Transcription
The one piece of advice I would say is don't wait too long to start your capital raise because it's going to take longer than you think. Make sure you have a budget for that capital raise because it's not going to be free. You have to raise your visibility. You have to, you know, be on social media. Just make sure that you are aware of your company's profile publicly.
You can't replace. Treat them the same. Source of truth for the medtech industry. Coexists with the robots. Robot understands things automatically. Number one show in the medtech industry. So Stryker got ahead of that and changed in the $9 billion company that helped a pie a lot of things. Stayed in medtech with your host Omar M Kib. Everybody, welcome back to the show. If you're a founder, this is going to be a really important episode. You're going to want to bookmark it, probably review it a few times. You know, it's really rare, uh, when you find somebody who has been on both sides of the pond in the sense of being an entrepreneur and then an investment banker. So, Colleen Gray is senior vice president at US Capital. Uh, we met at the beautiful, uh, LSI summit in Dana Point over dinner through our good, uh, mut, good friend and mutual friend Chris Prenis. And what caught my attention was that, you know, she was formerly an entrepreneur and now an investment banker. And so I just felt like I had to have her on the show to talk about, um, not only that journey but more importantly, new ways of raising capital.
You know, uh, one thing that, uh, I was able to pull from the HSBC's, uh, funding report, thanks to John Norris and his great team there, is that from 2023 to 2024, the amount of venture dollars that went into healthcare as a whole rose from, I think, 42, 43 billion to 57 billion. So a sizable amount, I think close to 30%. But the number of deals that got funded, I think only was an increase by 2 or 3%. So all that to say, finding capital has become a lot harder, and I think it's more important today than ever for entrepreneurs to understand what different vehicles they have access to to do that. That being said, Colleen, thank you so much for coming on the show. How are you doing today?
I'm great, and thank you, Omar, for, uh, asking me to be on the show. I'm really looking forward to it.
Absolutely. So before we got, I guess, get down to brass tax, as they say. Give us a little background on yourself. Like, you know, formerly, you're, you're an entrepreneur. So, like, what kind of company did you start? Give us a little background on that.
Sure. Sure. You know, um, Omar, what's really served me well is I started my career and my educational background is in finance and accounting. So it's a good, um, baseline for what I'm doing now. But I worked for some really large companies early in my career in the technology industry and, uh, spent a lot of time focused on data storage. Um, I always had, um, you know, an interest in operations. So, uh, I was able to expand my responsibilities beyond, you know, CFO roles and that type of thing into more of the manufacturing space, uh, at the technology company that I was with. And, um, and then, um, you know, that company was acquired by IBM. It was a great outcome. Um, and, uh, it was a public company. We did a successful public offering before IBM acquired us. But I, I will say my next opportunity was the start of my entrepreneurship. I was a co-founder in one of the first cloud-based storage companies. Um, it was too early to market, but I learned a lot. It was, uh, in 2000. We ramped up revenue really quickly, but, uh, but then, um, you know, it just wasn't the cost basis of, uh, connectivity and storage at that point in time was too high, and, uh, also had to go through the dot-com bust, which was, uh, a terrible experience in one sense, but, you know, learned a ton from what it takes to, uh, found a company. We raised a lot of capital there, both debt and equity. So it was, uh, it was a great experience overall. And, you know, from there, I went to, uh, kind of a turnaround situation in a data storage company, but that's where I met the, um, investors who recruited me into orthopedics. So, uh, so it was a kind of fortuitous meeting there. Uh, that didn't last long, but, um, I joined Consensus Orthopedics as CEO, and that was a turnaround situation and a really a learning situation for me. I had to learn a whole new industry, and it was, uh, it was a great experience. Um, we built that company to over 20 million in revenue and sold it to an Indian hospital system. So, uh, so that was a pretty interesting transaction. And we got it done, you know, kind of still in the middle of COVID. Um, and then, uh, we didn't sell the entire company. We kept a technology that we had incubated, which was a medtech tech technology, um, a patient monitoring medical device that was, um, done through a wearable, and, uh, it was monitoring patients pre and post-op, mostly, um, musculoskeletal procedures. And we sold that company to a family office in the summer of 2023, which is, um, shortly after that, I ended up joining US Capital. And, um, you know, I was a former client of US Capital. I worked with them for several years, uh, when I was CEO of the medical device company. Uh, they assisted me in accessing better lines of credit, and the last transaction they helped with was an equity raise. So I know the company really well. I know the founder really well, who's the current CEO still, and, uh, it was just a good fit.
