Emerging Growth Companies (EGCs) are unique business animals. At times EGCs are viewed as ‘in-between’ more common business categories like start-ups, privately held mature, or established public companies. One common thread that nearly all EGCs have is an aggressive appetite for capital - but what type of capital best suits an Emerging Growth Company? There is no one right answer, but understanding the landscape of financing options available to EGCs should enable you to make an informed decision.  

 

While start-ups often rely on Angels and Venture Capital investors and mature modest growth companies typically look to banking and Private Equity relationships, EGC’s have the unique need and ability to combine many more financing options to meet their diverse growth capital needs.  

 

Let’s take a look at the broad financing landscape for EGCs below:

 

Founders - Almost always the first capital in, founder capital is typically valued most highly.  Generally speaking, maintain as much control in your company as possible is very attractive.  That said, many founders look to internally meet as much of the company’s financing needs as possible, but as is the case with most rapidly growing businesses, most founders will hit resource limits early on.


Angels and High Net Worth Individuals - Think of Angels and High Net Worth Individual investors as micro or early Venture Capitalists. These investors often invest as part of a larger diversified portfolio either as individuals or in small syndicates. Investment sizes vary but can start as early as seed stage with some tens of thousands of dollars and can scale up to many hundreds of thousands if not millions of dollars at early or early growth stage.

 

These investors tend to invest in line with the broader Venture model and look for high returns from a few hyper-performing investments in their broader portfolio to help offset losses and underperformance from the majority of these high-risk investments. Angel Investors tend to have more flexibility on term and time horizon than institutional investors.

 

Family Offices - Family offices do more than represent a High Net Worth Individual. To understand Family Office investment let’s compare Family Office to Venture investing.  Venture Capitalists have one job - to deploy capital. Family Offices, on the other hand, have a very different charter - to preserve asset value long term. As such, it is no surprise that many Family Offices invest in verticals they have direct experience in and are also historically big investors in conservative, long-term categories like real estate.

 

Venture Capital - Most conventional Venture Capital firms look to deploy capital at early growth phases of a company’s lifecycle investing many hundreds of thousands to many millions of dollars. Venture firms most often buy equity in portfolio companies but many also have some sort of debt offering.

 

Venture firms look for hyper-growth companies that can scale rapidly and often participate in additional financing rounds as needed to secure growth. The network access and visibility that often come with a Venture investor can often greatly impact the business far beyond the value of the capital sourced. Venture firms also tend to play a more active role in business management through board seats or formal advisory positions.

 

Growth Equity - Growth equity represents the intersection of Venture and Private Equity investments.  Most growth equity providers are investing in more mature businesses that require significant additional capital to capture new growth. Many Private Equity firms have growth equity arms as do some Venture Capital firms.

 

Valuations and return expectations are often slightly more modest than that of a true early stage investment due to established track records, profitability etc. Where traditional Private Equity investors look for significant non-control or full control positions, growth equity tends to come by way of smaller minority equity positions.

 

Partnerships - Funding growth does not always require an infusion of capital. Strategic partnerships can provide a powerful alternative to raising money. Key partnerships can give EGCs access to production capacity, sales channels, and industry expertise. Strategic partnerships can also be a great prelude to an M&A transaction with partners down the road.  

 

IPO - The big daddy of capital sources is the public equities market. IPO funding is very flexible and can allow the company to repay debts, fund R&D and make acquisitions with little restriction. While raising capital through IPO is very attractive, it does come with a slew of requirements including tax, accounting, and compliance considerations. While some of the above capital sources can be managed by internal staff, an IPO absolutely requires an expert team of bankers to ensure the offering's success.

 

M&A - Many EGCs make attractive candidates for acquisition allowing a buyer to purchase market share and IP that may cost significantly more to innovate in-house.  Similarly, merging with adjacent competitors or industry participants can allow companies to become worth more than simply the sum of their parts.

 

Keep in mind, the full spectrum of financing options for EGCs reaches beyond this list. With so many options available it is paramount that your advisory team fully understands the unique nature of Emerging Growth Companies and has a fully developed skill set to lever the diverse option pool available to them. We have developed a global service model specific to EGCs that is best is class.

 

For more information about the Emerging Growth space or to be connected to our expert team please contact us or visit us online at www.healthios.com.  

