Welcome to the April 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

 

The COVID-19 pandemic has certainly turned the world upside down. Start-up companies and angel funding platforms are already feeling the pinch. What does this mean in the short-term and the long-term? Many angel investors will likely sit on the sidelines for a while as they wait to recoup losses they’ve realized in the stock market, and to see how quickly business resumes on a more normal basis.

At iiM, we’re looking for smart founders who have adapted to the situation at hand. They are reducing their burn rate and extending their cash runway. Where possible, they are pivoting into the pandemic and looking for opportunities to add to their product and service offerings as well as adopting new efficiencies and improved methods of doing business. The best and the brightest are also figuring out how to get to revenue and/or profitability more quickly.

Undoubtedly, there’s going to be a reset in the terms and conditions of seed and Series A fundings. Valuations will likely become more realistic and more of a milestone approach may be required for the disbursement of investment capital. Investors are going to be much more selective about the companies in which they invest, and founders will need to be able to clearly show that their product or service is metaphorically a painkiller and not a vitamin pill.

During this time of crisis, our Managing Director, Lydia Kinkade, has been in contact with each of our founders on a weekly basis. They seem to be resilient and are taking the steps necessary to survive. It’s our goal to do whatever we can to help them thrive. Venture funders should be more than checkwriters. We can help founders develop new strategies and business practices. We can help them find new efficiencies and understand how they can work more on their business than in it. We are pleased at how open and receptive these women and men have been to use iiM as a resource.

We continue to carefully vet early stage companies and have capital available for investment. Our screening process isn’t any different today than it was prior to COVID-19. Many prospective companies don’t make the cut and we expect that will still be the case as we emerge from this pandemic. It may be a while before angel investing reaches the level of investment previously experienced.

The basics and fundamentals of early-stage investing remain intact – brilliant founders surrounded by top-flight teams with terrific ideas that solve real problems for large addressable markets, and where large moats can be built to minimize competition. These pillars for success will endure long past the COVID-19 pandemic. 

R. Lee Harris, Managing Member

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.

Exercise Price –The amount that must be paid to execute options i.e. convert options to shares. Generally, in the US the exercise price is based on “Fair Market Value” when issued, rather than the vesting date. The differences in taxation and regulation are remarkable between countries and have a great impact on the proper and efficient use options.

Follow-on Investment –A subsequent investment made by an investor who has made a previous investment in the company — generally a later stage investment in comparison to the initial investment.

Fully Diluted – Ownership of the company based on the total number of shares outstanding when all possible sources of new shares (convertible loans, options, warrants) are taken into account.

Intellectual Property Rights (IPR) –Intellectual property (IP) includes copyrights, patents, trademarks, trade secrets, and other forms of intangible creations of the human intellect.

Pay to Play – A term in a financing agreement where an investor who does not participate in a future financing round will lose certain rights of existing shares. The rights lost can be anti-dilution rights, liquidation preference, etc.

To Follow-On or Not to Follow-On . . .Part 3

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 2 of this article appeared in the March 2020 issue of The Innovator. 

Q: What do you mean by downside risk issues?

This analysis is really about nasty things you observed or may have cropped up that you may have not been thrilled with. Some of them may be small concerns, and some of them are what friend and experienced angel John Huston likes to call "show-stoppers."  Whether you consider them a formal checklist, or just some things to watch out for, you need to consider whether any of the new issues are too important to overlook.  Here is my list of big ones (with credit to John Huston, whose mentorship and teaching has influenced this list), with an annotation next to ones I consider show-stoppers):

Any sign of integrity issues or concerns about honesty, transparency, openness (showstopper);

 Any sign of bad judgment or poor decision-making on the part of the team, suggesting that the IQ might not be high enough or a low EQ is driving impulsive decisions or an inability  to get or use help and coaching (showstopper);