Fantastic. I love that. And, you know, capital, um, you know, there's so many nuances of finance that I don't understand, but the one thing I do know as an entrepreneur is that, you know, for entrepreneurs and small business owners, it's important to have like smaller, uh, smaller banks available to us just because they're going to be a lot more flexible in terms of how they lend money, what they can do, etc. Um, you know, versus me going to like a larger institutional bank is just not going to make sense, you know. Um, so, like, on that note, like, let me launch into it. So you, so, uh, if we look at how the environment is today, right? The current capital raise environment is particularly challenging. There's a significant amount of volatility. Um, you know, the political environment doesn't help, and then also we're seeing longer timelines. So you put all that together, and securing first institutional rounds has become a lot more difficult. And, you know, in our space, like it costs money to take these products to market. Um, can you kind of elaborate on like why we're seeing this right now and like what can founders think about doing to get access to that capital? Because, like, I was just talking to a founder earlier who had a fantastic technology, actually, it's a clinician, uh, who's a founder. So good, great founder, great tech, all these things, and a lot of the institutional, uh, investors said the same thing, which is like, great stuff, can't do it now. Come to us, like, at the next round. You know? So, like, what do you do?
Yeah. You know, I think first of all, there are so many companies in need of capital right now at various stages, whether it's seed, A, B, C, but, you know, standing out from the crowd is so important, and you really got to capture the attention of these investors from the first meeting. And, you know, while tech is important, I think, um, one of the things that we focus on at US Capital is working with our clients to make sure that the messaging to investors resonates. Yes, you can talk about the tech, but really talk about what the investors really need to hear from you, which is you understand your market. You understand who's going to buy your product, how you're going to get paid for it, you've got control of, you know, the capital you have raised. It's so important to be able to show what you've achieved with the capital you've always, you already raised, um, because that's, you know, right now when there's so many companies competing for that scarce dollar, um, you know, investors want to know that you know how to spend money and accomplish things. Uh, so I think, you know, messaging that in your pitch deck and, um, raising the right amount of money and, you know, knowing how to articulate why it's the right amount of money are some of the key things that, um, founders can do in, you know, every communication with an investor.
I think that's a great point. And it's the first time that I've heard somebody, uh, frame it that way, which is, um, aside, you know, I, as a guy who runs a marketing agency, yeah. Getting attention is like step one. If you, you can't get somebody's attention, you can't get them to pay you money, right?
Right.
But I think the other side of it is actually framing and coming up with how did you come up with the with that amount of money that you need and like how are you going to use it? And I think a lot of founders, you know, sort of, uh, you know, rig and skate by and they just kind of come up with this some random number. But it feels like that's the wrong way to go because it could be that you actually need less money, and even if, let's say, maybe you need more, um, structuring how you're going to spend that money is going to be important based on like the val, the valuation you're going to get.
Correct.
Right. Right. And we know valuations are really under pressure.
Yeah. 100%. What, um, when you've worked with clients, uh, in this sense, like, what, what are some of the most common mistakes you see founders making?
You know, I think the most common mistakes. We see a lot of founders are technologists. And so we see founders that can articulate the technology very well, but they're not necessarily engaging speakers. So, um, you know, it, it, it doesn't really resonate with investors to the extent it could if they were more engaging speakers. So, I think practicing your pitch, um, to, you know, if you've got some investors on board already and getting some critique can help tremendously. And actually, we do that at US Capital. We will work with founders to help them, um, you know, really tune their pitch deck and all the investor materials, and we get all of our bankers on a presentation with the founders, and we have them present, and then we do a critique. And I think just practicing and listening to feedback is, is a really important. Let me ask you a question. Again, just I wanted to like be very direct and let the audience know, like, this is not a, like, US Capital sponsored, uh, episode, but I'm very interested because I didn't hear about US Capital until I met Colleen. And I think it's important to understand this. So, like, can you give me like a stereotypical persona that would come, you know, to US Capital? Like, at what, like, would it be a, a founder at a seed stage, at a series A? Like, what, what does that person look like? Like, how do they first start using US Capital so that they get access to, like, your expertise? And then, like, again, some of this financial modeling is really complicated, you know, like, you can't, you can't, you know, I love AI, but you can't chat GPT that, you know? So, like, what, what is, how does somebody know, oh yeah, like, I'm actually at a stage and I fit the mold of like somebody who could be a good customer, US Cap?
