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Welcome to the Q3 2022 issue of The Innovator, a quarterly 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 will remove you from the list of recipients. Please enjoy this issue of The Innovator.
Lydia Kinkade, iiM Managing Director
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Current Market Conditions and What it Means for the VC World
By R. Lee Harris, iiM Managing Member
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It’s obvious that the economy is a mess right now. What does this mean for the venture capital world? Before we answer that question let’s step back for a moment and examine why we are where we are. Since 2020, the federal government has pumped $6 trillion into the economy. One of the most prominent methods was in the form of “Quantitative Easing” where the Federal Reserve purchased longer-term securities from the open market and increased the money supply in the process. Translation – the federal government printed money and flooded the market with it. Quantitative easing increases the money supply by purchasing assets with newly created bank reserves to provide banks with more liquidity.
Increasing the money supply so dramatically caused consumers to spend freely. Interest rates were low, and the country was beginning to exit the COVID lockdowns and return to normalcy. In May 2021, the inflation rate in the U.S. stood at 5%. It’s a well-known fact in economic circles that large increases in the money supply are almost always inflationary. The correct course of action would have been for the Fed to back away from the quantitative easing process and proceed with quantitative tightening. Had this happened, it may not have been necessary to slam on the brakes with dramatic increases in the Fed funds rates which very probably will send us into a recession. Instead, incredibly, the Fed continued quantitative easing until March 9, 2022. All the extra money sloshing around in the economy caused asset bubbles across the economy. The public securities markets have been some of the first sectors to feel the effects of the Fed’s recent actions – quantitative tightening and increased interest rates. The mistakes perpetrated by the Fed are compounded by the war in Ukraine and the current Administration’s disdain for fossil fuels and the actions taken to move away from oil and gas. Oil prices have skyrocketed, driving inflation higher. Supply chain issues due in part to COVID lockdowns in the U.S. and elsewhere in the world, have also driven up prices. Again, it’s obvious the economy is a mess right now.
Where are we headed? It’s impossible to model the variables and reach a reliable conclusion. The classical definition of a recession is two consecutive quarters of negative GDP growth. We’ve already had one such quarter and are awaiting the results of Q2 2022. It’s difficult to imagine a recession when the unemployment rate is so low and there have been as many as 10 to 12 million job openings in this country. Lately, the number of job openings has been dropping rapidly by as much as 400,000 per month. Companies are preparing for a recession by laying off employees – especially in the tech sector. Should this trend accelerate, the number of job openings will drop significantly, and we may see a deceleration of increasing wages. Experts (if there really are any) believe that there is more than a 50% chance of a recession over the next four quarters. Historically recessions last an average of 11 months. So, it’s likely that we’re looking at economic turmoil for at least the next 18 to 24 months. The asset bubble in public securities has been brutal. Other asset classes will likely suffer as well. Cryptocurrency has been in a freefall with Bitcoin plunging from a November 2021 high of $69,000 to a June low of $17,000 – a drop of more than 75%. Increased interest rates may cause the housing market to stall and drive home prices down. This may be tempered somewhat by the overall lack of supply that has perpetuated for the past several years.
What does all this mean for the venture capital space? Early-stage companies need to completely recalibrate in a number of areas.
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1. Fundraising and Runway. The days of easy money via the fundraising process are likely over for the next few years. Early-stage pre-revenue companies are especially vulnerable. Capital allocators are very concerned for companies that are constantly fundraising. A seed round quickly followed by a seed extension followed by a bridge round with the hope of getting to Series A, may be a recipe for disaster. Instead, companies should raise enough money to get them through
at least 24-months without counting on any revenue. Founders should also be flexible and willing to take funding based upon certain milestones rather than expecting to receive an upfront lump sum.
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2. Valuations. Gone are the days of absurd valuations. Too many founders listened to what they were told about valuations at accelerator programs they attended. Most founders of pre-revenue companies can’t explain how they arrived at a $12 or $16 million valuation. That’s because there is no viable explanation. We’re back to the days of $4 to $6 million valuations for early-stage pre-revenue companies. Where annual recurring revenue (ARR) exists, in the best of scenarios, companies that are seeing 3x growth month-over-month, might command a valuation that is 12 times ARR. The 100x multiples on ARR are gone. Likewise, the terms for convertible notes are changing radically. One of the best early-stage companies was recently offering a 50% discount on conversion. Expect higher imputed interest rates on such notes – especially as interest rates increase on other instruments. It would not be a surprise to see 8% or 10% interest rates on convertible notes in the near term.
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3. Burn Rate. Managing burn rates is crucial to survival. Founders who think they can continue to expand their teams and increase their cost structure, believing that they have an exceptional company that will win in the marketplace, may be in for a rude awakening. Frugality is the byword. Pre-sell products or services. Apply for every grant imaginable. Be slow to hire non-essential team members. Partial or complete deferrals of salaries for founders and senior leaders will help conserve cash. Companies with revenue should pay attention to their Burn Multiple. This metric is calculated by dividing a company’s net burn by the net new ARR. A Burn Multiple under 1.0 is incredible. Staying below 1.5 in the current environment is a must. Remember that 82% of small businesses fail because of cash flow problems.
