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Raising Money for Your Medical Device Startup

What are Investors Looking For?
 
Simply, the best risk-adjusted returns they can get for their money. They want to put money to work. They want the best technology opportunity and the best team to execute on it that they can get at the most attractive valuation. They are looking for a good horse (technology) and a good jockey (team) to ride it to the winner’s circle, at a valuation that allows them to make good money. It’s not just a good technology or a good team, it’s a good technology and a good team. In short, what investors are looking for are good investments!

Valuation

When fundraising, you’ll need to answer two key questions: what is the valuation of your company, and what percentage of it are you willing to sell?

Valuation is critical. Too low, and you sell too much of your company and give up too much control. Too high, and you set up unrealistic expectations for the next round of financing or exit (or the potential investor just walks away because the deal isn’t worth their while, or worse, they do not find you credible).

The other issue here is dilution. The more of the company that is sold, the less of a percentage stake the current owners will have. Dilution is unavoidable if you are raising money – you just want to be sure that raising the money will take you to a place where your smaller percentage stake is worth more than before. Steve Kam of Cogent Valuations offers the following:

  1. What is the expected time and method of anticipated liquidity for investors? (Include underlying assumptions that support projected revenues, earnings and cash flow.)
  2. Explain further with examples of comparable transactions, for the multiple of revenue, EBITDA (pre-tax earnings), or cash flow used to value the company for the current financing round.
  3. How will the proceeds from the current financing be used, and what will be produced in terms of operations, growth, revenues and cash flow?

Financing Terms

Money always comes with conditions.

Some of these are anti-dilution terms, liquidation preferences, participating preferred stock, board membership rights, cumulative dividends, option pools and others. Even if you get a valuation that you find acceptable, onerous terms can give you serious headaches down the road. If you get to the stage of getting a term sheet from an investor, you must have people on your team who have negotiated a venture financing in the past to avoid potential pitfalls.

Helpful resources include: 

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