So I talk to, oh, I don't know, many people every week, you know, probably up to 30, 40, um, founders a week. And, you know, I will talk with just about anyone to understand, you know, what their stage is, if they're seed level, pre-seed, series A, whatever the case may be. But, you know, what works best, I think, for, uh, for founders if they're pre-seed or seed, they really need to focus on their network and I would say industry insiders that understand what they're doing to raise that really early capital. We tend to work with companies, um, you could say later seed in some ways, depending on the sector. For instance, biotech, you know, a seed round for a biotech can be, you know, $10 million. So, so we'll work with, um, with companies when they're in the market for about a $5 million raise. And one of the things that we do is we get to know our clients and their business really well. Um, and we collaborate with them on what type of raise, how much should they raise. You know, we collect enough information upfront before we're even engaged so that we can really add some value, even if the client decides not to go with us. You know, we've built a relationship there and hopefully they'll come back to us at a later stage.
Got it. So, you, you mentioned, so like the, the key number there is like when they're getting ready to ready to raise at least 5 million, and it doesn't matter whether it's that's a seed or or a series A or anything. Doesn't really matter so much. We like to see companies that already have raised, let's say, two to three million. So there's, you know, they, they've progressed and have, you know, kind of an operating entity. Um, you know, they're not really just an idea and a and a founder, right? Um, it has to be a little bit more substantial than that. So, a lot of, um, founders before they get to you or even get to me, you know, on the marketing side, they've raised at least like anywhere from like $200,000 to let's say a mil or two, right? Some, some, some of the clinical, clinician founders, like the one I just had on earlier, uh, did a $3 million friends and family, right? So, great. You mentioned how important it is to show investors how you've used money in the past. In the pre-seed stage, you know, in that range of let's say 200k to a mil. I think that's most medtech companies fall into. Um, rather than talk about like how to use it, let's talk about like what are the wrong ways to use that money where if you saw it and you're like, "Oh, that's really going to be tough to explain to investors." Like, walk us through that.
So we sometimes see, um, founders who are unrealistic as to how much they should burn on salaries and, you know, don't necessarily do a good job of just paying for the time they need from certain specialties. You know, for instance, you really can't afford a full-time CFO when you're in a seed stage. So, you know, taking advantage of fractional CFOs, um, you know, and other types of services can save you just so much money. And, you know, whether or not you can get people to work for equity and a very small salary, just being creative on how you're going to attack keeping salaries, uh, low while you're going through the seed stage. I think another thing that that companies lose sight of is, you know, make sure you understand that your product, if, you know, can be reimbursed. So, you know, just, you know, money you spent on investigating how your product will be reimbursed and just confirming that is money well spent.
Um, so, so would you recommend like engaging like a CRO for example?
Well, I don't know about a CRO. You know, it depends on the product, but if it's a, it's a really unique product, you might do some of your own research first, or, um, I don't know if you can afford a CRO at the seed stage, but there are plenty of independent contractors out there that have that subject matter expertise, and they're not too hard to find. If you find them, you can usually get them for a much more reasonable price than if you hire a full-fledged CRO.
Yeah, it's, I think it's a good point. I think also like there's a lot of really great tools out there. I mean, I think, um, if I, if I recommend founders to use two, two different ones. One is, um, on the commercial intelligence side, where you can see like procedure volume for specific clinicians, etc. Alphasopia is fantastic. Um, small plug, you guys can go to alphasopia.com/omar to get like a free demo. The other site, which I use all the time, is Compass by LSI, which is incredibly affordable. Um, and you can see a lot of like worldwide procedure volumes, market reports, etc. And I think it's really important to understand that because I think a lot of founders, they'll think of a great like technology to solve a problem, but you want to make sure that you're solving a sizable problem and you have a way of getting paid for solving them.
Right. Right. I think the other mistake founders make sometimes is they've got a great tech, but they're in search of a problem for it. And, you know, that is not ever going to fly with investors. You know, you really, uh, you really need to solve a problem. It can't just be, well, it's as good as XYZ VZ solution. Um, so it's a good alternative that that's just not compelling enough in today's environment.
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A good friend of mine and and guest of the pod, Bruce Cleveland, who's a venture capitalist. He kind of, uh, coined the idea around market engineering, you know, made this like very strong point because, you know, in Silicon Valley, we we hear about product market fit all the time, but it's actually wrong. And that's, you pointed that out, which is like developing a product and trying to find a market to fit it is the wrong thing to do. You need to do it the other way around, which is like you need to look for the market and then fit a product to that. You know, because then you're, you're designing around a problem, and then you can decide like, you know, this is actually not a big enough problem, and the pain's not big enough, I need to find something else. You know, I think that's a much better way to go. You know.
