EP #512 The Incredible Step-By-Step Strategy To Raise $900k With Crowdfunding | Pivotal Health

Key Concepts

• Angel Investing: Funding provided by high-net-worth individuals to startups, often at early stages.
• Venture Capital (VC) Funding: Institutional investment in startups with high growth potential, typically in exchange for equity.
• Equity Crowdfunding (Reg CF): Raising capital from a large number of people (the crowd), including non-accredited investors, online, in exchange for equity, facilitated by regulations like Regulation Crowdfunding.
• Regulation D (Reg D) Funding: A common regulation allowing companies to raise capital through private placements, typically from accredited investors, without needing to register the securities with the SEC.
• Startup Fundraising Strategy: The plan and process for securing capital for a new business, involving identifying funding needs, targeting investors, building relationships, and negotiating terms.
• Investor Relations: The process of managing communication and relationships between a company and its investors.
• Due Diligence: The investigation or exercise of care that a reasonable business or person is expected to take before entering into an agreement or contract with another party. In this context, it applies both to investors vetting companies and founders vetting investors.
• Startup Milestones: Specific, measurable goals that a startup aims to achieve to demonstrate progress and often trigger further funding or increase valuation (e.g., building a platform, reaching a certain number of users, expanding geographically).
• Term Sheet: A non-binding agreement outlining the basic terms and conditions under which an investment will be made.
• Customer Acquisition Cost (CAC): The total cost related to acquiring a new customer.
• Business Models: How a company plans to make money (e.g., Direct-to-Employer, Direct-to-Consumer).
• Healthcare Technology (HealthTech): The use of technology (databases, applications, mobiles, wearables) to improve the delivery, payment, and/or consumption of care.
• Serial Entrepreneurship: The practice of starting multiple new businesses sequentially.
• Hofstadter's Law: An adage stating, "It always takes longer than you expect, even when you take into account Hofstadter's Law." Applied here to budget planning for fundraising.
• Warm Introductions: Being introduced to a potential investor by a mutual contact, generally considered more effective than cold outreach.
• Cold Outreach: Contacting a potential investor without a prior connection or introduction.

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Introduction & Guest Background

The podcast features Salvador "S" Brigman interviewing an entrepreneur, also named S, who is a seasoned healthcare entrepreneur with over 20 years of experience. He has started three companies, run two others, and is currently on his fifth startup, Pivotal Health. S expresses a strong preference for the fast-paced, high-urgency environment of startups, finding it difficult to work elsewhere due to the slower decision-making in larger companies. His focus on healthcare wasn't initially planned but began after business school at the University of Wisconsin when he connected with professors for his first biotech venture. He finds healthcare rewarding because it allows one to "do good" by taking care of people while also presenting significant financial opportunities, contingent on providing quality care. S identifies as an entrepreneur since business school and acknowledges the inherent risk, stating, "if you're not comfortable with risk then then don't become an entrepreneur." He feels he has more control over mitigating risks in his own company compared to potential layoffs in a large corporation.

Raising Capital from Angels and VCs (Reg D Experience)

S has extensive experience raising capital through traditional private placements (Regulation D).

• Previous Companies: Raised millions for his first biotech company and second medical device company from venture funds, angel groups, family offices, and high-net-worth individuals.
• Pivotal Health: Raised over $3.3 million initially from small venture groups, family offices, and numerous high-net-worth individuals using the Reg D pathway.
• This podcast marks his first experience discussing Regulation Crowdfunding (Reg CF).

The Process of Raising Traditional Capital (Angels & VCs)

S shares lessons learned "the hard way" about raising capital from VCs and angel groups:

1. Relationship Building is Key:

   • It's rarely a one-meeting process to get a term sheet. S states, "it rarely happens that you have one meeting and then the term sheet just kind of you know pops up."
   • Start Early: Begin building relationships with potential investors well before actively needing capital.
   • Maintain Contact: Keep investors updated on progress to build credibility and warm them up for when the formal ask comes.

2. Getting the First Meeting:

   • Warm Introductions: The "absolute best way" is through a warm introduction from a mutual contact, which provides initial credibility. S notes, "if you don't have a network that's good enough... to be able to get connected... then you know do you really have the network to even do a company?"
   • Cold Outreach (Strategic Approach): While less effective, cold emails can work if highly targeted.
     • Research: Identify investors actively looking for deals in your specific niche (not just broad categories like "healthcare"). Understand if they prefer software, services, etc.
     • Timing/Fund Cycle: Target funds actively deploying capital (usually years 1-3 of a typical 10-year fund). Funds in later years (4+) without a new fund raised are likely not making new investments.
     • Messaging: Craft a short, punchy email that catches attention.
   • Investor Perspective: Understand the investor's background, prior deals, and interests to tailor the approach.

3. The First Investment Check:

   • S describes the feeling as "exciting" due to the hard work involved, but also "a little bit scary."
   • The excitement lasts "about a day," followed by the realization of the responsibility: "Now I need to do what I said that I was going to do."
   • Raising external capital creates expectations and pressure (a "good anxiety") that helps maintain focus and commitment to work through inevitable problems. Investors expect a return.

