TSP045 | Annette Lavoie – Transcription
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John:
Hi and welcome to The Successful Pitch podcast. Today’s guest is Annette Lavoie. Annette has a great story of starting a medical device company, working with Judy Robinett to get in the right room so she could get the right investor to invest in something that required millions of dollars before it got to market, and her exit strategy was so successful that it actually worked that she got her company bought before it even got to market and was able to make millions from doing it.
She shares the insights that she learned on the importance of a team working together, not only being experienced, but the ability to work together is really what investors are looking for. She talks about the crazy confidence that an entrepreneur needs to have and really understanding, are you investable? What are the kinds of things that investors look for that are basic things that you have to know about your numbers before you go into a pitch meeting? Finally, she talks about all the ways that people can value their company so that you get the maximum investment and maximize your potential to get funded. Enjoy the episode.
Are you a founder struggling with your investor pitch? Do you need warm introductions to the right investors to get your startup funded? Do you need a funding roadmap to get you there fast? All of this and more can be found in Crack The Funding Code. Judy Robinett, bestselling author of How to be a Power Connector, and on the board of Illuminate Ventures invite you to our free Crack the Funding Code webinar. Simply go to JudyRobinett.com and click on the webinar tab to see how to tap into our network of investors around the world. There’s a link in the show notes as well. You’re only one click away from getting funded fast!
Hi and welcome to The Successful Pitch podcast. Today’s guest is Annette Lavoie. Annette has an incredible story about being a medical device entrepreneur, and she now mentors startup companies. At her first startup, Annette was responsible for the funding, device development, and ultimately the acquisition of the Daisyclip contraceptive device by Hologic. Now she applies her experience to develop business, financing, and product strategy with startup companies in the critical early funding stages. Annette, welcome to the show.
Annette:
Thank you, John. Thank you for inviting me.
John:
Sure. I want to find out about how you’re helping entrepreneurs with their early round of funding, but before we get into that, I always like to know what someone’s background is. Obviously you have 2 patents and you have a degree, a PhD, in neuroscience. From an early age, it seems like you’ve been very interested in that area.
Annette:
I actually was interested in academics from an early age. I was surprised to find out that I had alternative interests in the entrepreneurship. I was quite happy doing my academic research at the University of Utah until I was exposed to a series of entrepreneurs who looked like they were having a lot more fun than I was and having a bigger impact in the world.
John:
Ah, yes, impact and fun. Those are 2 attractive things, aren’t they?
Annette:
Makes the world go round.
John:
It does. Tell us about how you made that first leap, because so many people sometimes… Some of our listeners still haven’t made that leap but they really want to, or they’re a little nervous. What was your first dipping your toe in the water from leaving your comfortable job in research to go become an entrepreneur?
Annette:
It was different. My transition from academics to the startup world coincided with my transition from being a wife to being a mother. The opportunity that I saw was to fully explore both aspects of my life. I was able to start a company around a medical device product that I was passionate about, and had some preliminary funding and some crazy confidence that I could transfer my ability to learn in the academic environment to my ability to learn about business. It was not something that I … It’s probably not something
I prepared for appropriately, but if I had prepared for it and known all that was ahead, I probably wouldn’t have had the courage to leave.
John:
So helpful. I love how you said crazy confidence. I love that. What does crazy confidence look like? I know what confidence looks like, but crazy confidence is you’re going to do this no matter what?
Annette:
Yes.
John:
Mm-hmm (affirmative).
Annette:
Unfounded confidence I think might also be appropriate. I was confident in my abilities, and so I thought that I could apply them in any area that I chose.
John:
That’s right. The skills are transferable. Tell us about when you worked at this company that you were involved with, that you were the founder and CEO for 8 years, and tell us that whole journey, if you would, about starting it, getting funding, and then selling it in 2012. What a great story.
Annette:
It’s a saga.
John:
Yes.
