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NIRI Webinar Recap: Navigating Capital Markets and the Macroeconomic Landscape

On Thursday, March 21^st, the National Investor Relations Institute (NIRI) held the webinar “Navigating Capital Markets and the Macroeconomic Landscape” with moderator Rose Sorensen (Partner, Snell and Wilmer) and panelists Alysa Craig (M&A Managing Director, Stifel), Paul Burgon (Managing Partner, Exit Ventures), and Pavel Molchanov (Equity Research Managing Director, Raymond James). The webinar discussed monetary and fiscal policy in 2023 and 2024, capital raising and allocation strategies, and company messaging to stakeholders amidst the tough macroeconomic environment.

Moderator: Rose Sorensen, Partner, Snell and Wilmer

Speakers:

Alysa Craig, Managing Director M&A, Stifel
Paul Burgon, Managing Partner, Exit Ventures
Pavel Molchanov, Equity Research Managing Director – Energy, Raymond James

Key Takeaways:

Macroeconomic Overview – 2023 Monetary Policy Recap and Positioning for 2024:
The NIRI webinar commenced with discussion from panelists on monetary and fiscal policy in 2023 and expectations heading into 2024. As for monetary policy, Pavel Molchanov pointed to a brief flash of optimism in December 2023 surrounding the belief that the Federal Reserve would begin to cut rates immediately (given inflation was cooling and the treasury yield curve showed a sharp compression). However, in the last 100 days, we have seen inflation come in higher than anticipated at roughly 3.1%, and the Fed is not expected to start cutting rates anytime soon (though Molchanov believes that they are signaling rate cuts in 2H24). Turning to fiscal policy, panelists believe that the Presidential election will not be enough to bring about meaningful change and that we should instead turn our focus to the two houses of Congress. The view from the panel is that we are likely to have a divided government, with one party controlling the House and the other controlling the Senate. Investors have traditionally favored a divided government because the circumstance limits the possibility of drastic policy changes in one direction or the other.

Capital Raising Strategies – Equity, Debt, and Alternative Vehicles:
In evaluating capital financing options, panelists emphasized the importance of management and investor relations teams carefully considering pros and cons. In the current macroeconomic environment, it is a necessity to create a strong and flexible capital structure, with a balance of short-term and long-term capital proving to be advantages for a company. When considering equity or debt, management should assess the financial impact of different capital, including equity dilution and fixed income leverage/coverage ratios. For an all equity fundraise, a Company will need to generate returns on shares for the foreseeable future and assumes large responsibility to drive long term value. On the other hand, with debt, one can achieve significantly higher equity returns once it is paid off. Paul Burgon spoke to both sides of the debate, ultimately recommending a balance of both equity and debt to optimize short-term and long-term benefits. Burgon also encouraged companies and their investor relations teams to explore alternative financing vehicles, given that there are now several additional broader options, including government grants, infrastructure bonds/funds, and customer financings.

Company Messaging – What Investors Remain Focused on Amid the Tough Macroeconomic Environment:
In addition to carefully assessing capital raise options, panelists believe that management needs to be deliberate in reassuring stakeholders and shareholders of major capital allocation decisions. It is important for investor relations teams to externally message how they created their capital allocation plan and any related flexibility. Overall, the speakers emphasized that transparency builds trust, which can even mean engaging in discussions with investors on a company’s contingency plans should the macroeconomic environment worsen. In times of uncertainty, investors want to see companies focusing on strengthening their balance sheet while managing their growth at the same time. Alysa Craig indicated that investors will primarily focus on a company’s existing balance sheet, and messaging largely depends on the size, market cap, stage, and capital needs of a company. For more mature companies, Craig argued that messaging should center around projected confidence, specifically on the company’s ability to perform (or outperform) in a higher interest rate environment. For smaller companies, displaying a level of confidence is still important, but investors will want to learn about what capital a company has in the near term and how they plan to utilize it. Specifically, small cap companies should be communicating the lifespan of their resources, sources of incremental capital, their ability to hit key milestones while managing uncertainty, and liquidity in the stock. Ultimately, the speakers were insistent upon being transparent and confident when speaking with external stakeholders to build a certain level of trust and credibility.

ESG – Driving Growth:
To end the webinar, the panelists were asked the question: “How do we invest in sustainable measures that are also good for our growth?” Paul Burgon noted that ESG is often overlooked, but that investing in sustainability can be an important part of demonstrating confidence and responsibility for one’s business. He stressed going beyond the minimum compliance requirements and thinking creatively to develop a strong, proactive, and offensive sustainability investment program to drive a competitive advantage over other companies. Moreover, Molchanov pointed to ESG importance in labor standards of an enterprise, which can drive how a company addresses human rights, diversity, and engaging with unions and employees.

Gilmartin Group has extensive experience working with both private and public companies across the LSTDx, MedTech, Biotech and Digital Health spaces. To find out more about how we strategically partner with our clients, please contact our team today.

Authored by: Gabby Gabel, Analyst, Gilmartin Group

Webinar Recap: Creative Financing & Investor Sentiment for Biotechs

WATCH WEBINAR REPLAY

The Biotech team at Gilmartin recently hosted a webinar with BTIG on Creative Financing and Investor Sentiment for Biotechs. The webinar featured a Q&A session that was joined by BTIG’s K.C. Stone (Managing Director, Head of Healthcare Investment Banking), Mikhail Keyserman (Managing Director, Healthcare Investment Banking) and Michael Karmiol (Managing Director & Head of Healthcare Equity Capital Markets). The webinar was moderated by Laurence Watts (Managing Director) and Stephen Jasper (Managing Director) of Gilmartin Group.

