Monday, January 4, 2016

7 Tips for raising $39M from 350 Angel Investors Rob Neville of Savara

Rob Neville, CEO of Savara Pharmaceuticals raised over $39M from 350 Angel investors, representing 30 Angel groups from around the world. Neville believes that there hordes of wealthy individuals looking to invest their money in promising startups. Most startups generally reach out to venture capitalists (VCs) for later stage funding, so it was an unusual and historic to raise this level of financing from Angel investors. Savara never specifically eliminated VCs as a potential source of financing, but the momentum within the Angel community simply carried them further than expected. Neville shares his experience with raising Angel funding.

1.      Scale from Angels to Groups to Networks

Raising meaningful amounts of capital from individual Angel investors is time consuming, and simply does not scale. At some point Angel groups become an essential part of fundraising, where 20-50 angels meet on a regular basis to collectively evaluate deals. Even Angel groups have their limitations, and Angel networks are the next logical step. Angel networks contain many affiliated Angel groups often spread around the globe. In most cases, candidates will pass screening and diligence only once for the first group within the network. For the follow on presentations, the screening and diligence details are shared throughout the network. Essentially, the candidate can skip the screening and due diligence process and access more investors quickly. Examples of Angel networks include the Keiretsu Forum and Tech Coast Angels.

It’s important to have a healthy pipeline of Angels, groups and networks, considering it takes two to three months to move through their respective processes, and even the best companies will face rejection.

2.      Tell a Compelling Story

Raising money from Angel groups is competitive, and the companies than win are those that tell the most compelling story. Focus less on the details and data – this will surface during the due diligence process. Neville suggests following a Ted Talk format and encourages CEO to practice their pitch over and over until it is perfected. In this regard he refers to Steve Jobs who would practice his story for two full days before keynote presentation, asking for feedback from product managers in the room. For 48 hours, all of his energy was directed at making the presentation the perfect embodiment of Apple’s messages. Practicing the pitch is paramount so that the flow is seamless and the story takes a meaningful form. Ideally the presentation should be graphically appealing, without the use of bullets.

3.      Be mindful of non-Economic Motivating Factors

“Do a little Good, make a little Money, have a little Fun.” Neville uses this to describe the drive behind Angel investors. While the economic return is an important motivator for Angel investors, it represents only one facet of attractiveness. CEO’s must be aware of the non-economic motivating factors that drive Angel investors decisions, often referred to as altruistic and hedonistic motivations. Altruistic Angels have a concern for the well-being of others, and wish to feel good about their allocation of funds. They will invest in stories that resonate emotionally, that help society in one way or another. Hedonistic Angels wish to get involved and be a part of an exciting growth story – leveraging their hard earned wisdom. They will invest in companies that are open to their input and participation. A compelling story will address economic, altruistic as well as hedonistic interests.

4.      Align Management with Angels

Neville stresses the importance of the alignment of Angels’ interests with those of the executive management, so that they all rise or fall together. He opens his presentations by mentioning that he has historically had successful exits, raising Angel funds and returning money to his shareholders. He then makes it clear that he and his team and board have invested meaningful capital into Savara. Alignment is influential because in a way it shows the Angels that you will treat their investment as your own. Angles appreciate a team that operates frugally, maximizing value creation with each dollar.

5.      Get ahead of the Due Diligence

Angel investors are accomplished and extremely busy people. Successful fundraisers keep the investment process simple and as straightforward for investors as possible.

Typically, a CEO will present twice to any one Angel group before receiving funds – the first time to motivate and assemble a due diligence team, the second time to communicate the results of the due diligence and hopefully collect investments. Candidates can alleviate work required by the due diligence team by completing a draft of the diligence document ahead of time. If a company relies on preparation of the diligence report from scratch by the Angels, it will take two to three months. Some companies with great stories never get a final due diligence report – often due to the business of the due diligence team members. Even when the Angels are actually doing the work, the majority of the information comes from the company anyways – organizing it beforehand takes out most of the work for the Angels. If feasible, having one or more existing or prospect investors own the draft diligence report as their own adds credibility.

6.      Communicate Often

Given Savara’s large investor base, investor relations become critical. A large investor base is often perceived as a liability or overhead, however, Neville views his investors as an asset. By communicating proactively and often, the Angels will more likely to participate in follow-on rounds. Savara generates a detailed quarterly report, and holds quarterly shareholder meetings. All email correspondence is personalized. A positive and consistent flow of news generates excitement and confidence in the team’s ability to execute.

In Savara’s $10M Series C round, a DocuSign was sent to shareholders asking for their electronic consent (a necessary step before a round of investment can begin). Within this electronic consent, shareholders were given the option to participate in the round (by simply clicking a radio button and entering the amount). Within a few weeks, $6M was committed from existing shareholders.

7.       Close Prospects as Expediently as Possible

The closing process from presenting your story to an Angel group to money in the bank must be as streamlined as possible. Angels have many investment opportunities, and their enthusiasm is likely to fade quickly after hearing your story, however compelling. Leveraging the sales funnel metaphor, prospect investors (those that express interest) must be converted into shareholders in a well-defined and expedient sales process.

To be effective, Neville found that the sales process needs some form of closing pressure (or possibility of loss pressure). This is naturally created when most of the funds have already been committed and the round is about to end. Breaking a larger round into smaller rounds (or tranches) creates multiple points of closing pressure. One additional technique is to offer warrant coverage for early investors. For example, in Savara’s Series B round, the initial investors received 12% warrant coverage – this warrant coverage declined by 2% every month thereafter. Without some form of closing pressure, Angels will not feel any sense of urgency to commit.

