Craig started a company by licensing medical IP (Intellectual Property) out of a University, raised money to fund it and ultimately sold it.
The impact of raising money without thinking about the exit standpoint including the need to manage up to the Board.
Hear the process he went through to license IP from a University to build a successful company.
His Employment Agreement that allowed him to maintain ownership and a board role upon leaving a day-to-day role.
Craig H. Misrach is an 18+ year business executive with C-level executive operating, finance, and accounting experience. Craig founded Poppy Capital as way to help both peer entrepreneurs and business owners complete a sale of their own business and also lead, operate, and grow another new business to success and growth.
From 2006-2016, was the Founding Chairman & CEO of Freedom Meditech, a multi-product diabetes medical device company. As CEO, Mr. Misrach secured $15M in private capital, obtained FDA clearance (the first in the world for a non-invasive diabetes detection instrument), established global manufacturing operations, launched product in the US and Europe, and generated over $45M in enterprise value during his 8+ year tenure as CEO. The company completed a cross-border M&A sale of assets to Sinocare, LTD(China) in November 2016.
Mr. Misrach is an active Certified Public Accountant (C.P.A.) in the State of California and serves on the Board of Directors of several private companies (DME Innovations, Aculief) and the Jewish Community Foundation of San Diego (non-profit/endowment). Mr. Misrach has a B.S. in Accounting and Finance from Indiana University and a MBA in General Management from The University of Virginia Darden School of Business.
Brandon: Welcome to Exits and Acquisitions podcast number eight. We have a friend of mine on today, Craig Misrach. And he’s an MBA, CPA, serial entrepreneur. And today, he’s gonna tell us the story of his last startup and exit. And we’re really excited to have you on today, Craig.
Craig: Thank you, Brandon. Glad to be here, and looking forward to a good chat.
Drew: Craig, this is Drew. I’d love to hear a little bit about how Freedom Meditech came about.
Craig: Sure. Just like everything, an epiphany in the shower, right? No, I mean, look, I wouldn’t call it traditional. I decided, you know, pretty early in my career, four years out of undergrad when I was moving up in the accounting and finance world that I wanted to start a business and I just knew myself well enough to know I needed to retool.
And I wanted to meet someone, a partner, that had complementary skill sets, and I decided going back to get my MBA would be the best way to do that. I think the odds from my colleagues at the University of Virginia, the Darden School, where I was getting my grad school degree was one, which was the number of interviews I would have for jobs there because they all knew I was determined to get something off the ground.
So, I took the approach of looking at the universe of problems that existed in the world and which one seemed to just trigger or elicit an emotion in me that wanted me to create something, or work with someone, or identify a technology that could help solve that problem, and looking in a variety of industries, could have been…it was real estate, manufacturing, and various others. I looked at the diabetes space and just at that time, which was 2006, the people with diabetes had to prick their finger multiple times a day to monitor their blood sugar levels, and I just shook my head after doing some research and looking at the landscape setting, “I cannot believe that it is still the status quo in 2006.” And you can in many ways say that even today in 2017.
So, it was really through matriculating at UVA and doing some research and surrounding myself with a lot of people that are much brighter, and more accomplished, and experienced than I, that I looked at this global problem and said, “We need to come up with something that’s better for the patient.” And it was really with that patient-focus, and understanding the nature of the problem, and learning lessons from how others had failed to come up with something better than pricking your finger did we set forth with the premise of Freedom Meditech.
Drew: And, you know, what resonated about this space, do you…I mean, is this something that you have, you know, connection to or was there a person that was passionate about it that you met at UVA, or how did that happen?
Craig: Yeah. I mean, it’s not one of those things. None of it’s in my family. My wife, her grandmother manages a disease and I’ve, you know, observed that over the years. But it more was, like I said, the patient, and, you know, you think about a lot of businesses or read about a lot of businesses that have an obsessive approach toward doing right by the customer, in this case, the patient.
