Welcome to the Innovator

Welcome to the March 2020 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

 

  

Recently Lydia Kinkade, iiM Managing Director, was invited to be interviewed on the podcast called Investor Connect. The podcast features venture capital firms, angel investors, family offices, and others about their experiences in investing in startup and growth companies. The audience is currently at around 5,000 listeners and is evenly split between investors and entrepreneurs. Below is a transcript of the interview with host Hall T. Martin.

 

Introduction

Hello, this is Hall Martin with Investor connect. Today we’re here with Lydia Kinkade of iiM.

 

Biography/Background

 

What was your background before investing in early-stage companies?

Prior to becoming an investor, I was in a completely different industry. After graduating from college with a degree in secondary education, I joined Teach for America, a nonprofit organization that places leaders in high-need schools to teach for two years. I stayed at my placement school for three years before realizing my passion was not in teaching. I re-connected with a mentor and we decided to launch iiM (innovation in motion) as an entrepreneurial approach to funding and supporting startups. I’ve now been with iiM for almost 7 years.

 

What excites you right now?

It excites me to learn about and be a part of the solutions to some of the most pressing challenges that span the globe – for example, how to provide nutrition to the nearly 10 billion people that are expected to populate our world by 2050. It is no longer an option, but it is a necessity to create new ways of producing food – both plant and animal based – because our world literally depends on it. Closely connected with feeding the world is the need for innovation in the human health sector to provide a better quality of life for current and future generations.

 

Advice

 

What’s your advice for people investing in startups in this sector?

As with many other industries, it can be difficult to navigate through the noise. It’s important to take a disciplined approach to due diligence, and truly understand what differentiates the companies that are seeking investment from you. In addition to the due diligence component, we like to invest in companies that have a large addressable market – typically platform technologies– led by entrepreneurs that have a deep understanding of the problem they are solving.

 

What’s your advice for people running startups in this sector?

My advice to startups is to seek out value-add investors who can bring more to the table than just money. I would encourage entrepreneurs to think very carefully about who they are adding to their cap table, and what types of investor partnerships they are cultivating. Your investors have a vested interest in your success, so they will be making introductions and opening doors for you that might otherwise not be opened.  

 

State of Investing

 

How is the industry evolving?

We are seeing larger rounds at earlier stages of company development. This can be both a positive and a negative. A positive because more capital earlier on can extend the startup’s runway prior to having to hit the fundraising trail again. However, this can be a negative if the company starts to scale too quickly before they’ve really found their product-market fit, causing them to unnecessarily burn through a ton of money.

 

 

What is the biggest change you see? 

We are seeing more investment attention in general being given to the ag and animal health spaces, much more so than ever before. More investors are starting to realize the business opportunities in these industries, which is creating a more robust investment ecosystem. Just in the last three years, the industry has seen the development of ag- and animal health -focused funds, accelerators and conferences, which speaks to the demand for innovation in this space. The human health sector continues to be massive, with the ever-increasing needs of our growing and aging population.

 

 

Your Investment Thesis

 

What is your investment thesis for this sector?

We invest in Seed to Series A companies that are in the agriculture, animal health and human health verticals. 

 

What startups fit that thesis?

Our investors get the most excited about platform technologies that are solving big problems in large addressable markets. Our interests in the agriculture space are fairly broad, including plant science, ag-tech, SaaS platforms, robotics, and applications for traceability and food safety. For animal health, we focus primarily on production animals, which includes both biotech companies and technologies that can improve workflow for producers, with a lot of overlap with what’s important to us in the ag space. Within the human health space, we stay away from pharma and generally any products that are going to require more than a 510k regulatory approval. However, we do like medical devices with a lower regulatory burden, and SaaS products as well.

 

Challenges for the startup and the investor

 

What are the challenges in this space for the startup?

Finding the right value-add investors is particularly challenging in this space, since there are still not a large number of ag- and animal-health focused investors. From a startup’s perspective, developing technology that is meaningful, intuitive, and has an appealing ROI for the customer can be difficult in industries like ag and animal health, where margins are razor-thin. In order for a startup to get attention from a farmer or producer, they need to meet all three of those requirements and more.

 

What sub-sectors and applications do you see as immediate opportunities for investors to pursue?

Traceability and food safety are two hot-topic sub-sectors within agriculture that we see as big opportunities. Within animal health, data collection and aggregation that provides actionable insights to producers is interesting, along with technologies that improve the health of an animal in various ways. With all of the attention given to the healthcare sector, we see a lot opportunity in the diagnostic and healthcare management spaces, coupled with the need for data science to be applied to healthcare at a broad level.

 

 

What else should we cover?

There has never been a better time to invest in the agriculture, animal health and human health sectors. The intersection of all three, and the impact they have on our daily lives, is creating lots of opportunity for entrepreneurs and investors. These industries need innovation, and iiM is excited to be a part of it. 

 

Thanks for joining us on this episode of Investor Connect!

Venture Investing Terminology

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.

 

Drag-Along Rights – Drag-Along Right is a common demand of venture capitalists: when certain shareholders (or shareholders representing a defined minimum percentage of the total number of shares) agree to sell their shares, the rest of the shareholders are forced to go along and sell their shares as well. Compare to Tag-Along Right: the right of a minority shareholder to sell the shares with the same terms as a majority shareholder, also known as co-sale right.

  

EBITDA – A measurement of the operating profit of the company = Earnings Before Interest, Taxes, Depreciation, and Amortization.

  

Lock-Up Period – The period an investor must wait before selling company shares subsequent to a transaction – usually in an initial public offering the lock-up period is determined by the underwriters.

