You found a pain or gap in a field, and you have a lucrative idea how to fix this. Congratulations! This is however just the beginning. Especially in the medical field the entry barriers are very high. From research to a profitable business there is a long way. There is a fundamental aspect that you have to think of:
Do I want to be acquired at some point? Or I keep growing and end up with an initial public offering (IPO)?
Aiming at an IPO might be the most appealing choice as you substantially keep control of the company and presumably keep growing, though the hard truth is that a startup can fail at any stage. Years ago, I invested through angels-crowdfunding platform on a small affordable electric car company called Uniti AB. The Uniti One was supposed to be a nicely-designed small electric car: three seats, and the 50 kW small battery should get you to 150–300 km. Retail price was planned around 17.000 EUR. They had 3 rounds of funding. One undisclosed, one of about 1 million UK Pounds, and one of 2.500.000 Swedish Kronas all through angels-crowdfunding platforms. Yet, more liquidity was necessary. In the end, they did not manage and then declare bankruptcy. This is to tell you that it can happen anytime, even after decent round of fundings.
Sometimes getting acquired is a safe choice. However, getting acquired means that you loose control. It is no more your company. You are just a part of a larger company. As a founder you have this clear in mind.
Let’s discuss what is the strategy of the two approaches.
Acquisition
If you have some decent moat (either patents, FDA approval, large networks within). You can follow up from the initial investments with other round of investments or revenue, to reach more maturity (generally more research or more patents/certification/approval), and then get acquired.
Acquisition is relevant for large companies, as once a company grows a lot in size, they tend to have difficulty in generating novel intellectual property from the inside, while acquisition provide a fast track to achieve this.
Indeed, companies often acquire startups to gain access to new technologies, expand their market presence, or diversify their product/service offerings. Famous examples include Instagram, Youtube and Github:
Acquisition of Instagram by Facebook: In 2012, Facebook paid over $1 billion to purchase the well-known photo-sharing app Instagram. Through the acquisition, Facebook was able to increase its mobile presence and take advantage of Instagram’s enormous user base.
Acquisition of YouTube by Google: In 2006, Google paid $1.65 billion to purchase the video-sharing website YouTube. Google was able to solidify its position in online video and broaden its selection of advertising options thanks to this acquisition.
Acquisition of GitHub by Microsoft: In 2018, Microsoft paid $7.5 billion to purchase the software development platform GitHub. The acquisition strengthened Microsoft’s commitment to open-source software and gave it access to a sizable development community.
In those and other cases, the acquired companies were already known and successful and probably approached by the larger company. If this is not your case, to get acquired the steps are the same of usual pitch (demonstrate value proposition, personalize outreach, etc). Instead of investors, you need to identify Key Decision-Makers: Once you have identified the target companies, research and identify the key decision-makers within those organizations. These decision-makers could include executives, CEOs, heads of departments, or relevant contacts who have the authority to make acquisition decisions. LinkedIn, company websites, and industry networks can be valuable resources to find the right individuals.
Startup funding from pre-seed to IPO
Pre-seed funding
The first phase of the startup funding cycle is pre-seed fungin. Pre-seed investment frequently occurs before a startup has a minimum viable product (MVP) or even just a concept. Pre-seed capital is typically provided by the company’s founders, their families, and the occasional angel investor who wants to invest early. Alternatively, the founding team will present funding to investors (this is indeed a growing behavior currently) in order to raise the funds necessary to set up the company’s fundamental infrastructure. Additionally, it is frequently utilized to create the MVP and reach early goals like getting the first client and spending money on marketing.
Typically, a pre-seed funding campaign will raise anything between $150K and $1 million (but often much even a lot less than this range). But more and more investors are getting involved in the pre-seed investment phase.
Pre-seed market analysis approach without MVP is actually a growing approach where people validate the feasibility of the business without spending time on building prototypes, certification which might be useless:
Seed funding
Seed capital is the standard entry point with investors. Angel investors predominated this stage generally, but venture capitalists began to see the importance in taking on risk by supporting firms at their earliest stages of viability. Though, unless the startup have solid IP, clinical trials, and tangible moat, only angels will take the startup seriously.
At this stage founders will be seeking to fund between $1 million and $5 million. Numbers in Europe can be meager compare to US approach, therefore double registration of the company in US might be worth of consideration.
At this stage of funding, the startup has between 2 and 10 employees, it will onboard their first clients after refining the MVP to be more market-fit.
Giving a medtech example, Current Surgical Inc. recently announced a $3.2 million seed funding round. The company develops a software-enabled surgical platform to empower doctors to precisely and micro-invasively treat a range of diseases so that more patients can receive the curative treatments they need.
Series A funding
A business receiving Series A capital has a finished product, a customer base, and a clear roadmap for further expansion. Generally, it should look like more a growing business than a scrappy startup.
Even if tiny, revenues should be steady, the company should have developed a long-term growth strategy (not a go-to-market strategy), and maintain liquidity until income is sufficient to fund the operation on its own.
Series A funding are relatively more challenging than seed. Less than half of all seed-funded businesses receive Series A funding. Given that Series A funding is far more considerable ($15 million to $20 million), investors will require more evidence to convince them of the startup’s potential.
Most of startups do not manage to proceed further, or at this point consider the safer opportunity of acquisition, few lucky ones are able to get into IPO after Series A, though those are exceptions. Most companies will not have the size or consistency needed to qualify for listing right after Series A.
Series B funding
By the time a company is looking for Series B funding, it has already proven itself. The prospect for additional expansion is obvious, the client base is expanding, and the product-market fit has been confirmed. Although Series B fundraising can range from $15 million to $900 million, it’s paradoxical that founders typically find this round of funding to be much simpler than Series A. There are also less VC able to handle this level of capitals. Investors recognize that a startup that has advanced to this degree is a relatively safe venture, and at this time you are gaining the attention of the large institutional players.
Series C funding
Generally, Series C is the last investment cycle, though many organizations also pursue Series D, E, and F rounds. The largest investment round, Series C, can range in size from $30 million to multiple billions of dollars.
The Series C money will be used by the founders to grow even more internationally, enter new industries, buy smaller companies, and create new products and services for the market. The business is now an established and successful enterprise rather than still being a startup.
As for the previous stage, there are less and less venture capitals with the capacity of investing in a series C.
IPO
The process of going public and becoming a publicly traded corporation is the last step for the majority of enterprises. The company will use the substantial new funds it receives from the IPO in a way that is comparable to how it would use Series C capital. It will be used to support expansion through the introduction of new products, markets, and acquisitions of other younger startups (yes we are entering the loop now).
Many entrepreneurs prefer to exit their companies at the IPO since they will profit significantly from the company they worked so hard to build from the ground up. Some will continue working as directors or advisors. However, startup founders typically understand the benefits of giving a listed firm to a seasoned CEO to run going ahead.
In case you are wondering, an IPO generally comprise the following steps:
Select a bank
Due diligence and filings
Pricing
Stabilization
Transition
An IPO is considered successful if the market capitalization is equal or larger than the market capitalization of the industry competitors. Market capitalization can be estimated as
Market Capitalization = Stock Price x Total Number of Company’s Outstanding Shares
Depending on whether they seek pre-seed money immediately or not, a modern business will go through four or five rounds of funding before they are ready to go public. A startup may occasionally participate in a Series D, E, or F round of fundraising or be ready earlier. Nevertheless, none of these steps happen overnight, and bumps on the way are expected especially at the beginning.