At this mature phase of the company and innovation, the invention would be proven as a viable product, there would be a market and a customer-base, the team would have proven their worth, and the company would have grown significantly. The next milestone is to scale both the product/service and the company to provide the breadth of services to its customer segments. Financial raises of more substance are therefore required to achieve these ambitious milestones. After the seed and follow-on investments, the entrepreneur looks towards “Series”-grade funds through large investment groups. These groups are Angel syndicates or large “Venture Capital” Institutions. The increasing Series investments are marked with ascending letters starting with A, B, C, etc. As each Series investment grows, the number of investors involved in the transaction, the complexity of contract, and its terms also grow, and become more intricate in nature. Series A funds would be a $1-2M ask to scale the support staff in anticipation of the marketing plan to acquire customers. Series B funds of $5-10M would be secured to scale the manufacturing process and so on. The UILO liaises closely with these investor groups and institutions to stay informed of investment trends, sector trends, and maintain key contacts to position the University and the inventors for success as we translate your discoveries to solve society’s unmet needs.
Be aware that the investors may ask the entrepreneur(s) to step-aside at this point. This is not a reflection of their inabilities as a leader. Instead, senior leadership replacement with the skill sets required for the company's growth is necessary for the next phase of devlopment. The entrepreneur’s skill-base may be more suited to a chaotic, small company ecosystem and could not direct a more stable and systematic endeavour, though of course, there are exceptions.
Within each investment, the Founders/Inventors are being diluted in their equity stake. In exchange to growing the company and bringing the product to market, equity must be given up to those who believe in the mission and who have invested their funds. Although your equity position dilutes with every investment, remember that the value of your equity increases at every turn. As the saying goes, it is better to have 5% of a million dollars than 100% of nothing.
The entrepreneur must understand the terms of investment and how the investors will participate, the company’s valuation, and have a strong sense of its potential. For example, you should understand when somebody says "Participating Preferred at a 3X multiple”, what anti-dilution means, and how it shields investors from a “down round”.
The following are a description of two groups that participate in these investments.
ANGEL SYNDICATES: Angels form organized groups that “deal screen” to seek opportunities to invest. Often, a Managing Director oversees the operation as they perform the entrepreneur-facing activities. They seek companies with attractive assets, seek companies that fit with their investment profile, perform financial management, facilitate the angel network, and coordinate the investment event so that the companies pitch their idea directly to the angels. As stated, these Angel networks invest in a specific “asset class” or sector, so the entrepreneur must ensure they engage with the appropriate group. In a syndicate, the angels invest much like a “Crowdfund”, by contributing a “Tranche” of the total fund asked by the entrepreneur. In many cases, the Angel group has a “Lead investor” who negotiates with the entrepreneur. Fund “asks” can be anywhere from $500K – 2M, and could involve a syndicate consisting of up to 10 investors.
VENTURE CAPITAL: VCs are Institutions that raise large sums of money from government, pension funds, angels, investment firms, etc. The VCs build investment funds or “vintages”, consisting of funds from the “Limited Partners” or “LPs”. These Vintages are managed by the “General Partners”, or ”GPs”. Finally, the entire ecosystem in managed by an umbrella Management Firm. The GPs answer to their LPs, and the purpose of the fund is to return their investment plus a pre-arranged multiple. Success of their investments range between 60-70%, thus it is evident that a stringent due diligence process is performed to ensure success. VCs are seeking companies late in their maturity at the “post-revenue” stage (ie. already selling product to customers). “Pre-revenue” firms like the startup would not be in their investment sights. As with Angel Syndicates, the entrepreneur should be aware of the valuation of their company, the VC group and how they operate, what asset class they invest in, the vintage of the investment fund, and details of the contract agreement.