Emerging Growth Companies (EGCs) have long been a topic of interest in investor circles and have historically been strong financial performers.  However, over time, the true meaning of the term EGC has changed, and possibly even become diluted.  So, let’s start at the beginning - what exactly is an Emerging Growth Company and what are the financing mechanisms that support them?

 

Under the Jumpstart Our Business Startups Act (the JOBS Act) a company qualifies as an emerging growth company (EGC) if at the time of its initial public offering (IPO) total annual gross revenues were less than $1 billion during its most recently completed fiscal year.  This technical definition only scratches the surface of what an Emerging Growth Company really is.  And, most believe that any Company with a $1 billion in revenue is not ‘Emerging’, even if it still is ‘Growth’...

 

We define Emerging Growth as companies valued between $50 million and $350 million.  On average, they will have attracted $20 million of historical invested capital and will require $20 to $70 million of additional financing over 12 to 24 months in order to achieve an exit which will generate 4x to 6x MOIC over a 3-year period.  These characteristics make Emerging Growth distinctly unique from any other investment category.  

 

For example, Emerging Growth is sometimes compared to the Middle Market, particularly in target valuations.  But, EGCs deviate from similarly sized Middle Market companies in a number of ways.  The two biggest points of differentiation between Middle Market and Emerging Growth Companies as follows:

 

EGCs grow faster and (as a result) have a greater appetite for capital.

 

While Middle Market companies certainly require capital, the need is often varied. Middle Market companies are predominantly profitable, whereas their Emerging Growth counterparts may not be.  Middle Market companies attract debt financing.  Emerging Growth companies gravitate to equity.  Middle Market companies have predictable, moderate growth, whereas an Emerging Growth Company should be growing 25-100% year-over-year.

 

Access to capital for Middle Market companies also serves a different purpose.  While Middle Market companies may be pursuing new capital avenues to reducing costs, to restructure a balance sheet or to build more strength in reserves, EGCs just have to grow.

Emerging Growth generates superior returns to the Middle Market.  But, EGC’s are more risky. While in the Emerging Growth category comprises 63% of total capital raised, a dollar first invested at a valuation between $50 million and $350 million will generate 73% of total investment returns.

 

In short, the deployment of capital into an EGC is generally more critical to the company’s overall success and provides both investors and founders with more ‘bang for your buck’ than capital deployed into similarly sized Middle Market Companies.

 

Scaling EGCs requires access to a global, more robust set of financing tools as compared to Middle Market companies.

 

EGCs often struggle to identify the correct resources (bankers, advisors etc.) because they can be perceived as being too ‘in between’.

 

Consider this - Your EGC is growing and you know you will need a number of capital solutions. You are thinking long term about IPO but have pressing needs today that need to be addressed.  Naturally, you would want to contact an upmarket service provider - an investment banking group that can help you with the big goal - the IPO.  Surely they can help you take the needed intermediary steps in between then and now…

 

Herein lies the rub.  Most “bulge-bracket” investment banks (JPMorgan, Goldman Sachs etc.) will prioritize on the $500 million deal, as arithmetic on their cost structures dictates higher minimum fees.  In short, they can't afford to serve the EGC market consistently, even if your company is on track to grow into an ideal client long term.

 

Parallel this to the Middle Market bankers (Jeffries, William Blair etc.) who are generally focused on $350 million-plus transactions and quickly you realize that EGCs are distinctly underserved in areas that are vital to their success.

 

Addressing the needs of EGCs on an accomplished and consistent basis requires global scale and expertise that is unique to EGCs. Access diverse capital sources, worldwide including: Angels, High Net Worth Individuals, Multi-Family Offices, Corporate Partners, Venture Capitalists, Sovereign Wealth, Foreign institutions, Structured Debt providers, pre-IPO investors, leveraged lending, asset managers and strategic buyers. _

 

While the market may struggle to understand how to meet the unique needs of Emerging Growth Companies, we have spent our whole careers in this market. We have developed a global service model specific to companies that have historically been underserved in the marketplace.

 

For more information about the Emerging Growth space or to be connected to our expert team please contact me directly or visit us online at www.healthios.com.  

Much has been written about the time it takes to file an Initial Public Offering. Often overlooked is the pre-file planning which can take as long as many years.  So, how far in advance should you plan your IPO?

The short answer is you should prepare as much as 36 months in advance.  While the tail end of this preparation period will be consumed with the formal filing preparation including negotiating with bankers, compliance, road shows etc., much of the early preparation involves ensuring that your company has the needed structure and resources to be successful come filing time.