And that was really the driving force. I’m a people person, born and raised in the Midwest, Cincinnati, Ohio. And I don’t know if it was how I was raised or how I’m wired, but that commitment toward coming up with an invention that could allow people to manage their diabetes in a manner that you could go as far as saying is more humane than pricking your finger or peeling back the onion, that’s not painful, that’s not inconvenient, that’s more accurate. You can go down the laundry list, but those became the driving factors from a, you know, in some ways a competitive standpoint and an achievement standpoint to try to strive for with the business.
Brandon: That’s such a huge space. What gave you the confidence to kind of enter that? I understand how you came up with it, but it’s such a big space and so many people. And it sounds like you have more like a finance background. Like, what made you think you could compete in that arena?
Craig: Well, as I say, ignorance is bliss. So, no… You know, when we’re talking about subsequently, you know, starting a second venture can many times be more challenging. It’s like, I have two reconstructive ACLs in each of my knees and doing the rehab for the second one was harder because you know what you were gonna have to go through from a rehab standpoint the second time.
Look, I didn’t know what I was getting into. I just knew that I was a determined individual, whether it’s academics or athletics, and then turning into business and what did I wanted to achieve from a career standpoint, so, determination, perseverance. I’m also aware, and I say this genuinely, I was hesitant to enter a field without a science background or engineering background where, quite honestly, there was no solutions to date, and I’m talking about having a non-invasive diabetes diagnostic device or a non-invasive diabetes glucose monitoring device that had ever been cleared by the FDA, zero.
And doing the research, finding all the venture capital money, Silicon Valley, Boston, down here in San Diego, we had estimated it to be about a billion dollars, with a B, over time that had been invested in various companies that all had failed in their mission to get FDA clearance. And who am I think that we can do that? And that just really turned into two key tenants of my philosophy which is, you know, always be learning…always be closing, but always be learning and in this case it was learning from the failures of others and what were the technical roadblocks that prevented those technologies from not being cleared by the FDA or not succeeding medically or in clinical trials. And then second, it was very logical to me is just surround myself as much as possible with people much smarter, much brighter, more experienced, and more technical than I.
Drew: Yeah. I think about, you know, some of the companies I’ve started, one in particular. Man, if I had known how much work was gonna go into it before I started it, there’s no way I would have started it. You know, like you said, ignorance can be absolute bliss. So, I mean, you’re jumping into something that, you know, you don’t know a ton about, you’re, you know, accounting and finance. So, what’s day one? You show up, and what does the beginning look like to you?
Craig: Yeah. So, look, I mean, like with a lot of entrepreneurs, I had somewhat of a false start. When I was in my MBA program, I learned about this problem and tried to get a venture off the ground with some technology that we had identified. I quickly learned from surrounding myself with those experts and soliciting their opinion, scientific, medical and otherwise that that venture, there were some scientific limitations, or it was a massive boulder to have to move up the hill to get to have it become medically accepted.
And it was through one of my mentors and actually a professor at the Darden School, who to this day I keep in touch with, and he had, ironically, had some experience in this field, at this intersection of ophthalmics and diabetes. And he was approached by a university who was out licensing some very, very, very young IP if you will. It was barely provisional patents had been filed, but I had learned enough in the year and a half about the space, the problem, the opportunity, as well as the human eye where this glucose information was being extracted that when this second technology was pushed across the desk to me, I knew a lot of those issues from the predecessor attempt were not present.
Just an example of that, when you’re looking in the human eye to extract sugar information, you have different chambers or compartments of the eye that you could be looking at to extract this information. And you have different technologies, you know, medical devices, or platforms that can be used to extract that data. And the water in your eye, as an example, for some technology platforms can be an inhibitor in generating accurate repeatable and precise measurements versus with the platform that was put on my desk to start Freedom Meditech, the water peak had an absolute or has an absolute zero, null effect on the technology platform.
So, a very iterative process of decision making that…you know, that is just one of the many examples, you know, as to how I got comfort with the technology platform and then ended up having to negotiate a license with a university that didn’t know who I was and didn’t want to be talking to me versus, you know, for example, the Pfizer, the Baxters and other multi-billion dollar pharmaceutical companies of the world.
Drew: So, how did you finance this? I mean was it student loans and credit cards? And, you know, how did you kind of get this stuff going?
