How to raise intellectual property-backed financing… in a dozen words
IP-rich companies need to be very well-prepared when raising capital.
The fundraising process is overwhelming enough for any entrepreneur. But it can be even more demanding for entrepreneurs building highly innovative and often untested technologies to market.
So, what can a founder or CEO of an IP-rich company do differently to increase their chance of success?
Believe it or not, the answer to this question is not necessarily about the size of a patent portfolio. Nor is it about having a sophisticated financial model. Nor is it solely about having the most beautiful pitch deck.
The answer lies in four steps, each containing three words… a dozen words.
Know your audience. Tell your story. Prove your story. Make it happen.
Step 1. Know your audience
Early in the process—whether it be in the first pitch deck or in the executive summary you send—you’ll need to capture your potential investor’s attention and interest. Paramount to this is understanding their investment strategy, criteria, methodology, team background and value-add, and then tailoring your approach and communications accordingly.
Approaching the right funder at the right time with tailored material will save both you and your prospective investor a lot of precious time.
Let’s take the example of the BDC Capital IP-Backed Financing fund. We are a “jack/jill-of-all-trades” but “master-of-none” fund. We can be looking at a cleantech company one day, a medical device company the next and then a cybersecurity company the day after.
Because of this, we appreciate getting an explanation of your products or services in a way that is quick and easy for us to understand. Explainer videos are extremely helpful, step-by-step visual guides are amazing, but please reserve hundred-page white papers for a later step.
But, even if we are generalists from a technology perspective, you should be aware that we look for companies that can articulate their IP strategy upfront. Therefore, make sure that the information you send over includes an overview of your IP strategy. You would be surprised at the number of pitch decks we have received from IP-rich companies that don’t talk about their IP portfolio at all.
And before you say it, I know you probably haven’t been asked this information before. That’s why our fund is the first of its kind in Canada.
Step 2. Tell your story
Fundraising in knowledge-based industries is essentially a form of financial and innovation storytelling.
After you have successfully tailored your communications to the right investors, the next step is getting them to buy into your story and rally behind your team. Now is the time to wow them with who you are, where you have been, where you are now, and where you want to go.
Woven into this narrative is the need to articulate how your products (or services) address the needs of a growing and lucrative market, and, importantly, how you are creating a moat (or competitive advantage) and leveraging your IP strategy.
This is what I call “product-market-moat fit.” Show how your IP portfolio (including patents, trade secrets, trademarks, copyright, software and data) drives your key products and services.
Ensure that you have a clear and believable story on how the financing will help you achieve your financial goals. Show how each dollar you raise will be spent and demonstrate the resulting return on investment (ROI). And make sure that you also provide a clear account of how the capital will help grow your IP portfolio even more.
Should you disclose the dark parts of the story? Should you talk about the skeletons in your closet (e.g. IP litigation, shareholder dispute or a product recall)? The answer is yes. Better to disclose it early, give your explanation and earn the trust of a prospective investor. Because good investors will almost always figure it out anyway. And this leads us to the next step…
Step 3. Prove your story
At this point, you will have received a term sheet or an indication that an investor is interested in your company. Now comes the fun part. During due diligence, you will need to provide investors with the confirmation that the story you sold them holds.
Investors will have already come up with an investment thesis (i.e. the story that they will put forward to their investment committee). They are looking to validate the strengths in the deal and find ways to mitigate their risks. They are also looking for consistency between your story and the information and documents you will be asked to produce.
Here are some of the actions that you can take to make proving your story effective.
- Share a very detailed pipeline of your sales opportunities, contracts and orders. Most of the deals that I have seen fail due diligence didn’t go through because the business painted too rosy a picture of future sales. A detailed pipeline or order book needs to support your story for the deal to succeed.
- Show how your historical financial statements and your projections are consistent with the story you are telling. If you are raising capital to accelerate the growth of an existing revenue stream, then don’t bring forward a plan to invest almost all of the capital in pure research and development activities.
- Provide sufficient information to show chain of ownership of your IP assets and seriousness in executing on your IP strategy. If trade secrets play a key role in your IP strategy, employ best practices in guarding trade secrets (such as using iron-clad non-disclosure agreements and having employees, including founders, sign employment contracts that protect your company’s IP).
- Share third-party reports and case studies to investors so that they have an appreciation that external parties have validated your value proposition.
- Give access to your customers, suppliers, employees, board members and current investors. The more these stakeholders prove and validate your story, the more convinced your prospective investor will be.
Step 4. Make it happen
Fundraising never really stops. For as long as you are looking to grow your company, there will always be a need to raise capital, especially in early stages. As your company evolves, so will your capital structure.
You should aim to make each round easier than the last. The key here is to get the support of your investors and to help them help you access more capital in the future. This could mean receiving follow-on financing or introducing you to better-suited investors.
And the way to do that is to make your story happen. Create a sense of urgency and purpose in your organization. Share the story you tell your investors with your team because they will play a crucial role in bringing it to fruition.
Even when the financing process is ongoing, keep your prospective investor informed of key areas where you are getting traction. Share news on key customers, patent grants or distribution partnerships.
After receiving your financing, develop a plan to keep your investors updated on your traction—both positive and negative. And stick to it. Transparency in investor communication builds trust and keeps your investors engaged.
If you raised debt financing, make sure you focus on meeting your financial plan and respecting your debt covenants. Since lenders are focused on getting their money back at maturity, they will look to you and your team to remain on top of managing liquidity and cashflow.
If you raised equity financing, you should also ensure that you keep your governance process and organizational structure in step with your growth stage. You will likely be changing your board of directors and perhaps welcoming new team members. Make sure everyone understands the plan that you just sold and understands the role they play in making it happen.
Start telling your innovation story
So, there you have it. The answer to successfully raising IP-backed financing, or any form of financing for that matter, lies in four steps, each containing three words… a dozen words.
Let the financial and innovation storytelling begin!
This blog post was partially inspired by my participation in a panel discussion held by the Innovation Asset Collective (IAC) and feedback we received from the audience.