4. Determining How Much to Raise:

   • Operational Plan & Milestones: Create a budget based on reaching specific milestones that increase the company's valuation.
   • Hofstadter's Law Application: "Everything takes longer than you think." S advises raising at least double the amount calculated to reach the next milestone because tasks invariably take longer and cost more than anticipated. "If you figure out okay well um if we get half a million dollars we can you know hit that don't just raise half a million dollars raise at least twice that."

Pivotal Health: Case Study in Action

Pivotal Health is S's current venture, aiming to simplify healthcare delivery.

• Service: Provides clinician house calls for urgent care and family practice visits. Patients use the Pivotal Health app to schedule and pay. The platform automates significant portions of the provider's charting and back-office tasks. The goal is "making health care easier for the consumer and for our providers."
• Milestones Achieved:
  • Successfully built and launched the core technology platform.
  • Launched services in the Madison, WI area.
  • Expanded to approximately three metro areas, proving the platform's scalability (can add new metros without adding administrative staff).
• Business Models:
  • Direct-to-Employer: Employers pay a per employee per month (PEPM) fee, allowing employees to access visits for a $25 co-pay. They have signed up close to 20 employers, covering several thousand employees.
  • Direct-to-Consumer: Individuals can book visits directly.
• Customer Experience & Traction:
  • Initial skepticism ("Wait you're going to have the provider come to me?") turns into high satisfaction and repeat usage. S notes, "once people use us and they use us again and again and again."
  • University Students: This demographic shows strong adoption. They are accustomed to app-based services (Uber, DoorDash) and find Pivotal Health intuitive ("this is how I want healthcare").
  • Low Customer Acquisition Cost (CAC): Viral spread on university campuses (like the University of Wisconsin) has resulted in "practically zero" CAC for this student population.

Bridging Traditional Funding and Equity Crowdfunding (Wefunder)

Pivotal Health launched an equity crowdfunding campaign on Wefunder (Reg CF).

• Motivation: Driven by requests from patients and supporters (often non-accredited investors) who wanted to invest after experiencing the service. It allows those who "really understand the value" to participate.
• Current Fundraising Climate: S acknowledges that raising capital is "significantly harder than it was just a couple of years ago," necessitating keeping all options open (angels, VCs, family offices, crowdfunding).
• Primacy of Revenue: S emphasizes, "the best capital is revenue... always keep your eye on the prize." Increasing sales makes the company more attractive to investors. Fundraising should be done in addition to focusing on revenue.

Investor Due Diligence: A Founder's Guide

S shares a cautionary tale and advice on vetting investors:

• The Warning Story: A small VC fund provided a term sheet, completed due diligence, but then tried to change key terms on the last day before closing, knowing the startup was reliant on the funds. S later learned this was the fund's standard operating procedure ("This is how they would operate... that's not good business.").
• Founder Due Diligence Strategy: When an investor performs due diligence on the company, the founder must do the same on the investor.
  • Key Tactic: Identify the investor's failed portfolio companies. Network to find the CEOs of those failed companies.
  • Ask Critical Questions: Talk to those CEOs about their experience working with the investor, especially during difficult times. "You really see how a fund is how an angel group is when when there are problems." This reveals their true character, unlike situations where a successful exit masks underlying issues.

Lessons from a Previous Exit

S previously ran a pharmacy business (not founded by him, joined as COO) which he grew significantly over 5 years.

• The Exit: Sold the retail pharmacies to a large chain and the long-term care pharmacy to a major long-term care pharmacy company (one buyer was a Fortune 100 company).
• Learnings: Gained experience in scaling healthcare operations, provider organizations, dealing with insurance companies, and navigating the M&A process from the target company's perspective. Understood how large companies evaluate deals and the importance of having an internal "champion" for the acquisition within the buying company.

Pivotal Health's Wefunder Investment Opportunity

S outlines the key points for potential Wefunder investors in Pivotal Health:

• Proven Demand: High patient satisfaction (strong Google reviews) demonstrates market need.
• Identified Low-CAC Segment: University students provide a reliable, low-cost entry point into new markets.
• Clear Expansion Plan: Target university towns with >500k population and >20-30k students, leveraging the university student base as a "beachhead" before broader market penetration.
• Scalable Platform: The technology is built, proven to scale across multiple metros. No significant "tech risk" remains. Capital is primarily for expansion.
• Lean Operations: The model requires minimal administrative overhead even during expansion, contrasting sharply with the inefficiency of traditional large healthcare systems (which S notes have "twice as many admin people as they do clinicians").
• Convenience: Features like texting with providers meet modern patient expectations.

Synthesis/Conclusion

The discussion highlights that successfully raising capital for a startup, whether through traditional routes like Angels and VCs (Reg D) or newer methods like Equity Crowdfunding (Reg CF), requires a strategic, long-term approach. Key takeaways include the critical importance of building relationships with potential investors early, the need for thorough due diligence by the founder on the investor (especially learning how they act under pressure), and the strategic value of identifying scalable customer acquisition channels (like Pivotal Health's university student focus). While fundraising is essential, revenue remains the "best capital." Pivotal Health's journey and Wefunder campaign illustrate how a company with a proven model, clear milestones, and a scalable platform can leverage different funding mechanisms, including engaging its own customer base as investors. The entrepreneur's experience underscores the demanding yet potentially rewarding nature of building multiple ventures, particularly in a complex field like healthcare.