Jeremy Glaser is a member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC's Corporate practice in San Diego. His practice focuses on serving emerging growth companies and the companies that fund them. He has substantial experience in venture capital financings, securities offerings, mergers and acquisitions, SEC compliance, licensing arrangements, and other general corporate matters.
Is there anything particularly unique about today's financing environment? How does the situation differ for startups and older companies? How do you see government policy affecting the financing environment?
I have been representing growing companies in equity and debt financings for over 20 years, and the financing environment over the last year has been as difficult as I have ever seen. Due to the credit market collapse in 2008 and early 2009, most sources of financing for companies dried up. For example, many of the growing private technology and life science companies that I advise rely on venture capitalists and angels, which are either not making new investments or have refocused their investment strategies. Public companies that rely primarily on institutional investors, hedge funds and individuals face the same challenging environment. Regardless of funding source, we are experiencing a freeze that is just beginning to thaw.
During the past year, venture capitalists have focused on funding existing companies in their portfolios and much less on new investments. Startup money became particularly difficult to obtain as venture capitalists found great opportunities to invest in later stage companies at fire sale prices. Even mature public companies found it hard to raise money, as hedge funds suffered from redemptions and other investors that typically invest in public securities decided to wait it out to see how bad the economy was really going to be. The good news is that the thaw is in process, and strong companies are having success raising money. For example, we are seeing a pick up in follow-on offerings of equity by publicly traded companies, and the venture capitalists are investing again -- although they appear to be more focused on later stage companies and companies already in their portfolios.
The Government Stimulus Plan has certainly provided opportunities for greater access to governmental funding, particularly for companies in the health care and clean technology spaces. Government policy may also offer help by encouraging capital formation for smaller companies. For example, some of the policy ideas that if passed may be helpful include eliminating capital gains taxes on early-stage investments and reducing the regulatory burden on small public companies to encourage the re-emergence of the under $100 million initial public offering market.
2. Where/what are the creative financing opportunities?
Even in this tough financing environment, there are creative ways growing companies can raise capital. For private companies, the options are more limited, but there is greater availability of small business loans under the Government Stimulus Plan. Government grant money is now becoming available for companies in the clean technology space and certain areas of health care, such as electronic medical records.
Publicly traded companies have more options. We are seeing more sales of convertible debt in recent months as well as follow-on offerings of equity. In the life sciences area, companies are getting very creative as the market for private placements dried up. We are seeing more registered directs, where a company sells registered shares to a select group of investors off of an existing shelf registration statement, and "at the market" offerings, where the shares are also sold off an existing shelf but are sold over time to the broad market rather than to specific investors. We are also seeing sales of non-core assets to fund existing lines of business or products. Companies are also licensing their technology to raise cash. Private foundations and patient advocacy groups are another interesting source of capital for life science companies and may be worth exploring in today's environment.
However, even with all of the above, there is no substitute for a strong venture capital and public equity market. The vast majority of successful companies will need to receive funding from these two sources as they grow and achieve success. Abandoning the quest for venture capital is not an option. Companies need to be more vigilant in identifying the venture capital firms that have fresh capital and are looking to invest in new companies. There are many sources to access these firms, including attorneys or accountants who are active in the venture capital markets and can refer you to the right venture capital funds.
3. How would you characterize the company that is able to get financing? What are some common assumptions/mistakes?
Most venture capitalists will tell you that in order for them to invest, they need to see an innovative and defensible idea that has a big potential market and is run by experienced entrepreneurs. To attract venture capital, it is important that you address each of these areas in the executive summary that you use to introduce the company. One of the biggest mistakes I see is not focusing the executive summary on the issues that the investor cares most about, and spending too much time getting into the details of the technology. There will be time to describe the cool new technology you have developed in detail later once you get an initial indication of interest from the investor. As I tell my clients, the purpose of your executive summary is not to answer every question the investor may have, it is to get a meeting!
Today more than ever it is important to show that you can build a sizable business while being efficient with capital. Prior to the dot-com boom, it was unusual for early-stage companies to receive funding of more than $3 million to $5 million. The amount of funding has not gone back to the pre-boom levels, but today we are seeing indications that venture capitalists are looking to go back to lower funding levels. If you can show that you can get to cash flow break even on under $10 million of funding and your idea has barriers to competition through unique intellectual property or other means, you have a much better chance of attracting venture capital today. The days of raising a huge sum of money and spending it to build market awareness while relying on the so-called "first mover advantage" to beat out your competition are over, at least for now.
-- Compiled by Rebecca Go