Yeah, and I think other things that that investors, um, look for is if a company is a little bit later than seed or A, you know, have you done a good job of looking at other types of funding solutions? Like if you're already generating revenue, look at asset-based line of credit, look at other things that help you along the way that aren't dilutive.
Yeah, I think, I think that's really important. You know, with, I think it's tough sometimes with medtech just because you have these regulatory hurdles, and, you know, to get to the point of generating revenue is tough. That being said, I think it's even more important to understand, you know, the financial engineering behind how much you need to raise, how you're going to use the money, get to market, and actually start generating revenue because you start doing that, then, you know, the benefit of getting a line of credit is you don't, you don't dilute yourself, and, you know, your, your existing investors are going to be much happier with that.
Yeah. I think the other mistake that founders make is being too optimistic when they put their financial forecasts together. Um, and I, and I think that doesn't serve anyone well. You know, in today's, uh, environment for capital raise, investors want to get to know founders for a few months at least before they actually start writing checks. So, I always, um, when I'm speaking to management teams, I always tell them, look, let's identify some milestones that you can put into your forecast that you're going to actually meet while you're talking to these investors. So maybe they're one month out, two months out, but it starts to show some momentum and build some confidence that you can do what you say you can do.
I love that idea. That's the first time I've actually heard that, but that's such a good point, which is putting together. So would you say, like, when you have those milestones, like you talk to an investor, do you mention those milestones?
Oh yeah.
Okay. Okay. So that's really, that's really interesting. So, like, what would be some examples of like some milestones that can be achieved within like 6 to 9 months that would be a good signal to an investor?
Well, you know, if you have, um, for instance, a checkpoint coming up that, okay, I'm filing my 510K or whatever regulatory process you're going through on, you know, X date, that you do in fact meet that, you, you know, you can at least file it. I mean, that's something in your control. And, um, you know, other things, I think if you're a little bit further along would be, you know, I'm about to, um, close some business with XYZ Hospital, and if you're confident enough in that and it's in your revenue forecast, then I think that's something you highlight, and then you're able to report to the investor, guess what? That deal closed, and we're doing our first cases there currently. So, you know, you really got to think through that a lot, but, but I think those are a couple examples of what you can do.
Yeah. And I think what's interesting about that approach is you're essentially proving the investor that what you say is going to happen ends up happening. I think that's, that's like, you know, I think like, um, I can't remember who it was. Uh, I'll, I'll have to, I, I'll remember who, but somebody said about like being a public CEO that essentially the skill set of being a public CEO is that you essentially have to predict the future and then you have to make it happen. And I think that's like, I think that's an interesting way of putting, which is coming up with milestones and showing the investor that you can make promises and keep those promises.
Yes. And I, and I think too, just, um, you know, kind of from a longer-term perspective, if you're raising, you know, millions of dollars, how you're going to deploy those and what you achieve with that, you know, and I think those are the messages that investors want to hear. Besides, certainly, they want to understand your tech and and the problem it's solving, but, um, but really, I think I've heard this my whole career that, um, you know, the check writers are really investing in the management team as much as they are the tech.
So, let me, let me, let me dig into that a little bit. Completely agree, which is a lot of people want to bet on the jockey and not the horse, right?
Right.
But what if you're a first-time founder? What do you do then?
Well, I think if you're a first-time founder, one of the best things you can do is add a co-founder that has a track record that brings, you know, maybe some.
I'm gonna, I'm gonna challenge you. What if you can't get, like, you, you have a co-founder, but they don't have that experience. How?
What's the best? I mean, I have, I have a, I have a thought here, but, like, I want to hear you first.
Well, you know what I would suggest? I would suggest that they have really, um, thought through and can articulate, here's the problem I'm solving. Here's why my tech is going to work. Here's what it does, and this is why I need, how many millions of dollars I'm asking for. So if they have the rest of the story that can resonate with an investor, then I think they can overcome that.
I, I agree. And then, um, you, you, you had mentioned it earlier, um, about the power of being able to storytell, right? And I think, and I want to dig into that just from, from, you know, my perspective on as an agency owner, is that I think your ability to communicate with a lot of conviction and energy and enthusiasm is so important because I think similar to, I, I wonder, you know, because you've done this a lot more than than I have. I feel like when you're a first-time founder and an entrepreneur, it's in a weird way similar to coming out of college and trying to get your first job, which is nobody's hiring you for your experience. And so, you have to somehow convey to them this image of you in the future of who you can be for that person. And I think it's the same thing with like being a first-time founder and pitching an investor. Would you, would you agree with that?
