Healthcare Financial Insights

Fundraising Best Practices Every Early Growth-Stage Founder Should Know

September 28, 2022

The year 2021 established new records for healthcare funding with 736 deals funded at $29.1B. And even though certain parts of the digital health sector have experienced a correction since the start of 2022, healthcare funding overall remains strong and there are still active funding sources for both early- and late-stage companies alike. 

For founders navigating the early stages of their company’s journey, there are likely some questions about how best to approach, pitch, negotiate and partner with growth equity investors to successfully grow their businesses and create the most value. So, we sat down with Ryan Engle, a partner at TT Capital Partners, to hear his perspectives and insights, drawn from over 20 years of investing, operating, and transaction experience.

What should early growth-stage companies look for in an investor? What should they avoid?

When it comes time to seek an investment partner, spend time upfront defining your objectives. What would a value-add investor look like for you? Most likely, you will desire a partner with strong domain expertise within your industry that can open doors commercially and help attract the right talent to drive results. Also, consider someone possessing the right mindset to your partnership — bringing attributes of being a proven problem-solver and demonstrating a can-do attitude. This, along with positive references from CEOs of businesses in the current and former portfolio, can reveal a lot about a potential partner and the kind of success you may experience together.

Once you have defined characteristics of your ideal partner, it is time to begin targeting potential investors. The key here is to target thoughtfully. Do your homework on investors’ preferred investment size and company characteristics. And remember, it’s a volume game, so prioritize your Tier I, II, and III opportunities.

As for what to avoid, be realistic in the role your funding source is capable of providing – do not count on your investment partner to be a “savior,” single-handedly transforming your business strategy and results. At the same time, do not shy away from “appropriately active” investors in favor of mostly passive ones; some active level of involvement, even when the business performs well, offers tremendous value. Lastly, avoid too broad a range for your raise (for example, $10-50M). Instead, construct a detailed uses of funds that includes building in some cushion.

What are some best practices for companies to keep in mind during their initial outreach to potential investors?

First of all, one of the main “day jobs” of investors is taking on intro meetings, so assume investors will be positively inclined to complete a call and do not overthink the outreach. Tap into your network to set up a “warm intro” whenever possible. It’s important to plant the hook of what’s unique and compelling about your company early in your outreach, and customize your communications whenever possible, especially for your Tier I targets. I suggest including a one-page PDF teaser and links to your company website in your initial email, as well as proposing a 30- to-45-minute call as a next step.

There is no need to come across as overly formal in your communications, but of course, you do want to present yourself professionally. So, always triple-check for typos or other mistakes before hitting send. And, yes, I do believe email is the right medium for your initial communications with a potential investor. Don’t rely on LinkedIn direct messaging or go straight to texting, even if you have an investor’s mobile number.

Lastly, if you do hear back from an investment firm, do not feel the need to hold out to speak with a partner. In most cases, principals and VPs have primary sourcing responsibilities and are empowered to bring investment ideas forward. You will also want to avoid asking for a non-disclosure agreement (NDA) for something as simple as an introductory call — get to know the investor first, and then consider putting in place an NDA farther down the path.

How should companies prepare for and navigate a first venture capital or growth equity meeting?

Of course, you will want to prepare, prepare, prepare! In advance of the meeting, build a story about why your company is necessary to exist and make it crystal clear how the company is differentiated. And, while it may be tempting to be creative and test out a new formula for how you tell your company’s story, now is not the time to experiment. Stick with a proven, tried-and-true pitch format of sharing the founders’ background, the pain point in the industry, why your solution exists to help solve it, and the tremendous size and growth of the industry. Just be sure to avoid making the case that your business is so unique it has no competitors! And do not try to jam too much into a 30-minute meeting — remember, your goal is to simply identify enough mutual interest to schedule a follow-up.