Annette:
Like any startup, it has … It’s a roller coaster throughout the entire process. My enthusiasm for the device was because of the simplicity. I was excited about the ability to take something that was a really simple idea, and that was to close off the Fallopian tube, and develop that. As a non-engineer, that was exciting for me to be able to have that ability to develop something that was simple but had a huge opportunity and would have a huge impact in the world. The device development piece of it was actually quite simple. The business model piece was the bigger challenge. Like I said, I came from science. I had the confidence that I knew how to develop this.
What I didn’t realize was how important the business model was to getting the funding. I really thought that when I had a device that was so obviously needed and obviously effective that the VCs would take one look at it and roll up their sleeves and say, “How can we help? We’ll provide the business acumen. You provide the science. Together we’re going to win and take this to market.” That was obviously completely naïve. I had no idea what I was up against and what the expectations were. Taking this product, this … really a science project that I had on my desk, and figuring out how I was going to learn what I needed to learn and prove what I needed to prove in terms of the business viability, was a lot bigger hurdle than I anticipated.
It’s a product that requires FDA approval, and not only that but requires a large number of clinical trials, which makes it expensive. When you’re raising an early round of funding and it’s apparent from the very beginning that you’ve got $10-30 million ahead of you before you can get this to market, raising the first million is incredibly difficult. They see that the path and the dilution that’s going to be upstream is daunting.
John:
How did you do it?
Annette:
Sorry?
John:
How did you do that? How did you convince someone like, “I need a million dollars but I’m eventually going to need 10, before I can even get this to market to prove that it’s going to sell”?
Annette:
Right. That was being in the right room.
John:
Ah.
Annette:
I did many, many, many, too many VC meetings. I went up and down Sand Hill Road. I talked to a lot of groups that were encouraging and enthusiastic. They liked what I was doing. They said, “We like your market. Come back to us for your Series B.” I didn’t realize that that was code for good luck, because I … I suppose they didn’t want to say no and I didn’t realize that. I was encouraged. All I had to do was get the Series A and my Series B is covered, because all of these groups are so excited about it. All the resources that I spent, all the time that I spent flying back and forth, and putting time into a business model that really wasn’t viable was discouraging and took a long time. I was finally introduced to Judy Robinett, and she understood that I had a great product, I had a compelling story, but I was in the wrong room. She was an incredible mentor. She joined my board and spent a lot with me teaching the business side and the business speak and helping me understand what was going on below the surface that I was not privy to and unaware of.
She took me to the right groups, and it wasn’t very long before I was talking to the right investor that was willing to make the right sized investment in this really early stage. It was a good fit in terms of market segment. We launched with that first early boutique venture capital round and got to the next point in terms of credibility for the product and the market, the business strategy, and we were acquired before we got to do any of the clinical testing from a large company that is … It was a great fit for them, so it added to their platform of women’s health care technologies.
John:
What a great story. How wonderful for the early investors that you got bought even before you got to market. That’s quite an exit strategy there.
Annette:
It is. It’s always a toss-up because when you’re talking to your board of directors and you’ve got a strategy, if you can stay in longer and you can take the product farther down the road, it has a greater value. If you can do that without dilution, then that’s a win, but there’s that trade-off about, how far can I take it and what is the return on the investment? The more money I put in, the more it’s worth, but are the ratios beneficial to hold on to it longer or to get an early exit? In this case, for a lot of reasons, we had political, a lot of political turmoil in the women’s health and contraception arena. It was when Planned Parenthood was on the chopping block and not funded. They were obviously a strategic that were talking to and interested in working with because the product we were developing was ideal for low resource environments. It was a good fit for Planned Parenthood but they were politically in survival mode. There’s a lot of things that go into your investability that have nothing to do with you or your product.
John:
Yes. There’s things outside of your control obviously and things change. Let’s talk about what you have learned from that, and how you’re able to consult and help other people with this now, which is this whole concept that you said of understanding your investability, are you investable, and what the key things that are needed. You mentioned earlier business model and structure and an exit strategy. Can you talk about some of the key things that founders should really know, the language they need to know, and what strategies they need to have before they even meet with VCs or angels?