Here are our key takeaways from the Q&A discussion:

1. Biotech Valuations, Rebuilding Balance Sheets and Bankruptcies
2022 has been a challenging year, particularly in the macro landscape. With around 200 companies trading at negative enterprise value, the capital markets have cooled off.

Costs of both clinical and pre-clinical studies have dramatically increased, resulting in a lot of companies exiting their clinical programs. As companies enter 2023, they need to streamline their focus on costs and rebuilding balance sheets while still being cautious of macro challenges. Bankruptcy continues to remain as the last option for biotechs even in the challenging market conditions. The ability to reduce burn without significant fixed expenses, quality programs, and valuable IP continues to play a vital role in avoiding bankruptcy in the biotech market.

2. Biotech Stock Price Recovery
Currently, investors continue to take a critical approach and emphasize selecting solid, de-risked stories with good management teams and science resulting in large caps and revenue generating companies to lead in 2023. As investors seek additional opportunities, the smaller caps will benefit, but the smaller micro-cap companies can expect to lag in the beginning of 2023.

3. Reopening of Capital Markets in 2023
Capital markets and M&A activity in the first quarter of 2022 was down 90% y/y, however the optimistic side of the story is that after the first quarter, equity capital markets in the healthcare sector have been up 50% each subsequent quarter. Building on the momentum, we can expect to enter a healthier M&A and capital markets in 2023 with maybe the small micro-cap companies lagging by a quarter.

4. Uptick in ATM Usage vs. Traditional Follow-Ons
The smaller cap companies can expect to start with ATMs as they have lacked the ability to finance using traditional methods. It is expected that biotechs with 3 key pillars (positive data, existing insider support, market cap) will continue to use more traditional financing and follow-ons. While ATM use is a great tool and good housekeeping for most biotechs, we will see a shift towards traditional financing and follow-ons as the capital markets start to improve, especially for the smaller-cap companies. Regardless of the type of financing, it is critical that biotechs get in front of the right institutional investors and build a syndicate.

5. Current Financing Options for Biotech
Traditional financing options remain available for biotechs with data and market cap. In the absence of traditional financing options, alternative financing such as debt funds that weren’t previously made available in the healthcare sector have seen an uptick in the sector and continue to receive several opportunities. The market has also seen an uptick in IP monetization and royalty partnering.

6. Big Pharma M&A Activity
Anti-trust and FTC risks are currently on top of the minds of big pharma. Big pharma’s are mindful of therapeutic overlap and crowdedness. It is expected that in 2023, big pharma will look at complementary therapeutic areas and different types of assets instead of going bigger in areas they already have natural commercial and pipeline presence.

7. Healthcare Conferences & Investor Meetings
While investors are continuing to take meetings with companies they have pre-existing relationships with, they are slow to take new meetings. Incredible numbers of investors return to academic conferences to meet with KOLs and management teams. Having a comprehensive strategy for KOLs and helping investors get educated on a particular target and program is going to become more critical. Having thought leaders and objective KOLs presenting stories will be accretive to investors’ investment process and will lead them to do a lot more diligence work. Overall, especially in a difficult market, biotechs need to make their fundraising approach ongoing, and utilize healthcare conferences whether in person or virtual.

Gilmartin Group has deep experience working with both private and public companies in the Biotech sector. For more information about how we strategically partner with our clients, contact our team today.

Authored by: Rachna Udasi, Analyst, Gilmartin Group

5 Biotech Market Trends out of the Biocom California CFO Breakfast Panel

Biocom California recently hosted an in-person panel with three equity research analysts: Ritu Baral from Cowen, Laura Chico from Wedbush, and Josh Schimmer from Evercore. Moderated by NIRI San Diego chapter president Jason Spark, the panel discussed the current and future biotechnology climate for both public and private companies.

Our top five takeaways are below:

1.The foundation of strong relationships between analysts, corporations, and investors is credibility.
Credibility, built through objective, long-term engagement and passion for the company, remains the basis for relationship development. The return of in-person meetings is a positive trend in maintenance and construction of relationships between analysts, companies, and investors.

2. New trends on the buy side, such as increasing sophistication of funds and increasing access to information, could reverse the undisciplined investment in the sector over the past several years which generated an excess of biotech companies.
The rapid increase in the number of biotech companies has been fueled by an immense influx of capital where too often clients don’t know or understand their investments. Undisciplined investment in the past few years has caused a significant bubble to form in biotech – a bubble which is currently deflating. However, analysts view this deflation as necessary for long-term sector health. Newer and larger funds have become more creative in how they approach companies, with most large funds only addressing companies with a high market capitalization. Smaller companies face significant challenges in acquiring capital.

3. Analysts and investors look for catalysts, low risk, and a strong management team when making coverage and investment decisions.
Catalysts and stock-moving news within 18 months remains a key factor influencing investment. In the current capital market, risk tolerance has plummeted. Despite investment trending towards earlier-stage private companies, the past year has seen a reversal of this movement as investment flows to de-risked assets. People, products, patents, and cash remain essential for any successful company.

4. The outlook for biotech companies remains challenging in the short-term, but with significant long-term potential.
After a weak year of stock performance, the biotech sector has shown some signs of stabilization, bolstered by the tailwind of strong M&A activity. Initial public offerings are not occurring and will likely remain minimal until 2023-2024. Investors remain nervous about new emerging issues, including the recent rapid action on drug pricing taken via the Inflation Reduction Act. Innovation in the space remains strong, although strategic investment remains exclusive and requires a minimum level of sophistication due to the technical nature of therapeutics and drug discovery. With greater representation on small and mid-cap exchanges due to a rapidly increased number of listed biotech companies, future investment outlook in the sector remains healthy.