I totally agree with that. I think storytelling and weaving that story throughout your pitch, you know, in, in ways that, you know, is consistent with the, you know, the problem you're solving, and it's like, why did you found the company? Where did that drive come from? You know, what drew you to this solution? I think all of those things are important, even, you know, even if you are a serial entrepreneur, but, but certainly if it's a first time, I think that it really engages the investors to hear that, um, type of story that really can, you know, talk to them more about why you're so enthusiastic because, you know, that's what they need to see. They need to see that you've got the grit to stay with a particular solution.
Yeah, I, I, I agree with you on that. And like, just as an example, um, I got to, I got to give a shout out to somebody. Um, there's this, uh, founder, Moises Barbara Ramos, who I think is, I don't know, I think he's like 24, 25 years old, but he delivered, I think, the greatest, most energizing pitch I've ever seen in a long time at LSI. Um, he's the founder. Oh, I got to give him a shout out of Drill Surgeries. And this guy had like the, like Steve Jobs level energy on stage, and it was, and, and I, I kind of forgot that he's so young, and he's a first-time founder. But I think that level of conviction, and I think that goes back to not just a storytelling, but also having a conviction on how much you need to raise, why you're raising that much, what you're going to do with the money. I think that just like inspiring that level of confidence as an investor is like so important.
Yeah. I mean, if, if the founder isn't confident and doesn't, you know, radiate that confidence and, um, you know, really telling the investor, I've done my homework. I am confident about this. I know what to do.
Yeah. And I think, you know, you're, you kind of, um, hit on it, uh, earlier, which is, you know, inspiring that confidence that, um, I, I think maybe, and I wonder if you see this as well, like with technical founders, they rely way too much on the product to sell itself and to get the investment when in reality, it's, it's like more so them, because, like, all these companies before they're making money, they're all PowerPoint companies. They're not exactly spreadsheet companies where you can sit down and say, "Oh, yeah, this is going to make, this is going to be a great investment." You know?
Yeah. You know, one of the things that investors are going to do is they're going to want to really exercise your financial model. And the biggest piece of that, the hardest to put together, and the most unpredictable is your sales model. How you predict, you know, how many cases, how many, you know, times per month, how many customers it takes to develop that revenue run rate is going to get a lot of eyeballs on it. And so that is the most important part of the financial model and also in predicting the amount of capital you need.
Yeah. And I think like even five years ago, Colleen, it was hard to do that. But now, like with generative AI, LLMs, all these things, it's so easy to use some, you know, like a combination of platforms. You say Compass, you can use Office Sophia. There's a, there's a new company I found called Med, uh, uh, uh, RepPrep.ai that essentially pulls all this information on a physician and tells you based on your product that you have, what's the likelihood that they are going to use your product based on their procedure model. So anyways, I think it's so much easier to to model that out and say, like, yeah, like, you know, conservatively speaking, we think we can get this much percentage of the market this fast, etc. Like, I don't think there's, there's no need to guess. And I think, would you say it's better almost to be a little bit more conservative on those estimations?
Yes, definitely. I think it's, it always pays to be more conservative. You know, if you can, it's better to be, um, to outperform your, your revenue forecasts or, you know, whatever forecasts or milestones you're putting into your deck and in front of investors. If you can meet those milestones earlier or exceed those forecasts, it's just going to help you, um, with this investment as well as follow-on investments. So let me, let me pivot, uh, real quick and ask you, um, like, one of the big topics for every founder is valuation. And so valuation always comes up as a tough topic. What do you, what are really the best ways for, let's say, a founder to support their perspective on valuation, you know, especially considering like how challenging the market is because, you know, this is the problem right now is that because of the challenges in the market, valuations are just getting squeezed. They are, they are getting squeezed. You know, I, I think to the extent that, um, you can access some information on other transactions, um, even if they're somewhat anecdotal, um, you know, having a command of, you know, other deals that have have been, uh, funded and, um, be realistic. Don't, don't hold out for, you know, some magical valuation that is unlikely to materialize, right? Because it's just not going to serve you well. But, you know, I think, you know, looking at, you know, time to commercialization, how much money you need to get to commercialization, how much you've achieved so far. If, if you've already, you know, are a little bit beyond seed, you can certainly look at how much capital's been put into the company, what you've achieved with it, and now, you know, what, how you're positioned against others in the market. If there's anybody that is remotely comparable to what you're doing, and just is enough data points to, uh, let investors know you've really thought about that. You just didn't pick a number out of the air. You know, that, oh yeah, my company is worth 10 million now. So I think as much, as much data as you can put together to justify your position, the better off you are. In fact, we work with companies, um, before we take them to market on doing just that. You know, we, we kind of ask them their valuation expectations, and then we kind of go from there.