Once your story is crystalized and well rehearsed, consider scheduling a few warm-up pitches with your Tier II investor targets before moving on to your prime, Tier I opportunities. And it never hurts to speak to other CEOs who have gone through the fundraising process themselves to get their insights on how to navigate these early meetings successfully. 

When it comes time for the meeting itself, it’s all about being yourself and telling your company’s story with conviction and credibility. Let the investor speak first about their experience with companies in your space and their engagement approach so you can calibrate your pitch accordingly. There is no need to be overly scripted, and you should even be prepared to discuss your business without your pitch deck if that is the desire of the investor.

In terms of pitfalls to avoid, do not assume the investors on the other side have prepared much in advance for your conversation. They may not have completed any preparation. Likewise, do not make assumptions about an investor’s level of industry knowledge, which is why you will want to have them share at the beginning. Listen. Come with questions. Anticipate questions. Also, do not oversell yourself or exaggerate your current traction to appear more attractive as that will all come to light in the eventual diligence process.

These early meetings are largely about getting to know one another, and, if they go well, beginning to build a relationship. That said, listen to your intuition on fit when evaluating investors. Trust your gut, but also don’t “fall in love on the first date.” And don’t be afraid to request suggestions or intros to other investors if you discover you are not the right size or stage fit for the investor.

What do CEOs and founders need to know to successfully negotiate the term sheet and document the deal?

Try hard to push most of the tricky deal items forward into the term sheet stage in order to avoid costly lawyer bills farther down the road. The truth is, there is generally a “middle ground” for most deal points – you just have to find it. Think hard about what matters most to you and be willing to compromise. 

It is also worth investing in experts who can help steer you through this process successfully. Primarily, this means working with experienced lawyers who can guide you to “what is market.” To further ensure you are following industry norms, consider anchoring on the National Venture Capital Association (NVCA) form document for the first round of institutional capital. There is no need to blaze new trails when an existing template will do, and this can really help to reduce transaction costs and time, as well as prevent bias toward either the investor or the company. In new capital rounds where an existing institutional investor is present, most often the parties will leverage the prior round deal documents and adapt to what has been negotiated by the new investors.

How can companies best navigate the due diligence period?

Open lines of dialogue will lead to a more favorable due diligence experience. I would suggest setting up a once- or twice-weekly call between the CEO and the investors that may or may not include lawyers and key consultants to ensure issues are being surfaced as they arise. With the key parties aligned and regularly touching base, you can continue working toward a reasonable closing schedule (somewhere in the range of 30-45 days), as well as keep tabs on any red or yellow flags that arise for investors.

A couple of other considerations to ensure a smooth process: Definitely confirm with your investors that they have completed most or all business diligence before entering exclusivity. And, while you may want to continue to move full steam ahead in other areas of your business, remember to prioritize the fundraise and diligence process above all — other commercial pursuits may need to be put on hold. In addition, while it may seem like a small item, be thoughtful about your team’s vacation planning. This process is a team effort, and you’ll want to make sure you’re appropriately resourced to give your due diligence the attention it deserves.

Parting thoughts and key takeaways

For many founders seeking investment, the idea of dilution is a profound concern. Understandably so. However, having led transactions both as an advisor and an investor, I can tell you it should not be the most important driver at the early growth stage. Instead, focus on finding an investor who can increase the size of the overall pie over the course of a 4- to 6-year investment partnership. When you have a roadmap of exactly how the capital will be used and how an investor will help you maximize growth, creating manageable amounts of dilution becomes a reasonable path forward.

Ultimately, it is best to take your time to narrow in on the right partner. If anything, err on the side of talking to too many investors. And above all, have fun! Keep a positive perspective, even if most investors will show little interest after initial calls. I like to say the fundraising process is less like getting married and more like finding a college roommate. It doesn’t have to be a perfect, “one-and-only” match. You just have to get along with your new investor, respect each other, and work effectively toward your shared goal of driving the most value creation possible during the time you are together in partnership.