5. ESG is underutilized with room to grow in the biotech sector.
Most biotech companies have underdeveloped or non-existent ESG programs. Some biotech companies with resources to allocate to ESG have used the scores to gain access to larger funds. Focused metrics like clinical trial diversity and patient access are most referenced in the biotech space. As companies mature, ESG will gain urgency and influence in the sector.

Gilmartin Group has deep experience partnering with biotech innovators, both public and private, to develop sustainable messaging and build nuanced investor relations and communications plans. To learn more about Gilmartin’s strategic approach to Investor Relations or our healthcare focused ESG offerings, contact our team today.

Webinar Recap: Fidelity Management & Research Virtual Buy-Side Engagement Panel

Fidelity recently hosted a webcast focused on engaging with investors. The panel featured a Q&A session with several portfolio managers and analysts who offered specific tips on what matters, what doesn’t and how to position yourself for success when interacting with the investment community broadly and with asset managers at Fidelity, specifically.

Here are our top 10 takeaways:

Most Effective Ways to Engage with Asset Managers at Fidelity

Be proactive. Utilize bank-sponsored conferences to introduce yourself – propose an in-person interaction at a conference or an introductory call.
It is helpful if you can quickly provide a high-level overview of the business and comment on industry trends to start the conversation
Have organic interactions. Reach out when there are material changes outside of the earnings cycles. Most analysts at Fidelity expect conversations at least once per quarter, with a hybrid of in-person and virtual meetings.
Use Fidelity’s IR Portal. Through the IR portal, you can see who covers what company and find their contact information. If your stock is held in multiple Fidelity funds, your analyst from the portal will be your point of contact

Management is Integral to Investment Decisions

For all companies, but particularly emerging growth companies, the management team is an integral part of the investment decision for asset managers at Fidelity
As stewards of capital, you are a big piece of the equation when it comes to value creation
Fidelity looks at management incentives, specifically are incentives aligned with the creation of shareholder value and the timeframe that’s considered

Your IR Site Matters

The investor relations site matters – don’t overlook the importance of having information well organized and easily accessible
Have your presentation, key performance indicators, and company summary in a visible and prominent location on the site
If you have supplemental data, such as information you refer to on calls or trends that you want to highlight, link it directly to the IR site
Include any ESG data that you have and/or your sustainability report on the IR page

Structural Dynamics Do Matter in Investment Decisions

Average trading volume, the float, and market cap all factor into structural considerations and considerations in investment decisions
From Fidelity’s perspective, for illiquid or structurally challenging companies, the expected return threshold needs to be materially higher given the risk profile

Investment Criteria and Holding Periods for Fidelity Investments

The holding period at Fidelity varies across strategies, but as a starting point, 2-3 years is typical
When evaluating a longer (or shorter) holding period – asset managers consider several financial metrics, including past and expected ROE, ROIC, earnings to cash flow, valuation, and margin profile
For small caps, your balance sheet is a key consideration when evaluating risk

How Do You Look at Distressed Companies (i.e., in biotech)

Portfolio managers tend to focus on understanding the maximum downside, whereas analysts also focus on the upside
Capital structure and cash position/burn are important considerations

Comments on Guidance

Guidance is useful and helpful – but needs to be grounded in confidence and visibility
In areas out of your control, or where you do NOT have visibility or confidence, Fidelity’s advice is not to try and guide
You do not need precise on all metrics; high-level trends are helpful

How Does Fidelity Use the Sell Side vs. Internal Research?

Fidelity analysts and portfolio managers view the sell-side as their partner
Analyst reports are very helpful when ramping up on a stock or serving as “feet on the street” in international markets

View on ESG for Smaller Companies?

Fidelity understands that small caps have less IR and ESG resources and that they should allocate resources to business growth and development
For smaller companies, it is important to get any ESG information that is available on the IR site
ESG is part of the investment mosaic and will be increasingly so going forward

EXAMPLES: Who are the best companies from an IR perspective?

ATKR: Very thoughtful about having robust, but concise data on their calls
PTC: Releases the transcript and data ahead of the call and jumps directly into Q&A on the call
ESG IR communications: PBH, TPR, WSM
Companies with great investor decks: EHC, LHCG, AMED, CSWI, YETI, LGIH, FOXF

Management and Investor Relations teams must balance many stakeholders and dynamics in an ever-changing environment. Properly and fluently communicating company objectives to the buy and sell side in the context of the overall market Is a challenge we at Gilmartin embrace! Great partners like Fidelity help build lasting relationships, ensuring respect and strong communication. To learn more about Gilmartin Group and our offerings, please visit gilmartinir.com.

This blog post was co-authored with Fidelity Investments.

Keynote Recap: MedTech Financing in The Current Market

In the event you missed it, Gilmartin held its Inaugural Emerging Growth Company Showcase featuring a Keynote Panel on MedTech Financing in The Current Market that was joined by Morgan Stanley’s Peter Harrison (Managing Director, Investment Banking), Piper Sandler’s Neil Riley (Managing Director, Equity Capital Markets), and Wilson Sonsini Goodrich & Rosati’s Philip Oettinger. The panel was moderated by Lynn Lewis (Founder & Chief Executive Officer of Gilmartin Group).

In this post, we are sharing some of the Key Takeaways on the IPO Market from our Keynote Panel:

IPO Market

There is an expectation that the IPO market will begin to pick up in 2023
While expectations have been pushed further out than originally anticipated, panelists believe that there would be a pickup in the IPO market beginning mid-2023 (2Q23 at the earliest).

