News and Features
Finding the Money that
Will Fund Business Growth
In this market, it
can be a full-time job
By Pam George
A business begins with an idea: a patch to treat migraines, a mobile-device-friendly Web page, a product to help patients at risk for heart attacks.
Turning that idea into an enterprise requires cash.
“For a business like ours, which is developing innovative new pharmaceutical treatments, it takes a long time and a lot of money and a lot of risk to develop a product and have it approved by the FDA,” says Jane Hollingsworth, CEO of NuPathe in Conshohocken, Pa., which is developing the migraine patch. “There’s a big need for investment.”
Few would argue that in today’s market, finding investors is a challenge. “There’s no doubt that money is tougher to come by than in the past,” says Anthony Gold, CEO of Healthy Humans in Wayne, Pa., which builds personalized wellness plans for people with chronic illnesses. Patients are often referred to the online site by hospitals and physicians.
Traditional funding sources — think venture capital firms and financial institutions — are more closefisted, causing companies to become more creative. They’ve learned to spread a wider net, and they’re taking a good look at their business model, making sure it is not only attractive to investors but also focused on the bottom line.
Friends, Family and Then Some
Like many entrepreneurs, Chuck Sacco and his partner initially self-funded Philadelphia-based PhindMe Mobile. “The company, founded in 2006, provides a technology that automates and optimizes the design and publishing of Web pages for mobile devices. Last summer, with the help of family and friends, PhindMe Mobile raised $225,000 to take its products from beta to a full product launch.” Credit cards with 0 percent interest rates came in handy for short-term debt.
PhindMe Mobile is currently looking to raise $2.25 million. “We’re reaching out to early stage venture capitalists and angel investors, both in the region and outside the region,” says CEO Sacco.
Indeed, most companies need to fish in other revenue streams unless founders and their friends have deep pockets.
Prescient Medical in Doylestown, Pa., started with help from family and friends in 2004, but quickly reached out to angel investors. For help finding angels, Prescient turned to Spencer Trask in New York, a private equity firm.
“They have a group of high-net-worth individuals they can tap into, and they offer them deals in a number of companies,” says Patricia Scheller, founding CEO of the company, which is developing products used to reduce deaths from heart attacks through the treatment and prevention of coronary plaque rupture.
Some angel investors are individuals; some are family-run funds or networks of individuals. These days, investing in a company might seem preferable to putting money in the roller-coaster stock market.
But Scheller has noticed that the pool of accredited angel investors has shrunk. “The stock market hasn’t been kind to anybody,” she says.
The Turning Tide in VC and IPO
Hollingsworth and partner Terri Sebree initially self-funded NuPathe, with the help of a private investor, an industry veteran, and early investments from Ben Franklin Technology Partners and BioAdvance, which provides funding to startup life sciences companies in Southeastern Pennsylvania.
NuPathe also received money from venture capital firms, including Safeguard Scientifics, Birchmere Ventures and Battelle Ventures.
Last summer, the company raised $31 million in its second round of financing, which brought in funds from Quaker BioVentures and SR One Ltd., the venture capital arm of GlaxoSmithKline.
“We felt fortunate to get the money before the market turned,” Hollingsworth says. The money helped launch Phase III trials on the migraine patch and fund R&D for a product to treat Parkinson’s disease.
NuPathe, already well into its research, is in a good place. According to a late 2008 survey by the U.S. audit, tax and advisory firm KPMG LLP in Philadelphia, life sciences and clean technology are key investment segments. Healthcare and healthcare IT are also big, adds Bruce Luehrs, a Partner at Emerald Stage2 Ventures in Philadelphia.
But Hollingsworth, who’s clearly familiar with the VC market, has still seen the effects of the economy on that revenue source. “Venture capital firms are not able to take as much risk as they did before,” she says.
Faced with reduced capital, some firms are downsizing and restructuring, and many are focused on their existing portfolio rather than substantially adding to it.
VC firms are faced with a finite amount of capital, Luehrs says, and they must put funds toward successive rounds of financing for companies in the existing portfolio.
Gone are the days when two guys in a garage can expect to find investors. “We’re looking for domain expertise,” Luehrs says. “If it’s healthcare, we want owners who’ve spent 20 years in healthcare; they know people and they have credibility.”
Companies who go the VC route can risk “getting hammered,” says Gold, whose firm —founded in 2007 — has raised $1.75 million toward a $2 million goal, mostly from Ben Franklin Technology Partners and angel investors.
Whereas you might value your company at $4 million, in today’s economy the venture capitalist might value the company at far less. (It’s not unlike the real estate market, where devaluation is rampant.) The $2 million investment you requested could thereby give the venture capital firm about 50% equity in your company.
That’s not because VC firms are “evil,” Luehrs says. They are simply following the market. If you had $100,000 in your 401K last year, now you might have only $60,000. “The world has reduced in value,” he says. “We look to buy at one price and hopefully sell at a higher price.”
Initial public offerings, meanwhile, have fallen from favor. “The buyers aren’t there for the IPO of a life science company,” Hollingsworth says. “IPOs have had ups and downs over the years, but the recent drought has gone on as long as I can remember.”
The KPMG survey found that the venture capital community does not see the IPO market improving until at least 2010.
“Everyone has to get more creative these days,” Hollingsworth says.
A Collaborative Effort?
Grants are an option, at least for partial funding. “Right now, there is a lot of grant money in the healthcare space,” Gold says. Hollingsworth agrees. She’s seen more money available from the National Institutes of Health.
Grants, however, offer relatively short-term money, she says. And they rarely cover even half of the cost of developing a medical product. Grant-writing, moreover, is a labor-intensive process. Petitioners don’t just fill out forms, Gold notes, they have to labor over every word and statistic they submit. “There’s a fair amount of work in writing effective grants,” he says.
To gain development and research funds, small pharma companies can enter into agreements with corporate giants earlier in the product development process. The upside: Corporate giants are hungry for new products. The downside: The small company can no longer profit from marketing the finished product to the highest bidder.
NuPathe has started talking to large companies about the migraine patch, though Hollingsworth knows full well that the longer her small pharma company can wait to negotiate, the more leverage it will have.
Cause and Effect
Raising money is far more time-consuming these days. Scheller and Prescient’s CFO can spend up to 75 percent of their time on the effort when actively seeking funds.
The increased time spent hunting for money is also delaying projects. Prescient had planned to take its catheter-based imaging device to market in Europe and Latin America this spring. But the financing squeeze has delayed its introduction. It takes money and time to train doctors, stock inventory and create training materials, Scheller says.
Healthy Humans unrolled its service for diabetics, one of 40 offerings it is waiting to debut. “When we first started, we were going to ramp up more quickly,” Gold says. “But when the market tanked, we reevaluated the numbers and determined that it would make sense to release new conditions a bit more slowly to more efficiently conserve cash.” Services for people with high blood pressure and high cholesterol will debut in the next few months.
The situation has made startups evaluate the best use of every dollar. “We have to be more disciplined than ever about how we spend,” Hollingsworth says.
But it’s not a dire situation, Sacco maintains. The bar is set higher. Companies must know their target market and go after it. “If we can get through this year with as little financing as possible, we’ll be seen as a company that survived — and that’s a strength,” he says. “Venture capitalists are sitting on a lot of money. We’ll have a good case for receiving it. When there’s economic growth, all the pieces will fall into place.”
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