Here is $100,000 – How Much of Your Company do I get?

It is a valid question. Your medical innovation is going to require money in order to advance from development to commercial launch. Whether your total capital needs are $3 million or $30 million, the needed money can trickle in via smaller increments or in tranches of millions of dollars—depending on how you ultimately structure your funding request. But, independent of such incremental amounts, you must establish and validate a valuation for your business. In other words, how much of your company (i.e., stock or ownership) will an investor get for their investment?

You may recall that in our previous article, we talked about the importance of raising funds after the accomplishment of meaningful milestones. If you missed that column, click here to read it because the timing of fund raising is a key to your company valuation. But, for now, let’s focus on calculating what that $100,000 investment offer might mean in terms of company ownership.

Let’s begin with your sales forecasts. You and your team must work diligently to estimate sales using a “from the ground up” approach—in other words, starting with the most basic sales activities, rather than offering a top down 1%, 2%, 10%, etc., of market approach. Ground up means figuring out who would sell your product, and how they would do it. Will you hire your own sales force incrementally over time? Or will you engage a distributor with a major salesforce already in place? How many clinics and hospitals can one sales person call on in one day? And what is an estimated success rate per call? One out of ten calls will purchase? Maybe one out of twenty or even 100 is more realistic? Does your product merit repeat orders, or is it a one-time sale? Does your product include consumables that must be reordered? All of these elements must be carefully factored into a sales forecast as your company gradually ramps up sales over a period of years. Aim for a five-year forecast. That “five year” will be crucial, as we will see. And be prepared to defend the rationale behind your forecast, including your “from the ground up” assumptions. When you are fundraising, if this rationale is not sound and convincing, you may end up giving away more of your company than you had expected.
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