The IPO market may generally favor quality versus growth when the IPO market reopens
Companies with scale, strong balance sheets, and prudent management would be choice candidates.

Investors are looking for more prudent management during the IPO process
Market sentiment has shifted towards a more balanced approach to topline growth and profitability. Management teams need to evaluate the amount of capital being raised and whether it is sufficient to reach the point of profitability. In the current environment, investors need assurance that management teams are mitigating the amount of dilution.

IPO Readiness

Most companies begin to work on their corporate governance structure and IPO readiness checklist about a year out before going public
If your company is a choice candidate (i.e., at scale with a strong balance sheet) for when the IPO market reopens in mid-2023, you should begin to think about what needs to be accomplished or at least start the process of drafting the S-1. For a more comprehensive look at considerations in the 12 months before going public, check out our post here.

Completing a crossover round prior to an IPO has been the general advice over the past few years
There is an advantage to having a strong investor base for the crossover round because they will help build the investor group going into the IPO process. However, it is not a prerequisite for MedTech companies, and this mainly applies to Biotech. The best scenario for completing a crossover is when investors are approaching your company, which may be easier now as there is a significant amount of dry powder on the sidelines.

It is difficult to perfect the timing of an IPO to optimize price.
In practice, if a company is looking to go public, it should be at a time when a company can leverage the capital infusion to drive growth (i.e., when the company has a built-out salesforce and/or pipeline).

Conclusion

Given the current market environment, it’s hard to perfect the timing of an IPO to optimize price. The panelists expressed confidence that the market will be open next year and advise companies to look at it for the long game. Leverage your capital infusion at a point in time when the fundamentals can accelerate growth, or in other words, when you are ready from a sales team, pipeline, etc. perspective. Though it’s easier said than done, setting reasonable expectations and being thoughtful about your cadence with strategies and investors will be paramount in the end.

The last piece of advice and insight from our panel on MedTech Financing in the Current Market is this: companies are bought, not sold. Dialing for dollars is successful, at most, 50% of the time. Where companies find success is in fostering relationships with strategy and putting effort into investor relationships. Preparation and strategic planning will be key heading into 2023. The Gilmartin Group can ease the pre-IPO process and set you on the right track as you embark on becoming a public company. To learn more about Gilmartin and how we strategically partner with our clients, contact our team today.

Recap of Webinar: Debt Financing for Emerging Biotechs

Recently, the Gilmartin biotech team hosted a webinar with Silicon Valley Bank (SVB), discussing debt financing for emerging biotech companies. If you were unable to attend, you can watch a replay of the conversation. Gilmartin Group’s managing director Laurence Watts and principal biotech Stephen Jasper interviewed SVB’s managing directors Kate Walsh and Shawn Perry about the current world of debt financing and if biotechs need to partake. Both Walsh and Perry are part of the Life Sciences and Healthcare department at SVB. Walsh holds a focus in biopharma and tools and diagnostics, and Perry is the head of credit solutions. We recommend watching the full webinar to capture all of the insights Walsh and Perry shared, but here are a few central points we wanted to highlight.

At what stage would SVB lend debt to an early-stage biotech company?

SVB works with companies at all stages of development. Perry explained that when focusing specifically on early-stage companies, SVB will entertain debt facilities once a potential client completes its Series A round. At this point, the company can start to think about how they can benefit the potential client. SVB analyzes how they can complement the client’s overall capital strategy.

What are “good use” cases for debt at a biotech?

More often than not, SVB works with debt facilities for a biotech company that has recently closed a Series A, B, or C round. Such companies seek debt financing to provide additional runway to their pipeline when they encounter inevitable delays in clinical trials. Perry noted, “It can be nice to have a debt facility that can give you 3-6 months of additional runway.” In addition, SVB helps companies fund any capital expenditures, including funds for manufacturing and singular or multiple asset acquisitions.

Does a reputational angle accompany debt financing–do only “bad” biotechs raise money for debt?

“No,” said Walsh. She would argue that the strongest biotech companies are using debt capital to lower their blended cost of capital. She then took the opportunity to emphasize that debt should be complementary to a company’s equity strategy. It should never be competing with it, and it is prudent for a biotech to take on the right amount of leverage to prepare its business properly. Walsh and Perry speculated that any negativity that accompanies debt financing would be a product of misuse. Walsh continued, “Over-leveraging can impede you from raising equity rounds. Many companies are board-specific when taking on debt at the early stages.” She noted that many venture capitalists are enthusiastic about taking on debt and use it at any given opportunity, while others use it selectively.

At the end of the day, it’s a conversation each biotech must have with its board to understand their views and how they plan to implement debt. Perry dove deeper into this explanation, stating, “The negative instances occur when companies take up too much debt.” He specified that SVB is challenged to determine how they might best benefit the biotech company and avoid leveraging too quickly when this occurs.

What are the prerequisites for lending?

With prerequisites, SVB’s goal is to complement a biotech’s equity round by positioning themselves to “generally come in alongside an equity financing or shortly thereafter,” stated Perry. He explained that, often, biotech companies do not seek debt financing until they actively need revenue support. This, however, would be the most challenging time for SVB to step in. Walsh and Perry urged listeners to think about “taking on debt when you don’t think you need it.” Debt should be viewed as an “insurance policy” to give a company additional time before running into more significant financial deficits. Perry continued, “We are always looking at the syndicates of these companies as well. There are phenomenal companies in the space that are bootstrapped by family offices, but that said, those are generally not the types of syndicates who borrow from SVB.”