  

Option Pool – An option pool is a percentage of a company reserved for employees. New companies create option pools by setting aside common stock shares, and granting these shares to employees as a way to pull new talent into a startup.

  

Vesting – After a stock option has vested the option can be converted to a share by paying the exercise price. This conversion must be done before the specified option expiry date. The vesting schedule set up by the option program determines the timing and other possible requirements typically giving the employee an incentive to perform well and remain with the company.

 

 

To Follow-On or Not to Follow-On . . .Part 2

This article was written by Ham Lord, Chairman of Launchpad Venture Group and Co-Founder of Seraf-invstor.com and Christopher Mirabile, Angel Capital Association Chair Emeritus, Managing Director at Launchpad Venture Group and Co-Found of Seraf-investor.com. iiM utilizes the Seraf platform for investor reporting. Part 1 of this article appeared in the Februaru 2020 issue of The Innovator. 

 

Valuations tend to go up with each progressive round (by definition, if the pre-money on the new round is not at least as high as the post-money on the last round, you are not in an offensive position and defensive issues come into play). Given the new higher valuation, a very significant part of your decision-making process about remaining upside potential is going to be a reapplication of the original valuation assessment steps you went through the first time you invested. But in addition to those original valuation factors, you now have some incredibly valuable additional information to review which you did not have the first time around: the company’s recent operating history.

 

How to make a valuation assessment is something we have talked about at length. Just as with your very first investment in the company, you are trying to gauge whether this new valuation is justified and represents an attractive opportunity. To determine that, you are going to need to take an updated view of:

• The exit realities this company is now facing. 
• The projected future financing requirements.
• The deal particulars of this round. 

Follow-on rounds are both familiar and different; they present essentially the same analyisi as first rounds, except they are: 

• More expensive
• Closer in time to the potential exit. 
• Presumptively less risky. 

It is up to you to look at the valuation factors in light of the new situation and determine whether the new valuation is attractive on a risk-adjusted basis. You need to answer the question “Is this still a good deal in pricing terms?”

It is worth pointing out as a side note that looking at the other investors in a round can help you benchmark your assumptions. Different kinds of investors specialize in different kinds of rounds (i.e. rounds at different stages), and each of them has unique expectations on both timing and cash-on-cash return multiple.  For example, investors who go in extremely early, experience a lot of failures for every success and face long timelines, might require a 7-10X projection for an investment to make sense and offer a good IRR. Investors who come in the post-revenue, but still early stage, might need to model a 5-7X to go ahead. Much later stage venture capital or private equity investors, who view the company as very de-risked and very close in time to a potential exit, might only need to be able to model a 2-5X return to green-light a deal. Once you appreciate that, you can use this knowledge to help inform some of your thinking and assumptions about the returns on a round by looking at the type of lead investor behind the rou

Let's look at an example of how to tackle this “Is this still a good deal in pricing terms?” question. In an early low valuation round, let’s say you hypothetically model and expect a 10X return in seven years. This would yield you a very attractive IRR of 38.9%. Now it’s a

couple years later, and you might determine that, realistically, the exit is unfortunately still about seven years away (put on your sad resigned face - it always takes longer). Given the new valuation is higher and given your best guess on the likely exit price the company is going to command, you estimate that your cash-on-cash return on this investment round is probably going to be more like a 4X. A 4x in seven years is a still-attractive IRR of 21.9%. But it is lower than your expectations when you wrote your check at the first round by about half. What you need to decide is whether the risk of this new investment is reduced enough to make that lower rate of return acceptable?

What does your risk reduction analysis hinge on? It is a primarily factual question based on how the company has done and what has been learned since the previous investment. Fortunately, when making that risk assessment, you have many advantages in later rounds that you do not have in earlier rounds. You can see: 

•  Whether the company has been a good steward of invested capital.
•  How well the company has communicated with investors.
•  How the team has gelled and performed together.
•  The quality of hires attracted to the company.
•  How well the board has performed.
•  Whether the customer traction has been as good as projected.
•  How the competition has reacted.
•  How the company’s margins are starting to shape up.
•  How the market has developed and grown, and
•  How the exit landscape has evolved.

That is a lot of insight. It should allow you to make a pretty good assessment of the risks the company faces. They are likely behind their original revenue projections, but if it is a fantastic team, you feel they are doing the right things, and you understand and accept the reasons for why they are behind, then maybe you are comfortable overall with where they are. Experience helps with this. After you’ve seen enough startups, you cease to be amazed or annoyed at the delta between projections and performance. Once you have reached your sense of comfort that this particular company is performing at or above acceptable levels, and that the new deal offers an attractive risk-adjusted return, then it is time to do a downside risk check and think about the opportunity cost question.
 

The third and final part of this article will appear in the April 2020 issue of The Innovator.

 

 

 

innate.ly is a provider of a web based and mobile device ready extended ERP platform as a service (PAAS). The company's innate.ly platform offers work process protocol generation, document collaboration, electronic signature capabilities and integrates with leading back end accounting, CRM, and ERP systems for complete mobile workforce management solutions. The company has established SAAS revenue in the animal health and protein production space, and innate.ly's cloud-based application RxExpress was chosen by Purina Animal Nutrition as thier regulatory software solution. The company offers a number of  software solutions that allow veterinarians and clients to collaborate to improve animal health, deliver notifications related to disease outbreak, write and distribute prescriptions, create virtual disease surveillance, write and distribute animal health papers (eCVI), and establish and manage vet-client patient relationships.