Got it. Yeah. And by the way, for the audience who's listening and, uh, uh, uh, driving right now, if you want to do, if you want to learn more about, uh, Colleen's current company, US Capital, you can just go to uscapital.com. Uh, quick question for you, uh, Colleen. So, um, one of the other topics I wanted to ask you about is, you know, even though, uh, cap, capital is tough to come by these days, it's still technically a commodity. You know, um, so that being said, I always feel that it's really important to be careful about who you take money from. To put it very bluntly, you got to be careful about who you take money from. So, like, beyond the terms, like, what, what are the qualities, some, a founder, an entrepreneur should look for in an investor when it comes to a long-term relationship, which I think even from a seed or series A standpoint, you should look at it as as saying, like, I need, if I need to go back and get more money from this person, right? What do you look for?
You know, for me, and I, I've in my career, I've taken money I've regretted, and I've taken money that was absolutely the right thing.
Let's, can we start with the money you regretted? Let, I think that's always, everyone wants to talk about the good stuff. Let's talk about the terrible stuff. The money you regretted. Why did you regret it?
Because there was no subject matter expertise. It was the investors first dipping their toe in the water of healthcare, and it just, it was just not a good situation, you know. Um, just didn't really understand the regulatory environment. Didn't really understand the, um, the difficulty you have sometimes getting into hospital systems, what it takes, you know, that. So, so I think that, um, an investor that is so far removed from the industry you're in, you really got to think twice about that if they're going to be your principal investor early on.
Right. Um, you know, later on, later stage, when, when you can are looking for pure financial investors to complement the investors you've already got in on board that are, you know, at least knowledgeable about the industry, that's fine. But the early investors, I think, have to have enough industry knowledge that you can actually connect with them and communicate well, and they understand what you're up against.
You know, it's funny. I, I completely, I, I completely agree with you. I think it's funny you mentioned that because I remember just two weeks ago, um, the interesting thing about my show is that I, I have investors on, I have founders on, and sometimes, like, I'm connected to both. And so there was an an investor who was in who had invested in a company that I know the founder in the company really well, and he sent me a message saying, like, man, why aren't they selling these things left and right? And like, this thing makes so much sense. And I had to call him and say, hey, look, um, I don't know if you understand this, but they're doing everything they should, and they're actually on really good track, they're getting really good momentum. And I think part of the reason why is that this investor has investments in other sectors, and I was, you need to put healthcare in a, you need to forget about how you're looking at every other sector and put healthcare in a different space. It's very different, you know. And I think that's important because, like, anyway, that founder should send me like a fruit basket because had I not called that investor, that guy would have been on his ass, like bugging him constantly about this. And, you know, as a founder, like, most entrepreneurs don't want to push back to their investor and say, "Well, this is healthcare. It's more difficult." They got to come up with other excuses, and you just don't want to deal with that.
Yeah, but, you know, I think that's the other thing, um, that you learn, um, when you get a little bit experience behind you is, you know, you have to push back on investors at times, right? They aren't going to have all the answers all of the time.
What, Colleen, in your, in your entrepreneurial, uh, uh, life, what was the hardest you ever push back on an investor on? Give me, give me the dirty details of that.
I think pushing back on, um, just an idea that, well, you know, you're located in California, why don't you just focus on customers in California? And I was like, well, okay, you know, we need to think about where the majority of procedures are done with the products that we're trying to sell. And so, um, you know, that was a really heated exchange that, you know, like, why are you selling products in in Florida? Well, because that's where they have some of the biggest need and, um, are most open to adopting new products. So that, that one, um, you know, I think was, um, went on for, you know, quite some time, but we eventually prevailed.
I love it. I love it. Um, you know, in, in, um, in some of your, um, in our conversation, and you had mentioned it earlier, that, you know, this sort of importance that there's going to be a lot of scrutiny on the financial model that you come up with, and, you know, investors these days, they want, let's say, like, interactive Excel versions of that.
In your opinion, like, what, what makes a financial model, let's say, let's say well-structured, you know, from an investor's perspective? And what are the most common areas that they like to focus on?