Annette:
Absolutely. When you’re going out for your first round of funding, that’s the key is understanding your investability. Your investability is based on your opportunity, not just your product. It’s the idea that understanding that the investor’s putting in money, going to stay with you for a period of time, and then needs an exit, needs to get that money back. Otherwise, there’s no reason to get involved if there’s not a way to get out. What I find with some of the greatest technologists that I’m looking at and working with, they have a widget that they are so excited about. It’s the coolest thing ever invented, and it’s going to change gaming, or it’s going to change medical device. It’s going to change the world in some way or another. What they don’t understand is that they’re the only one right now that’s in love with that baby. They show up to a pitch. I’m sure you’ve seen this with really new, enthusiastic entrepreneurs. They have 57 slides and 54 of them are pictures of their baby and all the things their baby can do. That’s not relevant.
What’s really, I find, investors struggle with the most is separating the baby from the opportunity.
John:
I love that. We’re going to tweet that out. Separate your baby from the opportunity. Great.
Annette:
If you can take the idea of your widget, whatever it is that you’ve just invented, and summarize it, you need to summarize it in 1 or 2 slides. The rest of your slides need to be talking about the opportunity, because that’s what they’re excited about. That’s what the investor cares about. The product, you can insert widget, you can insert the next pitch device they’re going to put in there, and that’s not going to matter to them as much as, do I want to work with this team and what am I going to make from this opportunity? When you’re again talking with a technologist in particular, the way that your product works, the specs, all of the things about it, are less relevant than, how can I sell it? How am I going to get this into the market? How much are people going to pay? Are they going to buy it? How do I know they’re going to buy it? All of those aspects that have to do with the business model itself. How am I going to generate revenues? Then how am I going to use those revenues to generate or churn for the investor? Does that look like, is it an IPO, which is really … It sounds like it happens a lot in the media, but it really is a rare occurrence for your IPO to be your exit. Is it going to be an acquisition? In the medical device space that I’ve lived in, a strategic acquisition for an early medical device technology is much more common, and that’s something that the investors can anticipate within a certain period of time based on the milestones.
John:
If I’m hearing you correctly, Annette, it’s really important when you’re putting your pitch together to investors, that you not only have an exit strategy of, “Oh, someone’s going to buy us,” but do some homework and come up with, I don’t know, 3 to 5 potential people that could buy you down the road, because you’ve done the research to know this would fit into their platform and how it would help their company.
Annette:
Absolutely. It’s like selling a house. You do comps when you’re selling your house. It’s the same thing. You would look at other companies in this space, in the similar space to you that have been acquired, who they’ve been acquired by, what their phase was at acquisition, and how much they were acquired for, so that you can compare. If you plot that out, you could see where you compare to these other technologies and anticipate who might be interested and how much they might be willing to pay.
John:
I love that.
Annette:
That’s going to be really key to having the investor interested, having them comfortable with the credibility you bring to the table, that you know what you’re talking about. It’ll tie directly into your valuation.
John:
Great. Oh, there’s 2 things you brought up I want to talk about. One is the investor’s question in their head is, do I want to work with this team? Then we definitely want to dive right into what you just said about selling the investor. Founders have questions about, how do I value my company? Do I ask for 20% for a million dollars or 30 or 10 or 5? Let’s dive first into, do I want to work with this team? What do you think people can do to be perceived as coachable and likable when they’re talking to potential investors so that they do want to work with them?
Annette:
That’s a great question, because at the end of the day, the team is much more important than the product. I’ve heard over and over again from different investors in different segments, angel investors, VCs, that they would rather invest in an A team and a C opportunity, I’m sorry, an A team and a C product, than an A product with a C team.
John:
That’s great.