The following recommendations should be considered a minimum of two years prior to filing:

 #1 Hire a CFO with real public company experience

The required skill set of a high growth private healthcare company CFO is significantly different than that of one which is public.  It is paramount that you hire a CFO that has public company experience and ideally has previously survived the IPO process, soup to nuts.

Public company CFOs need to focus their efforts on making internal controls part of every single day and must be familiar with the requirements of the Sarbanes-Oxley Act of 2002 and the Jumpstart Our Business Startups Act of 2012 among other key regulations. Learning such nuanced elements of the process on the job is an IPO killer.

#2 Build systems early and integrate into your normal processes

As the old M&A adage goes - ‘Build it today like you are selling it tomorrow.’.  Something similar can be said about IPO prep.  

Companies should develop the needed systems, in particular financial controls as early as possible.  This most commonly serves as a mechanism to purge any problems with systems or controls that exist far earlier than may otherwise be possible.

CFOs will need to address gaps in controls by completing a risk assessment, and should also finalize disclosure processes, which is the quarterly equivalent of the Section 404 yearly disclosure, as early as possible. Additionally, by adopting proper systems and processes into your month and quarter end periods your team can ‘practice’ working within a simulated post IPO environment.  This experience can help ease the shock of the formal process changes post IPO.  

Prior to completing a successful IPO you will be required to do this work.  Preparing in an environment that affords you the needed time and focus to do so correctly will pay future dividends.

#3 Build a board with public company experience

The strength of your board of directors can significantly impact the success of your future IPO. Be sure to recruit members with public company experience who can directly support the growth of the business.  Board members with specific skills needed post IPO are also preferred (like someone to sit in as the audit chair, for example).  While initial pricing is based on many other factors, do not discount the idea that your board can directly impact the interest in and price of your IPO in a very real way.

#4 Address the costs early on

Running an IPO process carries significant costs.  Understanding these costs and budgeting for them as far in advance will ensure that they do not become burdensome in mission critical times.  All IPOs have both a fixed and variable cost component.  While the variable cost piece is paid from proceeds, the company filing will have to carry all fixed costs including listing, legal, underwriting, due diligence.  These fixed costs can range from hundreds of thousands to millions of dollars depending on the company, so plan accordingly.

While there is no exact timeline for advanced IPO preparation, the sooner you start the process the easier it will be during the challenging, time intensive and costly months that immediately precede your offering.  

Is your healthcare EGC considering an IPO? If so, please do not hesitate to contact US. Our team has global reach, deep expertise and is dedicated to exclusively serving companies like yours.  Lean more about us at www.healthios.com

CHICAGO, April 7, 2014 — HealthiosXchange announced today that it has become a member of the
Angel Capital Association (ACA), the world’s leading professional and trade association for angel
investors.

“Affiliating with such a prominent organization as the ACA is in keeping with our standard of creating
strong relationships with the leading angels, venture capitalists, foundations and other capital sources,
which we believe is crucial for funding medical technology companies from seed to exit,” said Scott
Jordan, CEO of HealthiosXchange.

“The ACA has set a high standard for connecting with equity marketplace technology platforms made up
exclusively of accredited investors. Given that HealthiosXchange is unique among equity-based
crowdfunding platforms in that we are a broker/dealer, we have set a high bar ourselves when it comes to
investor protections,” Jordan continued, “and thus HealthiosXchange is in sync in with the ACA’s mission
of fueling the success of angel groups and accredited investors in high-growth, early-stage ventures."

About ACA (www.angelcapitalassociation.org)
The Angel Capital Association is the world’s leading professional and trade association supporting the
success of angel investors in high-growth, early-stage ventures. ACA provides professional development,
industry voice, public policy advocacy and an array of benefits and resources to its membership of 200
angel groups and more than 10,000 individual accredited investors across North America.

About HealthiosXchange (www.healthiosxchange.com)
HealthiosXchange is an equity-based crowdfunding portal and broker/dealer that raises funds under Rule
506 (b) and (c). A member-only site, HealthiosXchange offers private placements to accredited investors.
Some 1600 accredited investors, emerging growth companies, investment professionals, and strategic
buyers are registered members of HealthiosXchange.

