Raising capital is a lot like telling a good story: You don’t want to bury the lead.
When you tell investors that you’re developing a product that can do something that no other product on the market currently can do, it’s likely you’ve captured their attention.
Last year, XaTek Inc. intrigued investors enough to receive $9.1 million in Series A capital in less than 90 days to develop the ClotChip sensor. A revolutionary product for measuring the clotting ability of a person’s blood, the sensor could help more than 40 million people worldwide. XaTek is working to have it ready for use in hemophilia and anticoagulation therapy by 2021, says John Zak, XaTek’s president and CEO.
We caught up with Zak to learn about his approach to raising capital and the advantage of doing it all at once.
Think like your prospective investors
Zak is a firm believer in the value of conducting your own due diligence on your business as though you’re advising your investor pool on the deal.
“Prepare your pitch deck and business summary through the lens of the investor,” Zak says. “If you’ve scrubbed the opportunity, like your most seasoned investor will from day one, you should have no trouble raising capital from others when the time comes.”
Do you believe?
More often than not, the fatal error of a new company is committed upon inception of the business model.
“If you have to convince yourself that a business is investment-worthy, then the task only grows more difficult to raise the necessary capital,” Zak says. “The best advice I can offer is to know your criteria for a successful business and then wait for the opportunity that checks all the boxes.”
Here are those criteria:
- Novel technology
- Little/no competition
- Multiple large markets
- Non-binary outcome
- Clear exit strategy
You’ll also go a long way toward winning investor support if you demonstrate that you’re prepared to invest in your own deal.
“If the investment is good enough for their money, it should be good enough for you,” Zak says. “If you haven’t invested cash in the business somewhere along the way, be prepared to answer why not.”
Another key is to treat all of your investors with the same level of respect, regardless of who invested the most or who sits on your board.
“Transparency and communication are always the best policies for success,” Zak says. “Each investor, big or small, has not only invested their money with you, but they have invested in you. Keep them informed and don’t oversell and they will continue to back you.”
Be clear about your plans
Determine what it will take to get the company to a real endpoint — one that can easily justify an exit or launch.
“To accomplish this, you need to have a clear understanding of what you have and where you want to take it and then create a granular budget that encompasses everything that will be required to get there,” Zak says. “You should never underestimate your cash needs in an effort to fit under some pre-conceived notion of the ‘right amount’ to raise. Leave room for the unexpected.”
Most individual investors do not appreciate a plan that is designed for their own extinction, he adds.
“What I mean by that is too often, individual accredited investors have felt the squeeze of pre-planned dilution,” Zak says. “Today’s investor seems to appreciate a larger upfront raise with an appropriate valuation as opposed to a Series A that limps to a strawman milestone, only to raise again and again at artificially inflated valuations. That methodology of pricing deals and the escalation of subsequent rounds is antiquated in the eyes of today’s seasoned investor groups. It seems to only hold back management’s momentum and dilute any investor not able to keep pace with institutional money. It will be less attractive and therefore, your raise will drag on.”
Show your work
Investors want to know that you’ve done your homework and that you know the answers to the questions they haven’t asked, Zak says.
“Risk may be a four-letter word,” he says. “Nonetheless, it comes with every investment. It’s your ability as an operator to recognize the risks and articulate how you intend to mitigate them that will help secure investors for your business. Investors want to know as much about you and the team as the technology itself. Don’t shy away from past mistakes or deals that didn’t end with a 12x multiple paid to investors.”
If you haven’t made any missteps, that could lead would-be investors to believe you are about to make a big one — and they don’t want to be on the cap table for that calamity.
“No matter how seasoned an operator you are, no matter how gray or little hair you have, investors want to know that there is a team of seasoned minds at the table,” he says. “I’m referring to the rest of the management team and the board of directors. The board can be a great asset to any operator. Build a board of smart individuals that are more seasoned than you. Don’t fill the room with a bunch of like-minded men and women with similar experiences. Yes, you’ll all sit around and agree with each other — which is nice if you’re attending a mixer at the social club — but not if you’re trying to build an asset that will someday return a big multiple to your shareholders.”