Assuming some form of closing pressure has been created, prospects should be encouraged early to “reserve” a place in the offering while they complete their due diligence (without any obligation). Neville will ask early for a verbal range of interest. Once a number or range has been provided, these prospects become “soft commitments”. Accumulating soft commitments quickly helps create additional closing pressure.

As soon as a “soft commitment” has been made, attention moves towards getting signed documents and converting Angels into “hard commitments”. It must be emphasized that a “hard commitment” does not come with the expectation of funds transfer – this will happen later. Neville makes it easy for the investor to sign the documents by using pre-filled DocuSign forms.

After receiving a “hard commitment”, a funds transfer email is sent. Collecting funds should also be as simple as possible, with various funding options being made available. In the early days, Savara team members would literally collect checks by hand. Upon receipt of the funds, the prospect is officially welcomed as a shareholder.

To learn more about fundraising through TEN click here: TEN Site

Mark Standeford of Cardiovate on the Opportunity in Stem Cell Therapy

Cardiovate’s technology provides a structure for a patient’s own cells to form new tissue, replacing damaged blood vessels.

 Originally from Indiana, Mark Standeford of Cardiovate started working in medical device R&D and moved to Texas 9 years ago.  Through his work he traveled significantly and always enjoyed Texas in terms of its climate, culture and of course the people.  He performed his undergraduate degree at Ball State University.  As he was studying for his BS degree in Engineering Technology he found several courses in Computer Integration that he enjoyed and ended up taking the extra courses during his 4 years to complete an A.S. along with my B.S degree.  After working for a few years he attended University of Texas at Dallas to complete an MBA.

Cardiovate provides tissue regeneration

Cardiovate is a medical technology company targeting transformational opportunities in tissue regeneration and repair through the development of novel products.  The core technology provides a structure for a patient’s own cells to form new tissue, replacing damaged and diseased blood vessels.

The idea came from research that was collaborated by the University of Texas San Antonio and the University of Texas Health Science Center San Antonio.  The body’s vascular system is complex with a key component of that system being the interior tissue that lines the system which is known as the endovascular lining and is comprised of endothelial tissue.  The idea is to help the body regenerate its own endovascular tissue after surgery by using a bioabsorbable material that dissolves after use.

Vascular disease can cause restrictions to occur which will impede a person’s blood flow.  This reduced blood flow causes damage to the body’s systems and tissue that depend on the blood.  Over time as the blood flow decreases, severe complications can occur which can lead to loss of limbs (amputation) or even death.  Even less severe complications can be detrimental to a person’s quality of life if they have severe pain in their limbs due to poor blood flow.

When blood flow complications become severe, surgical intervention is required in order to establish good flow.  Often times this surgical procedure utilizes a synthetic tube to replace a damaged blood vessel.  Over time the body reacts to this synthetic tube and blood flow is again restricted as the tube becomes clogged.  The underlying issue is that the synthetic tube does not have an endothelial lining as your natural blood vessel does which causes the body to react and clot. 

The technology targets the poor performance of the current synthetic tubes by creating a structure or scaffold that the body can rebuild a new endothelial lining with, and then our material absorbs and leaves the body with just its own natural new tissue, thus reducing the response to clot.  This reduced response by the body will provide for improved clinical outcomes which in turn will reduce the number of surgeries a patient has to go through and the cost of treating vascular disease.

Cardiovate’s device is for vascular surgeons and interventional radiologist who treat patients with peripheral vascular disease.  They will utilize our synthetic device instead of existing devices along with their current surgical techniques.  By using the product the overall cost of treatment will be reduced which will provide value to hospitals and payers who choose this over existing products.

Challenges ahead

The most challenging aspect has been aligning resources with development tasks that create value as we move forward.   The technology has a lot of potential applications which is exciting but can be distracting at the same time. 

In this field, data driven analysis is key to supporting a solid business strategy so Cardiovate must continue to create data that supports the value proposition.  The next steps are to complete a set of product builds and use the devices in planned animal studies. The studies will inform on the initial blood vessel tissue generation with our latest design.  Cardiovate is also collaborating with a stem cell company to see if their product on our device will facilitate even better tissue generation than our device alone. 

Lessons for entrepreneurs

No matter what your product or service, make sure to first test the business model.  It is easy to get excited about a new technology or service but that is the invention phase which does not tell if you have a good business opportunity.  The entrepreneur should be focused on how you create a sustainable business for the new technology or service.  Often times I have seen new inventions raise excitement and funding but fail to test the market opportunity before moving heavily into development and fail.

In most cases you can test the model early and cost effectively as long as you know (1) what the problem you are trying to solve is, (2) who your target customer is, (3) the target market including its dynamics, and (4) how you get paid for your product or service.

Resources for entrepreneurs

Experienced mentors and knowledge experts familiar with your industry are extremely valuable.  Use their knowledge to assist you in planning your strategy and execution.  Everyone needs others to bounce things off of and using experienced people that are open to new approaches but can ground an entrepreneur in avoiding known pitfalls is priceless.  Often times these experts are not someone you need to hire or have equity in the company because without any financial interest they can be unbiased in there help and provide the support you need to make the best decisions.

To learn more about fundraising through TEN click here: TEN Site