Raising funding from external investors is a good idea if you need money to launch your product/service or accelerate your growth. Before you raise funds, you should evaluate various sources of financing and aim for the source that best matches your business and funding needs. We recommend that you look into the benefits and drawbacks of funding sources such as venture capital, angel investments, crowdfunding, governmental grants and other options you may have.
Pros and cons of crowdfunding
Some benefits with crowdfunding are that:
• Investment agreements and shareholder agreements will be more flexible than those of venture capital firms.
• You can seek lower amounts than venture capitalist companies and angels normally accept.
• You can reach out to many potential investors at one platform.
Crowdfunding may be less suitable for early-stage research intensive companies which need large amounts of money before a significant breakthrough can be expected. If such company already has an institutional co-investor, crowdfunding may be suitable though. Crowdfunding may also be less viable for companies without any track record, prototype or plan for launching their product or service. The reason is that such companies are difficult to evaluate. For very early-stage companies, we recommend governmental grants.
Funding takes time
No matter how you raise funding for your business, it will take some time. And after you have raised funding, you will have certain obligations towards your investors. Your specific obligations will depend on what funding source you chose. Although external obligations may motivate your team, too harsh obligations may reduce your flexibility and put you in an unfavourable position. Read all agreements carefully before you accept investments, in order to avoid agreeing on any unfair terms.
The timing of your fundraising round matters. If you are about to reach a significant milestone, you should try to reach it before you raise funding or raise only raise the funding you will need to reach it. Once you have reached the milestone, you will be more likely to reach your funding target and you will be able to motivate a higher valuation.
Many people have great ideas but the execution is what matters. Professional investors will evaluate your risks carefully to figure out what can go wrong. Knowing your risks and how to manage them is important when you talk to investors. If your key risk is that your technology might not work out as expected, you should try to develop a prototype demonstrating that your technology actually do work. Or let’s say that your key risk is that you will not be able to sell your product to the public healthcare. Then you should focus on doing some pre-sales or product testing with public healthcare providers to demonstrate their satisfaction with your product. If that is not possible without funding, you should raise as much capital as you need to address your key risks and then raise more capital for your future development.
Risks from an investor perspective
The main risks investors look for are:
• Market risk: will people or companies actually pay for your product (it is a big difference between saying they want to buy your product and actually buying your product).
• Business model risk: will your company be able to make money as proposed. Is your business model standard for the type of product or service you offer or are you inventing a new way of making money. The latter is riskier.
• Technology risk: are your company inventing new technology or using existing technology. If you invent new technology, will it work as proposed.
• Execution risk: will your team be able to realise the plans you propose. Will you be able to recruit any missing positions or find the qualifications you need. Investors will also look into regulatory requirements and any other obstacles relevant for your plans.
Life science and healthcare risks
Specific risks in life science and healthcare are:
• Regulations such as data security, required CE certification, and authorisation from Swedish and international medical product agencies and any other relevant certifications. Investors want to know that you know how to navigate within your regulatory landscape.
• If your product can easily be copied by other companies, investor will look into your possibility to protect your innovation with patent and trademarks. Investors do not want to throw their money into the development that can be copied and sold by other companies.
• No matter how great your product is, investors will not invest their money in a product or service that cannot be sold. Life science and health care products are difficult in the sense that they may require public procurement. In addition, products and services which challenge existing structures and processes may be difficult to sell to traditional healthcare organisations. For instance, we met with a company with a product which would reduce the number of therapy sessions to treat sleep disorder by 40%. They had difficulties selling their products to public healthcare suppliers, since the therapists were measured on the time spent with clients.
In addition to your business risks, investors will look into your management. If you have external board members, preferably with relevant expertise, you will become a lot more credible.
You will not need to develop a flawless business before you raise funding, but the more you can accomplish, the easier it will be to reach your funding target and motivate a higher valuation.