Generally, SVB has a longer track record with venture capitalists and crossover or investor firms. With its borrowers, SVB always aims to dive deep into the company’s financial demands, identifying its IP and defense level. If the IP appears weak, SVB will typically opt to take a different angle and look at the biotech’s liquidity position, its syndicate or competitive landscape. Perry stated that SVB must examine these aspects to contemplate a debt facility.

Are loans typically paid back out of future equity financing? Is this mandated?

SVB does not explicitly mandate companies to pay back loans. Typically, they are repaid through future financings. An exception to this would be an acquisition. Here, as money is required, it is typical for a biotech to pay off the loan at the time of the acquisition. However, Perry noted he has biotech clients in which SVB holds an ongoing relationship where they feel comfortable letting the acquirer assume the debt, but that is a rarity. With future equity financing, that’s a point where SVB will take a fresh look at a company’s debt facility and look into providing incremental debt on top of their existing loans. This will ensure that a company uses equity proceeds to further its business, not repay debt.

Throughout the webinar, SVB established the importance of each biotech company understanding its own financial goals and restraints, establishing clear communication with its board of directors, and acting proactively to seek out debt before running into financial hardship. SVB strives to offer appropriate amounts of debt to suit each company’s individual needs. Based on the discussion, it is clear that SVB wants to see its clients succeed. As stated above, “The strongest biotech companies are using debt capital to lower their blended cost of capital.” Debt can be immensely beneficial when used at the right time, in the right way.

To hear the full conversation, be sure to watch the replay. If you have questions about how we strategically partner with our clients, contact the Gilmartin team today.

Rachel Mahler, Analyst

The ABCs of VC/PE: PART 2 – INVESTOR TARGETING

When a company initiates a fundraising process or contemplates a sale, it can be difficult to identify appropriate firms to target, structure diligence items internally, and adequately prepare for the inevitable investor Q&A.

After providing a general overview on Venture Capital and Private Equity in Part 1 of this series, we turn our attention to VC/PE investor targeting. Our ABCs of VC/PE series will be continued on a quarterly basis throughout 2020.

Structured Outreach
Investor outreach is a time-consuming job for many leaders. A good rule of thumb, especially for newer teams building their networks for the first time, is that in order to arrange five meetings, you should plan to contact at least 100 investors.

Many VC/PE investors are more receptive to referrals from entrepreneurs and other investors within their network, but some funds are also willing to consider meeting requests via cold outreach. Therefore, it is important to map out your outreach approach with the following considerations:

Who will be performing the outreach? While VC/PE firms appreciate hearing from CEOs, other team members and partners (IR and financial advisory firms) may be able to help manage communication and assist with subsequent follow-ups.
Which funds are you targeting? We will delve into this subject next, but it is critical to identify the right firms. You do not want to waste time reaching out to a $50M fund that makes seed investments about a $50M growth equity financing.
What are you planning to say in your outreach to new and existing contacts? VC funds receive many cold emails, so even a differentiated subject line can make a difference. Additionally, you should have a specific ask in terms of the amount you are raising.
Do you have relevant materials ready for investors? Some investors will ask to see a deck prior to scheduling a meeting (and will not want to execute an NDA so early in the process). We recommend a non-confidential teaser deck that can be shared in these situations.
How are you tracking your outreach? It is a best practice to track all interactions through a spreadsheet or CRM to ensure you have followed up with each fund and that you know which funds have already reviewed your deck.
How are you going to ensure an ongoing dialogue? The VC/PE community is close knit. It is important not to burn any bridges and to maintain dialogue, even when you do not need to raise any money. This can be accomplished through conference outreach, email campaigns (e.g. a quarterly newsletter) and 1×1 emails with news you would like to share.

Once you have organized your outreach approach, the next step is to determine the funds you would like to target.

VC/PE Firm Targeting
In order to make the most of your internal resources and an investor’s time, we recommend building a target list. The goal is to start with a very large list or database and narrow it down to relevant firms. This way, you can ensure that you are reaching out to appropriate VC/PE firms, and you can better tailor your outreach strategy for warm introductions.

Below, we have outlined how to build a target list if you are not already working with an IR or financial services firm that can help you with investor targeting:

Create a sortable spreadsheet with a list of VC/PE firms. You can find these firms through resources that require a subscription (such as Pitchbook and Crunchbase) and by vetting free online resources.
Research companies within your sector (i.e. MedTech, HCIT, Biotech, Tools & Diagnostics) who have recently completed a financing at the stage you are considering. Since these financings are recent, it is a good idea to ensure that these VC/PE firms are on your list. The same subsector or therapeutic area can be helpful, especially if you can identify a theme or thesis within a portfolio, but it is also good to keep in mind that some firms prefer portfolio diversification in certain markets.
Research investment criteria and relevant portfolio companies. If you cannot easily find or export investment criteria, you can search announcements on the types of investments that firms have made or led, and whether those began at earlier stages or later stages.
Search for updates on each firm’s fundraising process. As you research announcements on a specific firm, is it clear that they have not raised a new fund since 2008 and appear to have deployed a lot of that funding already? If so, you can probably make a note (and later remove that fund from your final target list).
Identify VC/PE executives relevant to your company. At each firm, which partner or principal would be great to add to your network? Team bios and “associated team” fields within the portfolio landing page will provide a lot of this information.
Rank the information you have collected. Based on recent relevant investments, funding, and investment stages, you should be able to rank order the funds on a scale of 1 to 5 or 1 to 3.
Annotate potential syndicate investors. Some firms are biased towards participating in financings (with a more limited contribution of capital) over leading them. These firms may become relevant in a subsequent phase of outreach.

