The Anatomy of a Friends and Family Round in a COVID-19 World

When I wrote about fundraising early this year, I knew that I would be raising a round shortly, but had no idea I would be doing it in a changed COVID-19 world. I have experienced two unexpected recessions as an entrepreneur in 2001 and 2008 and each time causing huge struggles for entrepreneurs to raise funds. That is when I developed the mindset of acting like a desert rat, surviving with little help, learning to tap into the resources around you to survive and even thrive. Little did I know what was coming in March when the COVID-19 shutdown started.

The Solenic Medical team knew we needed to raise a round early this year, building upon the progress achieved since our founding investment in early 2019. The question was what type and size of a round to raise. We knew we were close to taking some valuable steps, but needed just a little more time and funding to get there, at which point we assumed we would be able to step up our valuation greatly. We decided on a modest $500,000 convertible note round, to help us accomplish at least a portion of the following items:

• • • Recruit a top-tier outside board member with sector-specific industry experience
    • Complete a planned large animal study stepping up from previous mice studies
    • Complete submission of a Breakthrough Device application to the FDA
    • Close our $1.3M NIH grant and/or other non-dilutive funding
    • Fine-tune simulation approaches to optimize the transducer design
    • File new intellectual property

We knew that some combination of these would occur in the succeeding months and would make it easier for Solenic to raise additional funds.

The first domino was the on-boarding of an experienced technology executive from Virginia to join our board. The large animal study was delayed when the Covid-19 shutdown started, but our Breakthrough application and the grant application review started as the team went into virtual work mode. Progress was also made on the simulations and drafting our next patent. Key milestones were being reached in spite of the shutdown.

My philosophy was to treat the round as five different type of efforts, in essentially five equal portions. The first 20% in a round is always the hardest, even in a closely held friends and family round. The first check regardless of size is always challenging as investors who are interested in the round will often wait for others to move first. The second 20% is not much easier, still requiring a leap of faith by the investor. The magic starts happening at give or take 40%, where momentum picks up as you approach halfway and beyond. At 60% you reach escape velocity, where those investors who may have been waiting to act for a while now start moving. At 80% you pick up investors who—worried about missing out before the round closes—jump in. With luck, you get enough momentum to oversubscribe the round and have to make the call to go beyond your target raise. For a quick hint on where I stand on that point…never turn down money.

Looking back on March, it was strange picking up the fundraising activity via Zoom meetings, and it got off to a slow start as the initial circumstances of the new COVID-19 world settled in. Following my own advice from the January article mentioned earlier, I started strategizing my communications: Who were the folks likely to be in the first 20%, the next 20% and so on. For a friends and family round you begin with your board, founders and management as champions for the round. No one is likely to be more committed and able to get things started in the best of times, and even more so during global crises.

With an institutional co-founder like VIC Technology Venture Development and a passionate board, we were able to jumpstart the round the round with $110,000 in commitments. This was quickly followed by another $100,000 from friends and family of board or management team members. Note that “quickly” in a pandemic was three months that—in normal times—might have taken only a month or so. Now that we had crossed that magic 40% hurdle, our fundraising started picking up speed, so that within another six weeks of individual presentations and discussions, members of the VIC Investor Network added individual investments totaling $140,000 to pass the next hurdle of 60%. The pace accelerated with friends and family and management team members stepping up to get us to 80% within few weeks. I’m happy to share that—at the time of this article—we are over-subscribed with more decisions pending. This is a great problem to have as things really picked up speed recently, and may be a sign that the initial fear and uncertainty created during the early phase of the pandemic is starting to subside.

Though the final tally is to be determined, the mix for this friends and family round looks to be pretty typical compared with past experiences:

• • • Board & Management – 27%
    • Family – 27%
    • Friends – 22%
    • Others – 25%

Because of the shutdown, this “pandemic round” has been unusual and at times frustrating, with some highly vocal and interested prospects going strangely silent as soon as the quarantine started, while others moved more slowly than originally expected. Regardless of how things transpired, it turned out largely familiar. As usual, the people you know the best and that know and trust you the most are the ones that are mostly likely come through for you. Building your network to increase the size of that pool is done long before the actual fundraising starts.

Later rounds will be quite different, but the same 20% momentum stages will apply. It’s a matter of building and nurturing a network of prospects in advance. Larger rounds involve an “institutional” friends and family network that you have known for a while. Not to sound like a broken record, but that work begins well in advance of developing them as prospect for an open investment round. By the time this article is published, we expect to have the final funds of this raise in the bank, but have already started building relationships for the next round. It never stops, but in some ways that is the fun part: Meeting new people to share your startup’s story.

Note that the VIC Investor Network itself as well as many individual VIN members were included in this friends and family round, which is a great benefit for VIC portfolio companies as well as VIN members: It’s a benefit to individual VIN members to get access to quality, well-vetted, early stage deals at a point in time where the valuation is quite modest and the upside is highest; It’s a benefit for the companies in that it greatly extends the traditional friends and family network that a young company counts on at those early stages.

VIN members can invest in later rounds as well, but VIN participation is especially beneficial for the earliest stage companies at a crucial time in their development, such as Solenic Medical in this round. In the case of Solenic Medical, the VIC Investor Network contributed 40% of the first $500,000 invested and played a significant role in the overall momentum of the fundraising process.

Learn more about Solenic Medical, Inc.

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