01.24.22
Is Venture Capital Right for Your Startup?
Tammy Allen, Director | Marketing & Programs, The NIIC
The Role of Venture Capital for the Right Startup
The transformational role of venture capital may be well understood. Yet, deciding whether to pursue a venture capital option is complicated. Mammoth Scientific experts Tommy Martin, General Partner and Chief Executive Officer, and Erin Heck, JD, Chief Legal Officer, discussed capital alternatives and venture capital’s implications during a recent innovation leadership breakfast at The NIIC.
According to Martin, a new business idea is like starting a fire. Venture capital is oxygen the fire needs to burn and grow. Yet, it isn’t the only type of oxygen available, and it may not be the best option. It depends on each company’s needs.
Here’s how venture capital compares to other types of funding sources.
Option 1: Grants. “Anytime we can get grants for research or ideas,” said Martin, “that’s like free money. It’s important to understand the grant process and requirements and be able to complete the proper paperwork. A grant can be an excellent source of funding for a new idea, providing cash to the business without a loan.”
Option 2: Bank loans. Bank loans provide another viable funding source, especially considering that the government backs a large portion of SBA loans. The advantage to this type of funding is a founder’s ability to maintain control and ownership of the company, research, or idea.
Option 3: Friends and family. While this funding source can be a viable option for some, it comes with some risks. “The last person for whom I ever want to lose money is my mother-in-law,” he joked. “That’s a bad Thanksgiving.” All kidding aside, it’s essential to evaluate this funding source carefully before moving forward.
One consideration is the size of the loan or investment. “If you’re just getting started, friends and family are often the easiest way to find $1,000 of seed money. Depending on who your friends and family are, maybe you can get $200,000.” Again, those funds come with strings attached that you might want to avoid.
Option 4: Angel investors. According to Martin, angel investors are typically people who have some surplus funds and want to put those dollars to work into great ideas and great people. “Typically, angel investors are not taking a board seat in the company. Often, with angel investors, you’re not giving up control. These are just people who are investing.”
Some angel investors offer funds only, while others provide connections and expertise. “Those are the angels that I love to see,” said Martin. “And there are a lot of great angel networks, including Vison Tech, which meets here at the NIIC.”
Option 5: Venture capital. One primary difference between an angel investor and venture capital is the amount of money involved. “In the healthcare space,” said Martin, “a typical series A is $10 – 12 million. It’s pretty hard to raise that from an angel network. So, that’s where venture capital starts to come into play to a larger degree.”
Understanding Venture Capital Risks and Rewards
According to Erin Heck, most people don’t ask for venture capital until they have exhausted all other financing sources. “They think, ‘We need to grow. We need to scale. We need some cash in the bank. We need to hire. We need inventory. We need to do clinical trials,'” she said. “In those situations, it can be difficult to find the funding outside of venture capital.”
Heck paints a typical scenario. “We’ve been bootstrapping this company. Maybe we have some traditional financing. Maybe we don’t. If we do, it will be tough to go back and ask for some more. And we don’t just need a million dollars. We need several million dollars. And maybe not just one round of financing.”
Rich or Royal?
At that point, it’s important to consider what Heck points to as Noam Wasserman’s “founder’s dilemma.” In other words, says Heck, “Do you want to be cash, or do you want total control?” Because pursuing venture capital is taking on a long-term partner, founders need to realize that they will be losing some control and some equity in the company.
“You’re giving up a slice of the pie,” she said, “but suddenly you have the potential for a much bigger pie, and you’re not the only one baking the pie.”
Some of the benefits of a venture capital partner, in other words, include access to resources beyond finances. “Venture capital offers a true partner,” said Heck, “not just for financing and structure.” Instead, venture capital offers connections and expertise, in addition to accountability and transparency.
Mammoth Scientific —a Bridge
In addition to providing capital, Mammoth Scientific hopes to offer a bridge to other funding options and provide the community with resources for evaluating risk. “That’s part of the bridge,” said Martin, “really educating people on how to evaluate risk, what a term sheet looks like, how to assess those things, how to be strategic. Education is huge.”
Whether founders find themselves evaluating the risk of venture capital and decide to move forward, or whether they realize that private equity or venture capital isn’t for them, Mammoth Scientific is ready to have the conversation. That’s why Mammoth Scientific has made a promise to get back to anyone local who mentions The NIIC when they reach out for funding. Include “The NIIC” in the subject line of your email to Mammoth at hello@mammothresearch.com.
“I can’t promise you we’ll be getting back to you with a check,” said Martin, “but we will get back to you to at least help and try to point you to the next steps and connect you to local resources.” He is quick to add that “if you are beyond idea and you’ve moved into that actual execution phase in the healthcare space, it might be a check. We would absolutely love to talk to you.”
About Mammoth Scientific
Mammoth is a venture capital company that specializes in life science and healthtech. Mammoth has launched a $100 million venture capital fund headquartered in Northeast Indiana. To learn more, visit https://mammoth.vc.