Once you have built your target list, it is time to think about your company’s network.

Warm Introductions
Once the curated list is ready, we recommend reviewing fund and executive names to see if anyone within your company or on your board is connected to them, or if there is any prior CRM interaction history. Additionally, senior leaders on your team can use LinkedIn to see if they have a secondary connection in common. From there, outreach can be allocated internally. (Outreach to secondary connections should convey that you would like to familiarize them with your company and are hoping to build your network as you gear up for your next stage of financing, rather than being overly presumptuous.)

Another way to generate warm introductions is to build connections with other entrepreneurs. This approach may require additional research as you go back to your target list for relevant portfolio companies and review market intelligence on peers. In addition to cold outreach and alumni networks, it is easy to overlook industry events where you can request mentorship/advice on fundraising over coffee.

As you reach out to investors and schedule subsequent meetings, it will be critical to provide a compelling pitch deck and supporting diligence materials. In the next part of our series, we will explore these topics in more detail.

To learn more about Gilmartin and how we strategically partner with our clients, contact us today.

Caroline Paul, Principal

IPO Timing Considerations

During these unprecedented times, one recurring question we hear from private companies is whether to go public now or wait till markets and society normalize. Since markets are by nature dynamic and constantly changing, we italicize normalize to emphasize that everything appears chaotic when timelines are reduced. That is not to diminish the current environment, nor the effects it has had on society, but to highlight that even without the COVID-19 pandemic, private companies still agonize over the timing of when to go public. That said, this week’s blog is not so much about the current environment, but an acknowledgement of the various factors to consider when deciding when to go public. Lastly, we recognize that every company is different and faces unique challenges. This list is in no way attempting to minimize those challenges, but to provide a framework that enables private companies to make a decision that puts them in a position to execute their long-term goals.

The one factor we will spend the least amount of time on but likely has the most influence is Market Conditions. No one would argue that when market sentiment is negative, the ability to execute a public offering becomes increasingly more difficult. Specifically, if public investor appetite for risk is low, less capital will be raised, resulting in lower valuations and increased shareholder dilution. In the worst-case scenario, demand could be so low that a deal just does not get done.

The second factor to consider is the Ability to Raise Additional Capital as a Public vs. Private Company. Following the excitement of becoming a public company and listing on a major U.S. stock exchange, executives and bankers often establish a plan to raise additional capital in the future that will allow the company to reach certain profitability milestones (EBITDA, Net Income, free cash flow, etc.). Given the increased disclosure requirements and transparency of quarterly financial statements (and annual audits), public companies can raise capital more quickly and efficiently now that they have access to all public market participants. Further, the cost of debt or equity capital for public companies is oftentimes lower, given increased transparency. Conversely, as a private company, raising capital can be time consuming and inefficient as private equity and venture capital firms require a full financial and business due diligence process to allow them to properly evaluate the company. Also, raising capital in a timely manner from private investors relies heavily on existing relationships, which significantly reduce the pool of potential investors and may result in suboptimal deal terms.

The third factor to consider is Corporate Readiness. Even if market conditions were optimal, we would strongly advise a management team to get as organized as possible to facilitate a smooth public offering. We break down corporate readiness into three buckets:

Practicalities – Leading up to an IPO process, every company has structural and administrative tasks that need to be completed. For example, if a company has not done so, a major gating factor for filing documents with the SEC is having a third-party accounting firm perform a financial audit. Given the increased accounting requirements for public companies, it is prudent for private companies to hire the appropriate back office and logistical support staff well ahead of a public offering. Additionally, it is highly recommended to reconstitute the board of directors, prioritizing diversity and candidates with complementary expertise and a history of strong character.
Wall Street Preparedness – In order for management teams to get off on the right foot, it is critical that they have confidence in their ability to forecast revenues. As a public company, a surefire way to lose credibility with public investors is to miss quarters and lower guidance shortly after going public. If a company is having a difficult time forecasting revenue and expenses as a private company, we recommend not testing the public markets until the predictability of the model improves. Conversely, if the business has a high degree of predictability, the focus should shift to developing a concise message regarding the company’s growth strategy. In doing so, it is recommended that companies provide a high-level analysis of their total addressable market (TAM), while utilizing reliable third-party sources. This last point goes without saying, but it is crucial for executive teams to be as prepared as possible when interacting with public investors for the first time. When an investor initially meets a new CEO and CFO, they likely will not have a long list of detailed questions. In fact, most meetings will be high-level in nature to get a feel for the overall business and the executive team. In order to make a good first impression, we advise management teams to commit to intensive Q&A prep sessions. This prep will pay off in spades as it will give CEOs and CFOs the added confidence they need to truly tell the company’s story.
Changes in Model & Valuation – Given the current environment companies are facing in the midst of a global pandemic, it is safe to assume financial projections have been trimmed. As a result, companies need to understand what this means for valuations and target multiples within respective comp groups. This may impact valuations and bring them below a desirable threshold for existing investors from a dilution and palatability standpoint. Conversely, in thinking about public markets, companies want to avoid a situation in which they have limited investor interest due to valuation and technical factors, like float and daily liquidity.