Annette:
The execution of that, taking that product to market, is key to the team. What we found is that it’s not just the experience of the team, because you can have very experienced entrepreneurs that have taken products to market. More often, there are … The team revolves around brand new entrepreneurs, but even if you have a fully experienced, serial entrepreneurial team, if they haven’t worked together, they’re going to have challenges. Those challenges can be … They can be fatal. It’s important to understand the coachability, because if you’re looking at that aspect of a team, it’s how coachable are they from the investor’s perspective. The investor wants to get involved because they know the space.
Typically it’s an industry sector or it’s a product type that they have worked with before, and they feel like they can add expertise. They can add more than just capital to create value in this company. That’s a good rule of thumb. If that’s the case, then they are going to be involved with the running of the company and the execution of the product to some degree. Now most of them won’t be at the office every day, but they want to be there. They want to be a valued resource, and they want to know that you can have a communication, open lines of communication, transparency, that they trust you, that they can work with you, and if there’s a problem, that they can roll up their sleeves and show up at the office, and you can work together to overcome whatever hurdle’s in the way. There are always hurdles in startup companies.
John:
Of course. I want to just summarize what you said for the listeners. To me, the ideal investor is someone who has capital but also expertise in your field. The ideal founder has a strong team that not only ideally has experience, but also has a track record of working well together that shows they can overcome problems.
Annette:
I think that’s exactly right. I think that I would qualify this as particularly true when you’re looking at early stage and angel investment. Sometimes when you get into the larger venture capital investments, your companies get larger. It’s easier to overcome some of the aspects of team because it’s possible to replace your team. When you’re looking at these early stage, that’s absolutely true that you’re going to be working together, and that collaborative effort is going to go a long way in making the success of this company.
John:
Let’s dive into your expertise around valuation. When it is pre-revenue in a lot of cases, and they’ve made up some numbers that they think they can make a product for X and sell it for Y, and they anticipate with the funding they’ll be having marketing, how do you recommend people decide what’s a reasonable percentage to ask for in early stage?
Annette:
That’s a really great question. What I wanted to clarify right off the bat was I’m not sure I’d call anyone an expert in …
John:
Fair enough.
Annette:
… pre-revenue valuation, because it really is more of an art. It really is it’s worth what they’ll pay for it. Some of that, there are a lot of algorithms and estimations that can be made around a revenue company, but in a pre-revenue company, there are indications that tie into valuation. It’s more of an art. What I like to start with as a rule of thumb is to know what I need to raise to make the first real value inflection point. What’s that first milestone that’s going to increase the valuation of my company, in just general terms, increase that valuation to a certain extent? If I know what it’s going to take to get there in terms of time and money, that should be my first raise. If you’re going to anticipate that I need $5 million upfront to get this to market, then the valuation that you’re going to be able to get on something that’s that early on is going to be so dilutive that that money is harmful rather than helpful. Does that make sense?
John:
It does.
Annette:
If I find out what’s the smallest increment of capital that I can make or that I can take, I should say, that’ll help me make that first value inflection point, and then I use that as my marker, put a contingency in there because something always happens, but if, say, that first … If it’s $250,000 that I need to get to the point where I have a prototype that I can prove it works, it’s a great milestone. If I can prove my prototype with $250,000, then what I want to raise should be about a third of the company. Ideally what you would say is the pre-money value on that company is $500,000 so that the post-money value is $750k and the incoming money is worth 33% of the company. Those are good targets to hit.
John:
That’s so helpful, Annette. I can’t tell you how clear and specific that is. I’ve never heard anybody say it quite like that. It’s really great information. Thank you so much. That’s going to be a huge takeaway for our listeners.
Annette:
Good. To me, it works. It’s practical. It allows for a win-win situation. The investor, I think there’s a stereotype or a misconception that the investor always wants the smallest valuation they can get, a largest piece of the puzzle, or a largest piece of the pie, excuse me. At the end of the day, they want that investor … The investor wants that entrepreneur to be motivated. If they don’t have much equity in it, they’re not going to be motivated enough to take the risks and make the sacrifices it’s going to take to take that company all the way.