Well, I think that, um, even for the management team, before it ever gets in an investor's hand, being able to do what-if scenarios, um, and variables that, um, you know, can be either conservative or middle of the road or even optimistic, but being able to run those variables through the model and have it really populate all the way through that you don't really have to do a lot of heavy lifting if you want to change some assumptions. So the way it's constructed, as you said, these days, there's lots of tools out there to use where you can construct a financial model, but I think the underlying assumptions have to be articulated well. And, and as you said, you can, you can get to those assumptions, there's lots of data out there, but just make sure you articulate, you know, somewhere in your model, have a page that talks about, hey, here are the underlying assumptions, and if you want to change these, you can change them right here, and you can have that populate through the whole model. And I think, um, the companies that are able to put that type of financial model in investors' hands, I mean, they're making a great impression from that, you know, from that point forward, that they've really thought through this, and when they say they need, you know, $6 million, they need $6 million, and this is why.
Yeah. Look, kind of dive deeper on that financial model. Uh, one area that is big in our industry for, for very good reasons, is, uh, intellectual property. So it's, you know, critically important. And, you know, you come from the world of orthopedics, very important there, um, but this is a place I feel like a lot of founders spend more money than they have to. What level of, let's say, IP protection is generally expected by investors at different stages? And like, how much emphasis do they usually place on, say, let's say, freedom to operate?
You know, I think it, it's going to vary by investor, but, you know, freedom to operate opinions, a formal opinion is really pricey to get that. Um, and, you know, depending on how complex your product is and how many patents, you know, might be in the universe for that product type, I mean, that can be hundreds of thousands of dollars.
I think, you know, I think having,
That's your friends and family round right there.
Yeah. Yeah. I know it is. I think having a well-thought-out, um, IP pathway is important, and doing, certainly, um, having a good patent counsel is important, and you can actually do a lot, um, without a freedom to operate. You can create a fair amount of confidence in investors if you've got a good IP counsel, you've, um, done a good job of of identifying patents and, um, articulating the claims, and, you know, they'll, I'm, I found that most investors that are going to write a big check are going to want to talk to that IP counsel.
Right. Um, you know, and again, this is this kind of goes down this like winding road of like expensive, like, you start with IP, and then you're going to get to legal. And like, given the expense of, let's say, formal legal opinions on IP. Um, how, how, how do investors evaluate a startup's IP claims and strategy? Like, is, do you think it's worth having a reputable IP law firm handling this at some point? Like, when, when, when should that happen? Because there's, I feel like there's two worlds. There's the world of, I'm going to use XYZ, like, patent domain, you know, to to search patents. There's a lot of interesting AI-based IP, uh, patent products out there. And then there's, I have like a law firm that specializes in this. Like, what, at what point does it make sense to go to the, like, more expensive IP firm?
You know, I think you can do the early research on your product and IP, you know, using all those tools you mentioned, but I think before you go too far down the road at all, you're really going to have to start spending money on a reputable IP law firm. And that's probably, you know, um, in the seed stage, not pre-seed. I would say not pre-seed, but I, I'd say somewhere in the seed stage, you really got to, um, you know, invest in that resource.
What do you, what, what's your take on, um, uh, like another alternative form of capital would be like state-backed venture capitalists or grants, um, you know, as a source of, let's say, early cash and support. What do, what do you think about those, those?
I think those are excellent things. I think you can, uh, sources of capital to pursue. Certainly, there's certain universities, uh, around the country and and cities and states around the country that will invest in, um, startups that are in their state or their locality. Um, I think there is many universities in, I don't know about all states, but certainly there's some very active ones. I, I do think that grants are always a good source. I know that has gotten a little bit shaky now, um, you know, in terms of some of the changes that are happening with the grant system, you know, from the, for instance, Department of Defense and NIH and those types of grants, but there are, um, individuals and small companies that can help you with grant writing, um, you know, because there, there is a skill set to that. So, um, you know, that's, and they're usually not very expensive. I mean, they're, they're, uh, they're pretty reasonable.
Yeah. Yeah. Yeah. And I think, I think the most important thing is, you know, uh, for founders, I want them to sort of listen to this and understand, like, aside from the preparation of being able to have conviction, pitch well, and I think a lot of that conviction and confidence comes from the preparation of having the right financial modeling, you know, framing the the problem the correct way, you know, and I think something that I, I want to, I, I mentioned this on a panel on LSI, which is there's a lot of people who I would say are like sherpas, right? Because we've gone through this mountain multiple times. You know, for you on the fundraising and investment side, my side is the marketing side. And I think that the way our ecosystem works is that we would rather, like, I have a business. I want, you know, to grow it and take on more clients, but I would rather a founder come to me and say, "Hey, look, like, I can't afford you right now. Can I just get on a call and just get your feedback?" I'd rather do that and do pro bono work and put them on the right path versus them not asking for the help and then they go down the wrong path and it becomes a much more expensive problem to solve later, or they they don't raise money at all, you know.