The final factor to consider is Managing Public Investors vs. Private Board of Directors. As a private company, the board of directors likely consists of founders and representatives from the largest investors. While the number of board members is usually less than ten, the opinions of each board member can vary greatly depending on their individual motivations. For example, if Venture Firm ABC was an early investor and is looking for a liquidity event, they will be most likely pushing for a public offering or acquisition. Conversely, if Venture Firm XYZ made a recent investment, they will likely favor waiting to achieve a higher valuation with less dilution. While this example is certainly not unique, it demonstrates that board member incentives oftentimes do not align with a company’s intermediate to long-term goals. Unfortunately, operating during this period of debating whether or not to go public can lead to unintended consequences of mismanaging the business in the short-term.

Compared to managing private company board members motivated by a future liquidity event, public markets (while consisting of thousands of opinions) are efficient enough that they typically come to a consensus. Ultimately, public investors want a consistent and effective communications strategy with a level of transparency that allows them to grasp the risks of the business. If management can consistently deliver results based on what has been communicated, investors will reward the company with a premium valuation given the predictability of the business. If and when results fall short of expectations, the investment community’s reaction is far more forgiving than one might expect. While high quality investors realize that companies are not perfect and that quarterly misses are inevitable, they will not tolerate a message that is consistently contradictory to reality. While this might seem like an overly simplified explanation, the goal of management should always be to maintain credibility by telling the truth and preserving transparency.

As it relates to the COVID-19 pandemic, one common theme private company executives concern themselves with is the heightened interest that public investors may have regarding the impact of COVID-19 and how the company expects to come out of it. Most private company executives we talk to want to spend as little time as possible on the impacts of COVID-19 and as much time as possible on selling the long-term prospects of the company…and rightfully so. Interestingly, there is a misconception on the part of private companies that COVID-19 will dominate the discussion during an IPO process, resulting in a lower valuation. In reality, public investors will want to properly assess the company’s short-term risks but will place far more interest and value on the long-term prospects. Look no further than the rapid return to full valuations, the recent capital raises and IPOs across the medical-device sector. If management has done their job and properly communicated the risks of COVID-19, public investors will be more likely to look toward a more normalized 2021.

If you have any questions about timing your IPO or want a second opinion on your current strategy, contact our team today.

Matt Bacso, Principal

The ABCs of VC/PE, Part 1

Before a company initiates a fundraising process or contemplates a sale, it can be difficult to identify appropriate firms to target, structure diligence items internally, and adequately prepare for the inevitable investor Q&A.

In the first part of this series we will provide a general overview on venture capital (VC) and private equity (PE). Our ABCs of VC/PE series will continue on a quarterly basis throughout 2020.

The Lifecycle Basics

Private equity and venture capital are generally distinguished by the amount of capital and equity involved, as well as the lifecycle of a given company.

Private equity firms generally invest in more mature companies – some of them have criteria such as >15% EBIT margins and/or >$25M in revenue. Within private equity, some firms specialize in investing in assets of companies in distress and on the verge of bankruptcy. Others specialize in management buyouts, which typically involve a much higher mix of debt and leverage than in venture markets.

In the context of a sale process, a private equity firm is considered a “financial sponsor” whereas a “strategic buyer” generally refers to an acquirer in the same industry or business. In exchange for its capital and expertise, a financial sponsor expects to generate returns within a specific time frame and to exit the investment via another sale or an IPO. Occasionally, private equity firms pursue acquisitions for the purposes of a roll-up strategy or a tuck-in on behalf of an existing portfolio company.

A strategic buyer is typically motivated to horizontally or vertically expand, fulfill a capability gap, or defend its market positioning. Publicly traded companies would prefer to announce an accretive acquisition to shareholders, Private companies also have their own payback period and return requirements.

Venture capital firms tend to fund younger, rapidly growing companies in return for a minority stake. Venture capital generally refers to seed funding through Series C+ financings, where debt is limited and funds invest alongside management teams. Lead investors typically focus on owning 20% of the company in each round. VC portfolios are often constructed in such a way that no more than 10% of the fund is allocated to a given company, and ~1/3 of total investment is typically allocated at the point of entry with the remainder reserved for future rounds.

Within Venture Capital, an “early stage VC” is generally focused on seed through Series B financings and a later stage VC is generally focused on Series C and D rounds. As global dry powder has increased substantially over the past decade, venture capital, growth equity, and crossover firms have been moving up and downstream for opportunities. Thus, not every firm can be categorized as “early stage” or “late stage.” In fact, “growth equity” occasionally shares some of the same characteristics as lower middle market (LMM) private equity. Some growth equity firms also pursue majority equity positions.

VC portfolio construction can vary depending on the focus of the firm. For example, life sciences firms require larger amounts of capital to mature than SaaS-based technology (or even healthcare IT) companies. A technology venture fund may have 30 companies in its portfolio whereas a life sciences fund may only have 12.

Finally, a “crossover” round can be used to bridge the private and public equity markets. This pre-IPO strategy has become particularly popular in the life sciences space. Crossover financings typically involve institutional investors who are also active in public equities, such as Baillie Gifford and OrbiMed. Crossover investors include traditional mutual funds, hedge funds, family offices, and other asset management firms. These financings expand the company shareholder base and lend credibility in the public markets, while allowing institutional investors to participate at a lower valuation than the IPO valuation.

Investment Requirements

The constituents of any PE or VC firms are the Limited Partners (LPs) who have contributed capital to the fund in the fundraising process. LPs include endowments and foundations, pension funds, family offices, corporations, individuals, and other asset management firms.

LPs expect both PE and VC firms to deliver returns above public equity markets. For example, the require threshold might be 4% above the S&P 500 index; however, a VC or PE firm is only entitled to management fees and carried interest. The carry is typically 20% of the profits generated on an exit and the management fee of ~2% of committed capital covers salaries, leases, and all of the other firms’ expenses. Therefore, General Partners (GPs), or the investment professionals spearheading the funds’ investments, are generally targeting over a 2-3x return on invested capital or a 20% annualized rate of return as they may need to meet a 7-8% hurdle rate before the fund receives a profit.