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4. Realistic Financial Projections. We have seen many founder pitches with totally laughable financial projections. This includes everything from capturing 35% of the Total Addressable Market (TAM) – which by the way has been pegged at multi-billions of dollars; to a ramp-up in revenues from zero in the first couple of years to tens of millions (or even hundreds of millions) of dollars in the third, fourth, or fifth year. What’s worse is the fact that these founders could offer no evidence to support their assumptions. This fairy tale approach is the quickest way to having the door slammed by capital allocators. Building a business has always been a long and drawn-out slog. Sure, there have been some rocket ships – they always get the media attention. But the vast majority of early-stage companies will take many years to gain traction and profitability. This will be especially true over the next several years – particularly in a recessionary economy.
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5. Differentiation. What is it about a company’s product or service that is unique? Is there a way to protect the intellectual property (through a patent or trademark)? For years, Warren Buffet has talked about the need for companies to build a wide and deep moat around their business to keep the competition at bay, something he did with the insurance giant, GEICO. His concept is sound – the execution with GEICO is not a model to emulate however, because it's based upon being the lowest priced insurance product in the industry. For most founders, that’s a race to the bottom. In tough times, having a clear differentiation with competing products or services is mandatory for success. If a founder can’t demonstrate a high level of differentiation and how it is protected from the competition, procuring venture funding will be unlikely.
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6. Say No to China. Early-stage companies that have any reliance on China for raw materials, manufacturing, or for customers, may find funding even more difficult. There is a national movement toward decoupling the U.S. and Chinese economies. There is already a U.S. ban on imported goods coming from the Xinjiang region where the minority Uyghur community is being persecuted. As relations with China become even more strained, be ready for the possibility of retaliation where China may prevent exports of specific items at a moment’s notice. Imagine having precious capital tied up in raw materials that suddenly cannot be shipped to the U.S. The best policy is for founders to avoid doing any business with China and finding alternative sources.
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7. Communicate, communicate, communicate. Smart founders will constantly communicate with their investors. Not only that, but they will also reach out to prospective investors – even if they aren’t currently fundraising – and provide regular updates on the status of their business. Sharing monthly or quarterly reports with investors that summarize activity and provide various metrics and milestone achievements demonstrates total transparency. Now more than ever founders need to have strong relationships with their investors to solicit advice and counsel and perhaps additional funding in a pinch. Investors are much less likely to participate in the funding process when such communication has been nonexistent. Finally, its apparent when founders aren’t being totally honest and forthcoming. Reports are filled with a lot of rah-rah-rah and very few challenges are noted. Everyone knows that building a company is a tough business with obstacles at every turn. Founders would do well to keep investors aware of what problems a company is facing and how they are being addressed.
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The road may be rough and rocky for the next two or three years in the venture space. Great early-stage companies can survive and thrive if their founders are thoughtful, creative, and resilient.
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Novel Vaccine is Produced in Corn, Administered through Feed
Note: Mazen Animal Health is an iiM Portfolio Company
Des Moines, IA – On June 9 at World Pork Expo 2022 in Des Moines, IA, Dr. Rick Sibbel, with Mazen Animal Health, announced his company is getting closer to completing development of a novel vaccine that would be produced in corn and administered through animal feed.
"My company is doing something that has never been done," said Sibbel during the Bacon & Innovation panel discussion at WPX.
"We've talked about it for 20 years, but it's never been done," he said. "We figured out through plant biology and immunology how to put protective antigens in the germ cell of corn, grow the corn, grind the corn and feed it to the pigs."
Transformative vaccine technology
Vaccination of livestock prevents disease and decreases losses. Injectable vaccination, however, can be costly and difficult to administer, said Mazen.
The company said this is why it is now developing a product that offers transformative vaccine technology where the animals don’t even know they are being vaccinated.
By administering the vaccine with feed, challenges associated with finding labor to administer injectable vaccines and other issues such as broken needles in the animal or accidental vaccination of the worker are eliminated. Oral vaccines allow for cost-effective disease prevention with improved animal welfare.
Mazen’s oral vaccines are produced via recombinant protein production in corn. The technology platform leverages many years of breakthrough R&D led by John Howard, Mazen co-founder and an expert in recombinant protein production in plants.
Read the rest of this story about Mazen Animal Health here
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iiM Portfolio Company, PyrAmes, Selected as Participant in LG's Innovation Center
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Note: PyrAmes is an iiM Portfolio Company
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LG’s innovation center — LG Nova among friends — today announced that it has selected the first 50 companies for its Mission for the Future global challenge competition. From 1,300 applicants, the company picked its first cohort to start building opportunities with the startups. Nova itself is a counterpoint to profit-focused corporate venture capital outfits, and is instead focusing on abilities to collaborate with the LG conglomerate across the board, in a few key verticals: the metaverse, connected healthcare, smart homes, electric vehicles (EV) and the wonderfully fuzzily named tech for good.
The first official "First 50" group represents innovations "in industries that will have the most immediate impact on society now and in the future," as LG describes it.