John:
That’s so great. This whole concept of knowing your numbers, I’d love for you to speak to the importance of that. Once you’ve got the coachability and you’re someone that people want to work with, and you’ve got the experience and the camaraderie and the collaboration coming across, and you’ve got the good product, you can really stumble, and people will lose faith in your ability to run the company, if you don’t know your numbers, right?
Annette:
Absolutely. I’ve seen more than once where you’re talking to an entrepreneur, and they punt the numbers to the CFO. If the CFO isn’t in the room, that’s an excuse for them to not know the numbers or come back with them at a later date. Now I would always advocate to be upfront, if you don’t know the answer, to admit that. The worst thing you could do is make it up, because then invariably you lose long-term credibility with that investor. They want to know, and they’re going to find a lot out about you and your integrity in that short pitch. If you don’t know the numbers, and you are going to make them up in order to create an appearance of success or an appearance of credibility or an appearance of expertise, then they can anticipate that when they’re working with you, if they made an investment in your company, downstream something happens that’s not necessarily positive, that you would be expected at that point to put on a face and have the appearance of success and maybe cover up what’s not going well or what you don’t know. That’s always a bad combination for an investment. If you don’t know, be upfront.
John:
Be upfront. I love it.
Annette:
That said, you need to know the numbers in broad strokes. It doesn’t help anyone if you know it to the dollar amount. As you have these 5 year, they’re going to change. What I like to use as a rule of thumb for pitching and for numbers is keep in mind that the investor that you’re pitching now has to turn around and pitch to their partners. They have to take your pitch and explain to their partners, whether it’s a wife or a business partner, that they like this deal and this is why they want to invest in it. Your numbers need to make sense. What I like to, particularly in that first early pitch, is to be able to give them multipliers. Give them numbers that they can remember.
Start off with a metaphor if you can so that they can understand the framework for your technology. For example, I was working with a company called Latch. It was a great product, but I couldn’t understand exactly what the technology was designed to … what problem it was designed to solve. The entrepreneur said to me, he said, “It’s like Carfax for houses.” Suddenly I understood it. Everything from then on out fit into a framework that made perfect sense, and it shortcut that discussion. Then when I went back to my partners, I could say, “It’s Carfax for houses,” and we could summarize the pitch very simply. Then the opportunity is this. They need this for an investment. It’s going to take this long to hit this milestone. Sell to this company, and this is the exit. It’s something that they can remember and articulate very easily and not get confused.
John:
I love it. It’s such a great framework. We need this amount of money to hit this milestone and get this kind of return, and then the exit strategy is this. How do we get in? What happens in between, as you said, and then what’s the exit? Structuring it like a story, beginning, middle, and end, with a metaphor is a great line. Are there a short checklist that you recommend that founders have or CEOs at a minimum that you should know? How much does it cost to get a customer? What’s your markup? What your competitor is charging versus you? Is there any kind of .. like be sure you at least know these 5 things, because these are the kinds of questions that you’re going to get asked?
Annette:
I think it’s very industry-specific. For example, customer acquisition is not a conversation we have in medical devices. If you know your industry and you’re in software, that’s certainly something that comes up, so you should be aware of that. I would say in broad strokes the minimum numbers you need to know are how much money I need to meet my first value inflection point, how much money I need to take this product to market, what’s the total amount of investment that I anticipate, and what are the basic industry metrics in terms of the average selling price or the anticipated selling price for that product, what the overall market is for that, and then what the anticipated exit numbers would be, and so that you can look at a return on investment.
John:
My last question for you is, are there any suggestions you have for founders to make sure that they stay the founder? That, as they grow, that the VCs don’t want to replace them?
