh, like, like you're like, and I know them like they're amazing people like why wouldn't their VCs want to just like, say, How's it going? What are you up to? Can I help? Oh, you're working on this, like, let me introduce you to Allan, he's got this and this going on? And, you know, that's our job. And we are the stewards of the capital. And our job is to help and and maybe that's an early stage venture thing. And, and the curiosity in each of us. But, you know, that's what we do every day.

Allan May  19:39  

So one of the more sobering kind of ways I think about this is is similar to relationships, but worse. You can you can step out of a relationship, you can divorce your spouse, you cannot divorce your investor. In fact, it's the other way around. So this has to really work. It's going to be a long term relationship, we understand that a lot of these things have existential crises. And we're all going to be tested in the in the hearth, and we're looking for people we can work with, and make it through that hard so. So LSA, if you want to really get to the top of the pile, there's always a pile. So getting in isn't your problem getting to the top of the pile? Is your problem. The way to do that is come in through a trusted partner, figure out who these people are. They've all got websites, they've all got LinkedIn, they're all tied to somebody, find somebody who's tied to us, work with them, gain their trust, and get them to recommend we talk to you, that works really well in terms of that maybe it shortens that nine month thing, and gets down to people getting more comfortable with one other Martin, how do you handle that? What's your real strategy for finding people who will go the long term with you?

Martin Gershon  20:56  

Yeah, it's such a critical question. So we really look at the, at the system right now, as at least a five year commitment. And in that five years, we look at ourselves as co-owners of the company. And so everything that the CEO and the entrepreneur founders are doing, you know, we want to be aligned. What does that mean, for us, it means that we need to work with people who are resilient, who listen to others who know how to build teams who appreciate the quality that comes with diversity, equity inclusion, that comes with an understanding that you need people to help you build great companies in this particular environment. And that there is actually a tremendous pleasure in that process. So the notion that you have an incredible innovation or technology that stands on its own in a siloed way, is not in keeping with what endeavor stands for, we want innovation and technology to sit alongside the human aspect of the CEO who runs the company. And that has to be very mission driven, benefiting the patient and improving outcomes. So we make very kind of structured decisions about who we're going to work with, based upon the connection in terms of the value sets and the ethos that endeavor and the CEO share

Allan May  22:34  

Willis, what are you looking for? What what all? What will bring them right into your sweet spot? And what will tell them, you know, this is somebody I can't work with. 

Martin Gershon  22:42  

Yeah, so our funds structure is a little bit different in terms of how we think about sourcing deals, doing diligence, and then supporting founders after the fact. So the fund is built on top of a community of founders and operators that have raised more than $250 million in early stage funding, and are really the main entry point for us when we're when we're talking to founders. You know, what's been really fantastic about that model is I get to meet founders, right at the moment of inception for their company, I get to be part of those conversations really, really early. In some cases, actually, the first investment out of the fund, I introduced the co-founders, and got to see them start building start building that company. And so, you know, really, there's no shortcut for relationships. You know, that takes time, it you get to see kind of how the founder operates. But otherwise, you know, outside of kind of the relationship side of things, we get a lot of inbound interest as well. And the things that I get really, really excited about, especially in this market, are companies that understand, you know, both the opportunity that, obviously, they're trying to solve, but the incentives that drive the decision making that are allowed going to allow them to get to market quicker, right. And so, for me, you know, a lot of my work is in the health tech space. So getting to market and speed to market is an incredibly important thing. But in terms of the founders, they have to have an earned insight into the space that they're going into, and they have to have those relationships that are going to allow them to get that first, second or third sale. I think those are critical.

Allan May  24:32  

I want to go back to valuation for a minute. Why because I like to stir shit. The if I can tell you that the number one reason LSA will walk away from a deal is a dispute with founding team over valuation, or in particular the way they handle the discussion about valuation. So, Jen, I think I'm worth 12 million doing a convertible note. I've already got 2 million Raise I'm raising 2 million more you in. 

Jenny Barba  25:04  

Oh, dear.

Allan May  25:08  

How do you handle the valuation discussion with your entrepreneur?

Jenny Barba  25:13  

Well, I guess the benefit of working with us is we're a two person Investment Committee. My prior firm was a seven person Investment Committee. So understanding your audience is probably their first question for founders of who are the decision makers at the fund? What's their process? You know, the modeling that they need to do, make sure you have your model in place comps, things like that. If someone were to say, Well, okay, a company, one of the companies, I had diligence for a long time. That was the that was the exact conversation. There's 2 million left in the deal. And I said, Yes.

