Welcome to the December issue of The Innovator, a monthly newsletter for iiM, LLC. What is iiM? We are a funding platform for early-stage companies in the animal health, agriculture and human health verticals. In this newsletter, we intend to share educational information, ideas and a perspective on the investments we are making. If you do not want to receive this publication, please let us know and we’ll remove you from the list of recipients. Please enjoy this issue of The Innovator.

Lydia Kinkade, iiM Managing Director

Within the past year I have had the privilege to see the bustling innovation surrounding animal health by attending several different investment forums across the US and Europe. Out of the five conferences represented in this article, one trend kept emerging: the digital revolution of animal health.

The year started with the Animal Health Investment Forum Europe in February, with the 1^st place prize being awarded to a company using cloud computing to provide actionable insights and analytics in veterinary medicine. Another emerging market segment showcased at the forum was the evolution of insects being used for vaccine production and as an alternative protein source for livestock. Shortly after this forum in March, the inaugural Digital Animal Summit was held at UC Berkeley. In August, the Kansas City Animal Health Investment Forum saw numerous startups pitching their innovative technologies ranging from monoclonal antibodies to AI biosensors and devices. Out of the 11 presenting companies at the forum, eight different states were represented reaching from California to Maryland, with the remaining 3 startups travelling from England, Israel, and Canada.

In October, the first Digital Veterinary Summit was held in London, where animal health startup companies pitched emerging technologies aimed at optimizing customer engagement, enhancing clinical processes, and collecting data points from various devices to derive data-driven insights. Over 12 digital veterinary technology innovators presented their innovative technologies alongside Zoetis and the University of Surrey, who announced partnership opportunities with their veterinary digital innovation hub: vHive.

Also, in October, the AgTech Innovation Summit in Amsterdam, Netherlands included over 260 delegates, with 28 different countries represented. This forum was targeted towards smart livestock farming, precision breeding, alternative protein feeds, vaccines, diagnostics, and supply chain traceability. The main theme of this conference was the use of AI and machine learning, not just for machines but also for animals, utilizing wearables and biosensors. Another large segment of this conference was focused on aquaculture. Once an underserved market, aquaculture has quickly caught the eyes of investors, and has burst into the animal health market as the Scandinavian countries take the lead on fish and other marine life health. What was once a traditional animal health conference with cowboys arriving in pick-up trucks is now attended by investors dressed in slick suits driving Teslas.

The main takeaway from 2019’s animal health conferences is that the industry is quickly shifting from reactive to preventative animal health care with once overlooked segments, such as aquaculture and digital animal health, taking a front seat in where the market is heading next.

Amanda Curtis Burkhardt, iiM Consulting Director

There are many terms in the venture capital world that can be confusing. As we look at various companies and meet with their founders, you may hear us use some of this terminology. Here are a few such terms and what they mean.

Cumulative Voting – Cumulative voting is a voting system used by organizations that allow shareholders to vote proportionately to the number of shares they hold. This allows a shareholder with 100 shares to cast the equivalent of 100 votes toward any single issue. In cases wherein multiple candidates are being considered for multiple positions, such as board seats, each shareholder has the option of placing all of their votes toward one seat during elections, or toward one choice when voting on other matters, but the shareholder can also choose to split his votes across multiple options.

CAGR – Compound Annual Growth Rate. The year-over-year growth rate applied to an investment or other aspect of a firm using a base amount.

Dilution Protection– Generally structured as broad-based weighted average or full-ratchet, this right protects investor’s ownership from dilution when new shares are issued during a follow-on round of financing. With full-ratchet, in a down round, the conversion price is set to be equal to the share valuation at the current down round (full-ratchet can be detrimental to founders and initial investors and is very uncommon). Weighted Average reduces the conversion price of previous rounds but does not set the conversion price equal to the price of the current down round.

Warrants –A type of security that entitles the holder to buy a proportionate amount of common stock or preferred stock at a specified price for a period of years. Warrants are usually issued together with a loan, a bond, or preferred stock and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as stock-purchase warrants and subscription warrants.

One of the key differentiators of iiM compared to other early stage investors is our commitment to a thorough and robust due diligence process. In addition to developing a deep understanding of a particular company’s business goals, history, team, competition, and respective market trends, we also review the company’s corporate structure documents.

Recently, we were completing our due diligence process with a company that had garnered the interest of our investors through a compelling presentation about a product that clearly solved a problem in the marketplace, had demonstrated traction with customers and was being led by a sharp, level-headed entrepreneur. Our initial due diligence efforts related to the company’s business and market opportunity netted positive results for the company, which convinced us to continue moving forward with an even deeper dive. 

Typically, companies provide us with access to their data room, which in most cases has already been populated with the standard due diligence items that professional investors request. In this case, once we started reviewing some of the more “tedious” documents such as the articles of incorporation, secretary of state filings, bylaws and amendments, and board meeting minutes and resolutions, we noticed that many of the documents were missing. Upon requesting them from the company, we discovered that many of the documents were either lacking in substance or included language that was detrimental to investors.

Ultimately, the company agreed to make several of the changes that we requested. These changes included: increasing the number of outstanding shares to accommodate the new financing, proper documentation of all board resolutions, modifying the stated requirements for a quorum (which if not addressed, would have enabled the company to hold shareholder meetings without investors being present), adding customary representations and warranties and adding pro rata rights for iiM.

However, there were two very critical items that the company was not willing to change, which resulted in iiM declining to invest. The company had eliminated cumulative voting, which in practice prevents any board representation by minority shareholders, i.e. investors like iiM. Further, the company declined to accept iiM’s request for a board observer role. For this company, this was high on our priority list because the current five-member board included only one investor, and that individual was considered an “independent.” There was no required investor board seat. With how critical board oversight is to early stage companies, we did not feel comfortable taking the risk of leaving our investment dollars in the hands of individuals who had no real motivation to ensure that the company is making fiscally sound decisions.

While it is unfortunate to get so close to investing in a company and not close, we take our due diligence process very seriously and are not willing to compromise on items that have a high likelihood of being detrimental to our investors. 

A Look at a Portfolio Company 

We are pleased to currently have nine companies in the iiM portfolio with due diligence underway for additional investments. One of our portfolio companies is P&P Optica, based in Waterloo, Ontario.

P&P Optica (PPO) combines in-line smart imaging technology with data analysis in a novel way to help ensure the food we eat is safer, higher qualityand produced with less waste. PPO’s systems provide a fast, in-line chemical map of food products. This means actually being able to see variability in the food, notice any foreign object or even assess flavor and quality of the product. PPO has applied its expertise in chemical imaging system design, which includes its patented PPO Gel Gratings, to build systems that solve critical challenges in food processing in a way simply not possible before.
 

Based on two and-a-half years of work within the market, it’s apparent to PPO that mid-sized food processors with at least $10M USD in revenues and employ 20+ people all have some degree of automation and require automated quality control that PPO can provide. PPO is focusing on the top 10% (in size) meat processors based in Canada and the United States with the expectations to reach 10% of this target market within three years, resulting in approximately $25M in revenue. Each spectroscopic machine manufactured by PPO sells for approximately $500,000. It can detect up to 19 different foreign objects including metal, plastic, rubber, chemicals and other items. All this happens at line speeds and can save a food processing company, millions in recalls.

iiM invested in PPO in June 2018 and has committed to follow-on funding before the end of 2019.

https://ppo.ca/