News From MATTER
 

MATTER secures $4.4M from Illinois-Area Healthcare leaders

 

Public and Private Investment now Exceeds $8M with MATTER on Track to Launch in Early 2015
 

 

CHICAGO (November 19, 2014) – MATTER has secured private-sector commitments of $4.4 million to support Chicago’s new entrepreneurship and innovation hub for next-generation health IT, medical device, diagnostics and biopharma companies. The $4.4 million in private investment complements the $2.5 million grant and $1.5 million loan provided by the State of Illinois, and means that MATTER will launch with an initial capital commitment of more than $8 million.
 
MATTER’s initial strategic partners include many of the biggest names in the region’s healthcare ecosystem, including industry leaders, technology and health providers and professional organizations.  MATTER will help connect partners with innovators and entrepreneurs, unite Chicago’s dispersed health technology community and accelerate the formation and growth of new businesses that can revolutionize healthcare. MATTER’s strategic partnerships will also give startups the rare opportunity to collaborate with and learn from industry leaders that can help them develop and launch their innovations.
 
MATTER’s initial strategic partners include:

 

  • AbbVie
  • Allscripts
  • American Heart Association
  • Astellas Pharma US, Inc.
  • AVIA   
  • CDW
  • Comcast
  • Crain's Chicago Business
  • EdgeOne Medical     
  • Ernst & Young LLP   
  • Healthios
  • Horizon Pharma
  • Insight Product Development
  • Jones Day      
  • JPMorgan Chase                   
  • OSF Healthcare/Jump Center
  • Marathon Pharmaceuticals
  • Marshall, Gerstein & Borun LLP
  • Medline Industries, Inc.
  • NorthShore University HealthSystem
  • Sidley Austin, LLP
  • Silicon Valley Bank
  • State Farm
  • Takeda Pharmaceuticals
  • William Blair

"MATTER's partners will accelerate their access to new healthcare technologies and expand their presence among the region's innovators and entrepreneurs," said Steven Collens, MATTER CEO. "Together with our strategic partners, MATTER is building a community that will accelerate the formation and growth of next-generation healthcare technology businesses."
 
“Our relationship with MATTER is a strategic partnership for Astellas and an initiative we feel strongly will have a positive impact on Chicago’s healthcare economy,” said Jim Robinson, president of Astellas Pharma US, Inc. “By bringing together industry leaders, researchers and early-stage entrepreneurs, MATTER will act as a facilitator to drive collaboration that’s been difficult to effectively accomplish through other channels at scale.”
 
“Investing in and supporting innovation in healthcare is core to AbbVie’s mission,” said Jim Sullivan, Ph.D., vice president, pharmaceutical discovery, AbbVie. “MATTER will foster new ideas and provide valuable support to local entrepreneurs as they explore new frontiers in healthcare. We know that innovation requires a collaborative approach and AbbVie is proud to support the creation of this Chicago-based healthcare technology incubator.”
 
MATTER is scheduled to open in early 2015 and is currently accepting applications for membership. Interested entrepreneurs should visit www.matterchicago.com. Membership rates start at $150 per month and include access to MATTER’s mentor network, workshops and events designed to help entrepreneurs and innovators accelerate the growth of their companies. MATTER will also provide space to venture capital firms, research universities, healthcare providers and established companies.
 
MATTER is a not-for-profit organization developed by a team of entrepreneurs and industry leaders and supported by the state of Illinois. ChicagoNEXT, Mayor Rahm Emanuel’s council on technology and innovation, helped develop MATTER and is a key partner.
 
“These private sector partnerships will help MATTER to continue driving entrepreneurship in the rapidly expanding healthcare and biotechnology fields,” Governor Pat Quinn said. “We are proud to partner with MATTER to take our healthcare technology industry to the next level and keep Illinois as a national leader in life sciences and health innovation.”
 
“MATTER is already helping to drive Chicago’s healthcare economy forward by bringing together corporate partners from across the healthcare industry to drive innovation and create jobs in Chicago,” said Mayor Rahm Emanuel. “This investment by the private sector means that new companies will have the opportunity to grow and provide an economic engine for our city into the future.”
 
About MATTER
MATTER is a community of healthcare entrepreneurs and industry leaders working together in a shared space to individually and collectively fuel the future of healthcare innovation. MATTER’s mission is to proactively connect and promote collaboration between entrepreneurs, scientists, physicians and industry partners in order to bring next-generation products and services to market that improve quality of care and save lives. For more information, visit www.matterchicago.com and follow @matterchicago.

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