Allan May  25:55  

Did you take it? Of course,

Jenny Barba  25:57  

like that company is going to rock it, like knock it out of the park? And so Heck, yeah, right. But there's many people like it's, it's not a sale, it's not a pressure. It's not a transaction. Like, Owen was saying, like, this is a relationship. That FOMO fear of great, that is a tech phenomena. I think in med tech, we have a bit more structure to our diligence. And just because there's a big name that's already on the cap table, doesn't mean I have to be in that deal.

Allan May  26:32  

No, but this is Martin, you're here, right? The you're right here. So I just came out of Y Combinator, and I'm worth 26. I gotta save. And I got three guys and Y Combinator gave me 26. Come on, are you in?

Martin Gershon  26:47  

Well, first of all, we don't do saves. So that's an immediate work closer

Jenny Barba  26:53  

Tell us why.

Martin Gershon  26:55  

In my former life, I was an attorney and safes don't really supply the terms that make me comfortable sleeping at night. That's rule number one. So I think what I would like to address here is kind of the subjective aspect of valuation. So for us, actually, for digital for digital, exactly. So we are two thirds digitally health focused, that means that we're looking at electronic healthcare records, wearable sensors, big data analysis, drug discovery improvements, all the tributaries that come off the digital health space, of which there's going to be hundreds, if not 1000s. The other third really is about opportunistic invest in investments in biotech, bio ad, and other areas of sustainability. We look at the market valuation in a very specific way, we want to be able to understand liquidity. We're not so much concerned about recession, we're concerned about liquidity. And from our analysis, we're in a long term liquidity crisis. That means for us from our research, that the s&p probably is going to return somewhere around 3.1% year on year for the next 10 years. And healthcare we believe, is going to return in some sectors 37% We look at this as an important part of evaluating companies and their valuations. Because we look at the money that has been put in by the large big tech companies like Microsoft, Google, Apple and Amazon as an indicator of what companies are willing to pay. And this for us is an important barometer. We know that there's been about $100 billion put into play by these big tech companies in very specific health tech centric companies. Because the core competencies of these big tech companies allow synergies. We also know that as these companies move in, in series B, they have very clear exit strategies. So for us, valuation depends upon understanding who the buyers are, where the liquidity is, what the entry and exit points are. And that's why we try to work with CEOs who are flexible, who do understand that they need to listen, as Owen was saying earlier, who is the counterparty? What do they want? What do they need? So it's a combination of understanding outcomes and patient centric company development, but it's also a critically important piece to understand what your investors are looking for. And they bring synergies to that that you need to really pay attention to.

Allan May  29:46  

So Kevin, how much money should on investor should they should a startup raise now? We just described the environment we're in uncertain 2023 unclear 2024 lots of lots of headwinds out there, what's the right amount of money for the investor to be asking for.

Kevin Schimelfenig  30:05  

So for the investor for the CEO, this startup to do all you can, and lock it down as fast as you can, would be my advice right now, because you've got an interesting market, when you're looking at the capital, depends where you are. So if you're early stage, mid stage, or late stage, you know, knowing what people were putting into him. For us. When we look at a deal, the amount of capital we're putting in is a direct correlation of available capital. So we're kind of an anomaly open your family office, we have, every dollar we have is at work, we actually moved from a liquidity event to another, so there's times we have lots of capital to deploy. Other times we don't. So we'll pass on deals. And we'll explain to a CEO, the timing is bad. And there's a lot of deals I feel like the fifth Beatle on, but that's okay, we're comfortable with that. But we'll look at the deals and try to figure out the right money. So for us, it's usually how much money we have available at a time. And then if the valuation back, which was well covered, we'll look at that. So we can use the analogy, we've never done a bad deal, we've only done bad due diligence. But when we look at them, we'll say okay, what's the multiple, we can get back on this money, and we compare it to where else we can put the money. And you know, now, for example, even with interest rates and things going up, you know, you could earn a certain amount of money sitting in the bank, or in the past, you couldn't. So as we look at it, we'll probably know a good a good number for a company to be raising is in the five to $15 million, that we think is a good sweet spot for an early stage company, depending on valuations.

Allan May  31:25  

And also so Willis, what would you say to that?

Martin Gershon  31:28  

Yeah, I mean, I think I would. So I think there's, there's kind of two pieces. So number one, as an investor, one of the things you do have to think about it are the investors that are going to be following on in the future, right. And I think, you know, investment decisions aren't necessarily made in a vacuum, you have to believe that, you know, if I'm at preseed, I have to believe that at seed stage, if the company hits their metrics, you know, there is a vision of story of market opportunity that will get seed stage investors excited, right, and it's just going to look different at seed versus pre-seed. And so, you know, when I'm thinking about it from kind of the company valuation standpoint, and, and in other places, I do think that that has to be kind of part of the story that the founders has to think about, through that journey. And I do think, you know, when I, when I think about kind of my Fund, and the structure, many, and most of the most of the the immediate screening decisions come from a company raising outside of my model, right. And if they are raising either too much capital, they're raising it too high of a valuation, that's going to be outside of my mandate. And it's, you know, it's a conversation that, you know, I'll have with the founder, and if there is a way to get in at a lower price, because of the value that I bring, that's fantastic. But at the end of the day, you know, I think there's an amount of diligence. And inflexibility that I think you sometimes have to have in in your investing.