Yeah.
Yeah. No, I think that's true. I, you know, I talk to
A lot of people that I tell them, you know, you're a little too early stage for us, but have you thought about reaching out to, you know, various groups um for some assistance that are maybe either incubators or angel groups? But um, you know, again, it's building a relationship where hopefully um they'll be successful and maybe they'll um there'll be something in the future to collaborate with on.
Yeah. And you know, speaking of uh, let's say different stages um, when you match the investor to the company's, let's say stage, like how, how do you think about pitch, pitch and and and the strategy around the pitch differing between, let's say, targeting say angels and high net worth individuals versus institutional investors and VCs.
Well, you know, I think if if you're really targeting the um, the angel networks, including high net worth um investors, I think you really have to um be able to communicate, okay, this is how much I need now. Here's what I'm going to accomplish with it, and here's how I'm going to get my next round done, and where I'm going to target those type of investors. And, you know, really think about the dilution that from from the beginning. You know, how much are you going to dilute the company with the early angel round? Um, you know, what type of um, again, raising the right amount. Um, you know, that maybe your Series A is got to be less uh, than, you know, just the only capital you'll ever need because you've got to be cognizant of dilution. So, I think that's the other thing to keep in mind as you move through these stages that, you know, in the early stage with with the angels, you're going to, you know, demonstrate to them that you're aware of this. You want to protect their interests. You're not going to overly dilute them.
And I think when you're talking with VCs and maybe family offices, which we've had a lot of success with family offices during this uh period of scarce capital, but you really want to um be able to um manage through the um dilution situations you're going to encounter at every round. And um because all the investors want to know that you're aware of that, that um you're not going to raise more than you need. You're going to accomplish what you say you're going to accomplish. The valuation's going to go up. So when you're out there talking to VCs for, you know, a much larger round, uh you've really got a valuation to support it and you've accomplished enough that you can support the valuation.
Yeah. Uh, that makes that makes complete sense. Colleen, I want to thank you so much for coming on the show and, you know, sharing a lot of this insight and value. And again, for those who are interested, just go to uscapital.com. Colleen's also active on LinkedIn, but Colleen, I got one last question for you, which is, you know, we covered we covered a gamut of topics. If you had like one >> one piece of advice you would give entrepreneurs, what would that be? And one, let's call it I don't want to call it a watch out, but like one thing to just avoid. What would be the one piece of advice you would give them and what would be one thing that's like, hey, just be careful about X.
So um, the one piece of advice I would say is don't wait too long to start your capital raise because it's going to take longer than you think. Make sure you have a budget for that capital raise because it's not going to be free. You're going to it. I think the companies that are successful go to conferences like LSI. You have to raise your visibility. You have to, you know, be on social media. Just make sure that you are aware of your company's profile publicly and I think that's, you know, uh going to serve companies well that are in the capital raise market. And I think the thing to avoid would be don't um spend the company off a cliff. Have enough runway when you go out to the capital market to understand, you know, this is how much runway I have and have a, you know, a backup plan if you need to change your burn rate, you know, um because it's unpredictable out there as to how long it's going to take.
I love it. Colleen, thank you so much for coming on the show. If you're listening to this episode, you're an entrepreneur, do us a favor, send this off to another entrepreneur. I think the best part about this ecosystem is that we're always looking to help each other forward. This on to another entrepreneur. If you're an investor, please eblast out eblast this out to your portfolio companies. I think they'll benefit a lot from it. And as always, be sure to subscribe. Give us five stars. And as always, I'm your host, Omar Katib. We'll see you all next time. Thanks for checking out this episode. If you want to do me a big favor and join so many other people who have helped grow this podcast, take a second and look below. If you're on Apple, give us five stars and write a short review. If you're on Spotify, just give us five stars. And if you're on YouTube, hit the like button. And most importantly, if you can subscribe, we release so many different episodes that you may miss. Be sure to subscribe and turn your notifications on. You get extra points with me if you subscribe across all three channels. Thank you so much. And if you felt like this episode helped you, send this to somebody who would really enjoy and appreciate it. Share and spread the love. We'll see you all next time.