• Lack of board director support for the round- not every director needs to invest hevily in every round, but if none of the directors are investing anything in the round, what does that tell you? 
• The round is a total slapdash financial band-aid that was not in the original capitalization pln or forecasts and was done on an emergency basis because the CEO let the company get down to fumes;
• The competitive situation turned out to be much worse than expected; 
• The company's investor reporting has been insufficient or non-existent;
• The investment thesis was IP-based and the IP situation has turned out to be much weaker than hoped (patent rejected, infringement claim, competitor issued a blocking patent.);
• CEO doesn't know how tobuild or execute a real sales process and instead keeps trying to pivot;
• Round puts the company squarely on a "big capital' path where they are going to require VC support and a huge, low-probablility exit to become a winning investment
• Angel director is being thrown off the board, or the board has not been fully formed, or the board is weak and not adding sufficient controls or value (potential (showstopper);
• Founder alignment has drifted from starting pointand team now feels they would only accept one very specific exit scenario;
• COGS is higher than projected or margins are otherwise not ab;le to approach what was expected;
• Sales cycle is much lower than expected, value prop seems to be weaker than expected or product's customer buying priority is lower than expected (potential showstopper); 
• Badly needed key hires were not made, or low quality hires have been brought into key roles (showstopper);
• Founder relations have deteriorated and the team is not on the same page or actively feuding (or marrying or divorcing each other!);
• Science (and or trials) or product technology not working out ot not looking sufficiently promising (showstopper);
• Investor support and enthusiasm already waning- low interest or participation in this round suggests future rounds may be even harder and money may be stranded. 

Needless to say, as you read that list, you probably had a visceral reacion to a lot of those items, and maybe an unpleasant flashback or two. That is what I am talking about when I talk about downside risk!

Q: What do you mean by opportunity cost?

Opportunity cost really refers to a couple of issues more personal and specific to the individual angel in question. One is a portfolio construction question. If you believe that adequate diversification is key to your overall returns, you always need to balance the decision to up your portfolio concentration by doubling down on an existing company against the opportunity to add a new company to the mix. Hopefully you are seeing good deal flow and have opportunities to invest in interesting new companies. In the case of most angels, if both rounds are compelling the right answer is to do both. If funds are so tight that you are having to starve your “winners” of follow-on money to add new companies to the portfolio, you might want to reevaluate your overall angel allocation and make sure you are going to be able to reach sufficient diversification for acceptable risk-adjusted returns. But weighing that issue is half of the opportunity cost issue.

The second is a parallel issue revolving around the question of what I sometimes refer to as “psychic returns.” With first checks, there are always lots of psychic returns. It’s exciting to add a new company to your portfolio, the company is young and dynamic and fast moving, there are lots of ways to help out - it’s loads of fun. But with third, fourth, and later rounds, the excitement dies down and it is more about financial investment strategy. At some point, a company is far enough along that it is out of the woods, the rounds are much larger. Your relatively small check is not really going to make much of a difference to the company, garner much influence, or change your ownership percentage much.

By that point, even if it might be a fully-justifiable investment on a cash-on-cash returns multiple and an adequate IRR, it can still be less appealing emotionally. With these much later rounds, admittedly some very deep pocketed angels say “Emotion? Are you kidding?” and slam a massive check into the round. Many other angels, however, decide they are done with the company and choose to put the check into something newer and more exciting, where the money is much more badly needed and they can have a much bigger impact (and they can still model the magical 10X).

Needless to say, the follow-on decision can be a tricky and nuanced. But with a good process such as the decision tree above, you can get your bearings in terms of offense vs. defense, you can verify that a good upside case can be made, you can check for the presence of showstoppers or other major sources of downside risk, and ultimately weigh the opportunity against other options in the context of your overall portfolio goals.

About iiM

iiM (Innovation in Motion) is a funding platform for early stage companies in the Animal Health, Human Health and Agricultural verticals. The company invests $100,000 - $500,000 in selected companies. iiM is building a diversified portfolio of companies – currently there are ten with commitments to fund at least two more – with a target of at least 30 to 40 portfolio companies. A professional staff guides 25 investors making investments across the United States and Canada.

The iiM Syndicate entitles its members to participate in all the iiM meetings and pipeline calls; review prospective investments; view due diligence materials and invest only in those companies that each member chooses. And, an investment can be as little as $5,000.

Why a syndicate? Syndicate members invest alongside iiM Investor Members to produce a cumulative capital investment that is meaningful to new portfolio companies. Further, if the capital commitment is large enough, iiM may be in a position to lead the investment round and secure even better terms and conditions for all investors. In one investment, Investor and Syndicate members pooled capital totaling $530,000 to invest in a Series A Preferred Stock round. Syndicate members must be Accredited Investors and pay $2,500 per year to participate.

If you are interested in attending an iiM meeting or want more information about the iiM Syndicate, please contact Lydia Kinkade, Managing Director, at lkinkade@iimkc.com or (913) 671-3325. The iiM website is http://www.iimkc.com.