VC Financing Progression

Venture Capital stages almost always begin with a seed stage and each subsequent financing is lettered alphabetically. The size of the financing progressively increases as the company’s growth progresses.

For example, a seed round typically ranges from $1M-$2.5M, with valuations typically falling in the $4M-$8M range, whereas the median Series C financing is ~$30M with a median pre-money valuation of ~$120M. Less than 1/3 of companies that raise a seed round ultimately reach a Series B, and less than 10% reach Series D stage.

As NEA has discussed in greater detail in “What size Series A round can you expect to raise?”, the most variation tends to occur at the Series A stage, with the median size increasing over time to ~$8M. For a Series B and beyond, companies are typically generating revenue, and according to NEA, “an entrepreneur can quickly grasp an expected round size by triangulating on (1) a new VC’s requirement to own 20% (2) his/her company’s next-twelve-month revenue projections and (3) valuation multiples for the company’s space.”

In order to efficiently deploy internal resources as a company prepares to reach out to VC firms, the stage of the venture capital firm and its investment strategy should be considered. Later in our series, we will discuss targeting tactics.

To learn more about Gilmartin and how we strategically partner with our clients, contact our team today.

Caroline Paul, Principal

Don’t Jump The Gun: Pre-IPO Considerations

With the right team in place, a compelling growth story, a comprehensive long-range plan, and a clear line of sight towards an IPO, executives become exceedingly proficient in marketing their company and its value proposition to a multitude of stakeholders. As they prepare for their organizational meeting and the official launch of the IPO process, it’s prudent for these marketing experts to brush up on so-called “gun jumping” restrictions and the implications of improper disclosure and solicitation.

“Gun-jumping” serves as a blanket term, not officially defined in the U.S. securities laws, that refers to violations of the communications restrictions under the Securities Act.

Specifically, SEC regulations prohibit communications outside of a normal course of business that improperly solicit the securities to be offered in an IPO. The restrictions are designed in part to ensure that proper risk disclosure is conveyed fairly and comprehensively to all potential investors. The specifics of these restrictions evolve through the stages of the IPO, becoming relevant as soon as the company reaches an agreement with its lead underwriter(s) and remaining in effect up to 25 days following the pricing of the IPO as underwriters continue to sell shares. While exceptions implemented as part of the JOBS Act have made gun jumping somewhat less of a concern for certain emerging growth companies who are now able to “test the waters,” companies deemed to have “jumped the gun” will see their offering delayed for weeks or months and their credibility on the Street significantly eroded.

“Gun-jumping” restrictions apply to every corporate communication, from press releases and social media posts to marketing campaigns and simple emails that could be considered intentional or unintentional solicitation. Statements made about a company’s future prospects are the most likely to be considered as improper solicitation, and, as a matter of practice, an issuer should avoid public disclosure of any financial forecasts or projections, expected valuations, and IPO proceeds; they should implement specific disclosure procedures for all public materials. With an IPO around the corner, companies and their communications partners should also consistently seek review by counsel before disseminating any written materials, and employees responsible for generating and posting written content should be educated on the nuances of “gun-jumping” restrictions. Proper review and approval policies are particularly critical for press releases, which under Securities Act Rule 169 are exempted from “gun-jumping” restrictions so long as they are considered regularly released business information in line with prior communications and exclude any forward-looking statements. Companies should also conduct comprehensive reviews of websites, social media accounts, and other existing marketing materials to ensure that content is factually correct and well aligned with the registration statement to avoid being considered an illegal offer of securities.

“Gun-Jumping” restrictions also apply to oral communications, particularly those with potential IPO investors via 1×1 meetings and media interviews. While emerging growth companies are afforded the ability to hold testing the waters (TTW) meetings in the so-called “quiet period” between the organizational meeting and the filing of the registration statement per Section 5(d) of the Securities Act, management teams should be extremely careful to avoid making an offer as defined by the SEC. Specifically, they should avoid making an explicit case for purchasing shares of the company, making any forward looking statements, or discussing specifics around expectations for the IPO.

Once the registration statement is filed publicly but not yet declared effective, emerging growth companies are afforded the ability to make oral and certain written offers on TTW and official IPO roadshow meetings. These conversations may reference a preliminary prospectus, or “red herring,” which can be used to make written offers and include a price range for the offering. They cannot reference a final offering price or corresponding proceeds and underwriting discounts. For the IPO roadshow, slide decks, handouts, and videos presented during the time of the meeting are not considered to be written offers so long as copies are not left behind. By collecting these materials, companies avoid having them considered free writing prospectuses (FWP), which are otherwise used after the registration statement is filed but before it becomes effective to inform potential investors of any changes to the offering. Companies are also able to publish a limited notice of the upcoming IPO in addition to disseminating a rather boilerplate press release upon pricing.

Once the IPO has priced, company communications remain somewhat restricted as underwriters continue to sell shares before their final prospectus is delivered within 25 calendar days. During this time, management must not disclose information or make forward-looking or speculative statements that would make the prospectus inaccurate.

In all, executives should pay special attention to “gun-jumping” restrictions throughout the entire IPO process and remain closely aligned with their IR team and legal counsel. This will help them avoid running afoul of these somewhat nuanced regulations that can derail an IPO and lead to less than favorable media attention. If you’re considering an IPO or would like more information on “gun-jumping,” contact our team today.

Brian Johnston, Vice President