Kevin Schimelfenig  33:15  

I was gonna see if I could just add to that. So it's interesting when you're raising capital, for us is making sure the CEO understands that when the business sells, what is the number, so we'll talk to the CEO, and you got to be inspired by someone who's willing to do what they do. So it's always interesting and very good conversation invigorated, but who you're going to sell to, and how much is it going to sell to, and what is the buyer. So one thing I've uncovered over the years, is there's a threshold for corporate buyers. And if it's over a certain threshold, it's a little bit more complicated for them to buy your business. If it's below a threshold, it can be done pretty seamlessly. The other issue is, the more capital you bring on, the higher the multiple has to be exit. So for example, my friends in traditional venture capitals, they have a 10 to one for every dollar they want put it in, they will put it they want 10 out. So if they give you $10 million, you can't sell for less than 100 million, you may have just eliminated yourself from a quick transaction. So knowing that because some of the best deals I did, we didn't put as much money in, but we turn the capital quickly. And we had a pretty good multiple, and the transactions move through pretty quickly. So we kind of look at that as well as we're doing it. But it is a very interesting dynamic. You have people you'll talk to, you know, who's the buyer XYZ big company? Who do you know, I'm going to call the 800 number, that's a problem. They need to know who these buyers are and what their characteristics are for buying and what fits. And yesterday, I think was one of the panels Christos from Zimmer was spot on with the comment of don't call them up with the cardiology product. That's not what they do. So make sure you match the characteristics of what you're doing to the partner. And as an investor, if you can't explain to me my line of sight return my money, because for me, it's like inventory. I want the capital back to do another deal. And so I'll look at it differently.

Allan May  34:54  

So So Jenna, I've been in this 25 years and I can't actually recall an over capitalized medtech company. So all right, it's tough. Now we're in a down market terms might not be so good valuation might not be good. What are you going to do? How are you going to handle that what what amount of money is going to make you comfortable to write a check.

Jenny Barba  35:16  

So in terms of, you know, we always, this is where medtech is so unique, we always raise to the next milestone, and we were just talking earlier that the next milestone is actually six months, longer than you think it really is. And we've all been through cycles, and you know, a one and Oh, nine and etc. And in terms of that check, it's, it could be tranches. It could be, you know, a certain number of patients, it could be, you know, key things in development. So this is where having a CFO, and helping you with that model, and the numbers that you need in the capital raise is important, but really, again, thinking about the capital, it's going to take total. So we we also do the who's gonna buy you for how much when? And then we say, and how much do you need to get there. And we also do the math backwards of our percentage ownership at a seed an A or A, B, and what we need in those percentage ownership,

Allan May  36:20  

let's, let's emphasize this again. And I'll tell you why. Somebody said attaching ego to value there, it's such a personal thing. You know, I mean, you know, you bought your car, your house, your business, these are the most important things in the world to you. And so they're very, very hard to be objective about. As a matter of fact, though, this is a math discussion. That's what we're, that's what investors are going to do. They're going to look at the fidicuary duty, right? They're going to run them, they're going to run the numbers, what can you exit out? How much capital is it going to take to get there? What stages are there that can raise your value for inflection points for investors during those, and the numbers kind of fall into place on that? And if if founders don't want to have that discussion, that's a pretty negative signal for investors. How have you experienced that?

Jenny Barba  37:12  

Well, I guess it goes back to that. It's a partnership, it's a relationship. You know, it's probably longer than a lot of marriages. You know, it's it's the are you willing to roll up your sleeves and be a part of it together?

Allan May  37:27  

California, I don't know about Vermont. Martin.