“These companies represent the top of the diverse pool of innovative ideas and companies who applied to our Mission for the Future challenge to address the challenges facing our community. In these companies, we see great potential opportunities to explore transformative changes that will take our commitment of innovating for a better life to the next phase,” said LG Nova head Dr. Sokwoo Rhee, senior vice president for innovation at LG Electronics. “Our work with these companies will be guided by our role as a leading global innovator of next-generation products, technologies and services as we help them accelerate their growth and deliver positive impact to the world."
Read the rest of this story about PyrAmes here |
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Mign Referenced in Bloomberg
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May 20, 2022
Note: Mign is an iiM Portfolio Company
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…It’s possible that bracing is one of the rare categories in which there’s a limit to innovation. Braces may always have to be a bit cumbersome, says Baron Lonner, chief of minimally invasive scoliosis surgery at Mount Sinai Hospital in New York, because of the necessity of providing sufficient pressure on spinal curves. He’s a fan of another recent entrant in the field, a brace made by a Charlotte startup called Mign Design. Mign’s rigid brace is a spin on the perennial Boston brace, according to Lonner. It’s not a novel concept, like the Whisper, but the low-profile latticework design looks better than any other brace on the market. Mign uses an all-digital process instead of working from a physical mold, which CEO Lisa Tweardy says opens up the possibility of “mass customization at scale.”…
Read more of this story about Mign here
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Why It's Time to Invest in Early-Stage VC
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July 12, 2022
By: Marc
Schröder, Crunchbase News
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Warren Buffett often says to “buy when there’s blood in the streets and sell when there’s euphoria” and that moniker is as true today as it has ever been.
We are witnessing a global correction in equity prices, driven by macroeconomic factors like inflation and geopolitical instability as well as microeconomic factors like the recent (and dramatic) declines in cryptocurrency prices.
No matter where you look, it’s a scary time to deploy capital, but that’s exactly when generational opportunities are created.
The public markets will likely continue to feel the pressure of inflation and rising interest rates, making equities less attractive until directional clarity is created (or provided by the Federal Reserve). Rising rates will make fixed income securities more attractive, but only marginally until inflation is curbed. Assets like real estate will likely hold their value, but require significant capital expenditures and management resources.
The current landscape leaves institutional LPs with a difficult choice on how to deploy capital. History often repeats itself, and in previous cycles mirroring today’s reality, enormous returns have been generated in early-stage venture capital by LPs who invested deeply at this stage of the cycle.
Read the rest of this story here
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A Look at a Portfolio Company
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We are pleased to have made 29 investments in 19 companies within the iiM portfolio with due diligence underway for additional investments. One of our more recent portfolio companies is Lumoptik, with operations in Spring Grove, IL.
Lumoptik, Inc. is a medical device company that has developed a needle guidance system to assist physicians with needle placement during epidural procedures for childbirth, spine/back pain and surgical procedures such as knee and hip replacements. The Lumoptik Needle Guidance System is a low cost, easy to use device composed of a reusable handheld controller (resembles a smartphone) plus a single use, sterile fiber optic light channel designed to fit in the lumen of existing epidural needles. This is a razor (reusable handheld controller) and razor blade (disposable fiber optic) commercial design.
- The device is a multispectral reflectometer that shows the exact color of the tissue at the tip of the needle in real-time while it is inside the patient.
- As the tip of the needle penetrates in to different tissue (skin, fat, muscle, ligament, etc.) the reflection changes showing the physician the color and total reflectance of the tissue at the tip of the needle in real-time. Upon piercing the ligament and entering in to the epidural space, the color and total reflectance show a significant change which is displayed on the hand-held controller.
- The Lumoptik device can:
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Detect false loss of resistance, when the tip of the needle accidently enters a blood vessel or other structure that is not the epidural space.
- Detect when the needle tip overshoots the epidural space, which can lead to a wet tap.
- Detect when there is a tissue plug (coring) in the tip of the needle, which can lead to a wet tap.
- Potentially help with epidural catheter positioning by showing when the needle tip is in the center of the epidural space.
- For training procedures, provides the trainer with real-time visual information on the location of the needle tip while the trainee is performing the LOR technique on patients. This will allow the senior training clinician to see when the needle tip actually enters the epidural space during training procedures. This can help reduce the number of training procedures required and help reduce the number of side effects during training new clinicians.
- The device works in conjunction with the Loss of Resistance (LOR) method to provide the physician with visual verification on the location of the tip of the needle in real-time. It does not replace the LOR method and physicians do not have to use different needles/syringes.
- There are no other devices like this on the market. This gives Lumoptik the first mover advantage.
iiM made an initial investment in Lumoptik for preferred stock in April 2022.
Company Website
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iiM (Innovation in Motion) is a funding platform for early-stage companies in the Animal Health, Human Health and Agriculture verticals. The company invests $100,000 - $500,000 in selected companies totaling approximately $6 million to date. iiM is building a diversified portfolio making 29 investments in 19 companies – with a target of at least 30 to 40 portfolio companies. A professional staff guides 37 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 www.iimkc.com.
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