Annette:
That’s a great question, because it’s a concern I hear a lot. I know that at one point, and I’ve heard venture capital investors say that their job is to replace the founder as soon as possible. I don’t think that that’s necessarily across the board, but I have heard that. What I think is that we know that there are different skill sets that are required to grow a company from nothing to a prototype and a first product, and then growing to the first million is a skill set that is very unique to startup companies. Growing the company from the first million to scalability at 5 million or 10 million is another skill set, and then growing it beyond there is another skill set all together.
I understand the concern of entrepreneurs not to be replaced. What I’ve always found is that if you are a team player and you add value, then there’s no reason to replace you. You may be replaced in that position as CEO, but that’s often for the betterment of the whole company. If you are adding value, and you’re easy to work with, and you’re making contributions to the technology, then having your history and your expertise within the company stay within the company is a benefit to all. You may find yourself in a chief technical officer position or you may end up as VP of R&D as the business grows. Your role will change, but if you continue to add value and be a great team player, then I think that the concern that you’ll be booted out is less. That said, there could be performance clauses or protections that lawyers put in place when you bring in the capital, so that they’re not motivated to eliminate your large equity stake for other reasons if you can be replaced technically.
John:
Got it. Nice. Is there any book that you recommend founders read about life or business?
Annette:
Life or business? My startup companies, I typically recommend 3 books to start with. One is Dead on Arrival, because I think that has some great vision into some partnership issues that enthusiastic friends and entrepreneurs are often not aware of. I think it’s a really short book, but it gives you some ways to anticipate potential problems down the road legally which may not be what you’re anticipating or good at. That’s Dead on Arrival. Pitch Anything is a great book.
John:
Mm-hmm (affirmative). Yes.
Annette:
Even though it is focused on venture capital and some of the power positions and the power struggles that he talks about are not necessarily as relevant to angel investing, I still think that there’s great information in there about the emotional aspect of pitching. Then of course How to Be a Power Connector is critical to understanding how to meet the right investors and be in the right room so that you’re not wasting time and resources pitching to someone that is never going to be a viable investor for you.
John: Fantastic.
Yes. That’s Judy Robinett’s book. You’re working with her on her new program, Crack the Funding Code, right?
Annette:
I am. It’s very exciting to see the mentoring that I received put into play in a webinar and a format that can be shared across the board. It changed my life to be able to work with her and to get in the right room and really see the product that I believed in go where it needed to go. It’s great that she’s able to share that across the board.
John:
Yes. It’s a fantastic program. I highly recommend it, because I’m going to be working with her on that as well. It’s exciting that I get to work with both of you. Annette, how can people follow you on social media? What is your Twitter and all that good stuff?
Annette:
My website, annettelavoie.com, and my Twitter is Annette.Lavoie.US, or Annette.Lavoie.US if you’re French Canadian.
John:
Lavoie. I love it. All right. Thank you so much. It’s been great having you on the show., You’ve given us so much valuable information from the importance of how to structure your valuation to the importance of being coachable and the team and that crazy confidence that you had, and getting in the right room of course is paramount to being successful and what investors are looking for. I can’t thank you enough, that it’s really all about the opportunity, not just your product.
Annette:
Thank you very much for having me. I enjoyed speaking with you.
John:
Great. Thanks for listening to The Successful Pitch podcast. If you like the show, please go to iTunes and write a review, and encourage your friends to write reviews too. It really helps get the word out. People say that the longest distance is between someone’s mouth and their wallet. People can tell you they’re going to invest, but when it comes time to write the check, they don’t do it. How do you get people to say yes and then follow through? Visualize yourself on the left side of a river bank, and you have to cross the river. On the other side of the river is where the funding happens.
First, you make up your idea. Then you make it real. Then you make it reoccur. Once you start dipping your toe into the water to get to funding, that’s where I can help. I get you across that river faster than you would on your own with a lot less frustration than you will get when you hear a bunch of nos and you don’t know why. If you want some help getting funded faster with less frustration, go to my free funding webinar, sellingsecretsforfunding.com/webinar. Sign up and get in-depth information on how you can get funded fast. Thanks.