Martin Gershon  37:31  

It's just such a fascinating discussion here. You know, we look at things a little bit differently at Endeavor because we are in a new sector, with AI driving a lot of our focus on machine learning. And for us, what that means is that we look at expanding use cases, we look at ways to generate new revenue streams. We're all about commercialization, and generating revenue at every single step. We will do that early on with feasibility studies with large corporations and strategics. We will do that across industries. We work with one company, for example. And as a wearable sensor company that initially was designed to notify healthcare providers about potential fall risk for patients that are in long term care facilities, we immediately came in and said, this is really not going to hit our bogey at a 35 year old per month subscription service. We added a cardiac, respiratory pulse ox series of sensors, we looked at sleep as a way to measure many aspects of what pharmaceutical companies are interested in. And we sold that data to pharmaceutical companies and increase the revenue streams. Within a few short months. We then took that same sensor and we moved it over to the US because this is a European based company. And we went to pre diabetics. And we put the sensors on these pre diabetics to look at their compliance with important aspects of nutrition and sleep and exercise. And we sold that data. We then moved out of healthcare and into the workman's compensation space. And we went to employers who have employees who are in dangerous work environments. And we said we can put sensors all across your corporation to monitor how at risk your employee is. So what we try to do and I think this circles back to the valuation issue, is we try to look at revenue generating potential new use cases, and most importantly, how buyers and investors are going to respond to that and pick that up and drive an accelerated growth curve for these companies, which could include licensing deals, or it could include many other kind of financial structure is ultimately we think that amplifies the value of the company.

In going back to the the question about how much should you raise? Right, I think that's a it's an important one. You know, a big part of early stage investing is is obviously the the fun math, it is also evaluating an underwriting risk. And one of the biggest risks that the biggest risks that a company has is running out of money. And, you know, one of the reasons why to echoes Martin Martin's point and kind of drill in a little further on it, you know, a big part of the reason why early commercialization for us is so important, is that because capital is not cheap right now, because it's harder to raise extensions, because it's harder to raise seed rounds, there's less margin for error, right, you have less time to build out the go to market, you have less time to think about, you know, is this going to is this path going to work versus another one. And so for us, you know, those early indications of product market fit, go a tremendous, tremendously long way towards de risking. And to answer your question on, how much did you raise, you know, I think you need to raise, you know, if we're thinking about kind of, from today forward, at least enough to get to the second half, or towards the end of 2024.

Allan May  41:17  

So I'll end it all ended here. I'll just make a comment. So look, I've been a founder way more than I've been an investor. And and you know, I get it, it look when it when it's your equity, and you're giving it away. This is a tough discussion, right? I founded companies where the first round, we gave up 75%. And why did we give up 75% of our equity, because we got an investor syndicate that we knew would power us to exit. And they powered us to exit ons exceedingly up round prices. And the founders in that company made $50 million out of the exit, and it wasn't that high, it was only a quarter of a billion dollar exit. So to me, the deal is this. Don't worry about that, right now go get the money. Don't worry about terms. I mean, I know you have to worry about terms, but don't worry that much about valuation, pick your investor, pick your partner, we don't want an unhappy pissed off founder, that's not going to be a team who works hard and is incented, we want you to we want it to be right for you, we want it to be us the right for us get that get that relationship going, get the money, get in there and move forward. That would be how I would leave you.

Jenny Barba  42:33  

I think just going back to the title of this panel of the new regime. You know, depending on what state you are in, there's a whole pool of capital coming from US Treasury called SSBCI, for example, we're getting capital from the state of Vermont to invest in Vermont companies, each state is getting a pool of this capital. So figure out who's allocating there are a ton of new funds starting family offices have been tremendous in the ecosystem, corporates, Grant NIH, I love meeting companies, I think there's might be someone in the room who had about $4 million was in there in the middle of their clinical trial, and they had not taken a dime of venture funding. So there are scrappy ways out there.

Martin Gershon  43:23  

Yeah. And, you know, I think the to go back to the beginning of the conversation, you know, the number one job of a CEO, as you as you're building is, obviously to keep your company capitalized. And there are going to be many market opportunities in the future, probably for for, you know, kind of where you're thinking and what you're building. And you just need to survive to be able to take advantage of those. And so I would really encourage CEOs, as you're thinking about raising capital, to be flexible, to be creative, and find the partners that you want to work with. And you know, when it comes to terms and things like that, this is a long game, right? This, that's, that's what you're building towards and, you know, find investors that are excited and willing to work with you and the other pieces will fall into place.

Kevin Schimelfenig  44:11  

There's going to, if I could think about it from a capital efficiency perspective, make sure that the capital you have is going into things that actually have an ROI on them. It's a really good way to look at it. You know, and think of yourself as a wartime conciergerie. It's gonna be a hard time right now. But it's always been hard particularly now

Allan May  44:27  

and Martin brought up the point of this is a time when CEO leadership really matters. Here's the deal of all the things you could spend money on. If you can articulate a clear case for why that expenditure increases your value for the next investor. Don't do it. Drop that one. Just spend money on things that matter to the next people. You're going to ask for money with that we're way over I appreciate everybody sitting through this. It right before the bar our so thank you all for that. We'll see you outside