You may be invested in several startups. Congratulations! You may be looking for your startup to exit. Maybe so that you can invest in more startups!
I was an Entrepreneur in Residence (EIR) at Khosla Ventures for a year. I share some thoughts with you based on this experience. As you nurture and mentor your startup, strategic investors and strategic partners may be an area where you can add value to your investment. These strategics can be a great way for your startup to leverage limited capital and time. Early planning can optimize the value that these partnerships build for your eventual exit. As an angel investor, your mentorship of your startup is one of the values that you bring. Here I offer some suggestions for Life Science companies.
Strategic partnerships: Strategic partnerships can be part of the efficient operation of the company. Partners can contribute equipment, expertise, and contract effort for research and development. This may be more efficient than in-house work. And those partners can be potential acquirers in the future. Partnership with a contract research organization (CRO), university, or hospital is how most clinical trials are carried out by startups. If the clinical trial is carried out at a large, entrepreneurial hospital – that partner could be a potential acquirer. A telltale sign is whether the hospital has a venture capital fund. If so, that is an entrepreneurial hospital.
Corporate Venture Capital (CVC): When your startup is looking for capital, corporate Venture Capital may be an avenue to suggest exploring. Corporate Venture Capital has a different viewpoint, return expectation, and level of commitment than traditional Venture Capital. And there can be risks. On occasion, it might be necessary to exclude the CVC board member from certain discussions that could involve a conflict of interest. The CVC may pave the way for an acquisition by the corporate parent. This can pose a risk as well: partnering with a CVC too early may discourage other potential acquirers from making an offer for the company. Some companies have successfully partnered with multiple CVCs to maintain a healthy competition for their eventual acquisition.
Acquisition: An acquisition is a great form of an exit. Particularly in the medical device space, startups often focus on acquisition as a potential exit. From the venture capitalist perspective, acquisitions are often considered a second-best exit, with an initial public offering the best. I always advise companies to plan to go all the way to the market. By doing so, they may build enough value to receive an attractive acquisition offer. Conversely, building a company for an acquisition can sometimes lead to disappointment.
IPO: The initial public offering (IPO) is the classic exit. It is not the end of the company, but rather a way for the company to raise the capital required for its continued growth. For investors, however, this may be the time that they recoup their investment plus a return and part ways with the company.
Oversubscribed Rounds: There are other ways for investors to exit. They may be able to sell their shares in future rounds of funding for the company. If the round is oversubscribed—there is more demand than available shares—then current investors may be able to sell their shares to other investors. This may require permission of the company, depending on the investors’ rights agreement and the right of first refusal agreement. Strategics may be potential purchasers of your shares.
The Secondary Market: A final way for investors to exit is on the secondary market. Even though your startup may still be private, it may be possible for you to sell your shares to other investors. Your startup company may be able to match you with an interested investor. Or there may be a secondary market exchange available for your shares. Again, strategics may be potential purchases for your shares, possibly subject to your startup’s approval.
As an investor, you bring great value to any startup. Your thoughts on best use of strategics can be very helpful to your startup. Your investments are helping create a better world. Good luck!
Michael Deem is Managing Partner at Angeliki Fund, a physical and digital private equity infrastructure fund. Previously Michael was an Entrepreneur in Residence for Khosla Ventures, a tier-1 venture capital firm on Sand Hill. Michael was part of the founding team of Ion Torrent Systems, sold to ThermoFisher for $2.3B in 2014. He was the 3rd person and performed all the original engineering calculations. He was the 10th person and director of drug design at CuraGen ($100M IPO in 1998). He started the first `Synthetic Biology' PhD program in the US. He was chair of a top-10 Bioengineering Department, with responsibility for 400 people and $27M annual budget. Michael is an active member of The National Association of Corporate Directors (NACD).
Comments