Craig: Yeah. So, look, I mean, you had asked before what was the first step. I mean, I was getting a business plan together, when I was going to…I mean, it was a different time 10 years ago, getting a business plan together was more critical. Then to demonstrate it, you could look at all facets of the business, you had it documented, potential investors could review it. So, I did the whole business plan circuit in various programs at graduate schools.
And, you know, when I left Darden and moved back out here, I had the opportunity to in-license this. And actually, here in San Diego, I leveraged the services of CONNECT and their Springboard program, it’s a wonderful program where a lot of third-party professionals and experienced entrepreneurs are there to give back to first-time entrepreneurs and help them stage their business for financing. And I think the combination of both my concentration and entrepreneurship, and venture capital, as well as some finance previously in my career. Leaving school, the business plan I had in tow, the knowledge I had in the space, and willingness to be coachable which I think is crucial for an entrepreneur, all, you know, set the table for the ingredients, plus the team I was surrounding myself with where…moved back out here in the summer of 2006 after graduation, went back to my old employer to see if they had any contracting jobs so I could put some money on the table for my wife and I to live while I was trying to get it off the ground and negotiate the license, because no one was gonna finance the company unless I had rights to the technology, and then boom, boom, December 14, 2016, graduated the CONNECT Springboard program.
We signed the license with the university, and two week later raised half a million dollars. And I can’t emphasize enough to the listeners, it was a different period of time in 2006, prior to the financial crisis and being able to raise that early stage capital.
Drew: For sure. Brandon, didn’t you fund your company with a limo business?
Brandon: Yeah, absolutely.
Drew: By any means necessary, right?
Brandon: My business plan was just to figure out how to afford food and pay my rent.
Drew: Little side hustle. So, you also did some side hustle contract work, got things going, raised money, and, you know, I know you’ve been there over 10 years. Can you kind of give us a kind of condensed, you know, how did things take off and kind of when did you know, “Man, I’m really on to something.”
Craig: Yeah. So, you know, there’s definitely a few phases of it. And with any medical device, pharma, biotech business, you know, it really is crucial early in order to be financed to have intellectual property and a cogent sensible plan that ideally can be successful relative to generating efficacious clinical data.
So, it was kind of simple early as far as what the objectives were, it definitely was not simple to raise the capital. I guess one piece of advice is try not to start your business that’s pre-revenue and predicated on external capital during a financial crisis. So, I mean, look, I mean, no one could have foreseen the collapse of Bear Stearns and Lehman Brothers, but, you know, my first year I raised probably I think it was $500,000 and I mentioned after that initial seed capital, but once September, October hit, that 2007, I think I counted once, it was like five and a half months before I raised my next dollar.
And, so that early phase was excruciatingly tough. I even had a personal loan with a commercial bank that I was personally guaranteeing. I know entrepreneurs have stories of credit cards being financed, but have a personally guaranteed loan from a bank that is failing and on the verge of being ceased by the FDIC, it’s like brass knuckles, back alley type stuff. And I’m proud to say we repaid every dollar plus interest, but it didn’t change the fact that when we were going through that, it was a lot of stress on me and my family. But I was fortunate.
Actually, one of the early investors which was one of the few…most of the capital I raised in the business was off of angel investors, 17 million. And early on, a lot of angel money, it was crucial. But we did have an organization that invested that had a tranche security in, and had committed to a second six-figure tranche after we’d accomplished a milestone. But once the financial crisis happened, they said, “You know what, we know we’re contractually obligated to do that, but we’re not gonna provide that to you unless you’ve raised,” I think it was something like $300,000 within two weeks. And this is after not raising money for five and a half months.
So, I had 1 hour and 15 minutes left on that Friday before five o’clock, and I was still $125,000 short. And I somehow mustered it up and I walked into the firm with the checks literally, in order to get that second tranche. And that I think is the microcosm of an example of when I say perseverance, persistence, friends, and family, money, that first money is many times the hardest.
And when we go through that, it really started to feel like, you know, we can accomplish anything which, with what we are trying to accomplish, was a very important mentality to have that needed to bleed through the culture. So, I’d say that was the first phase.
The second phase is, okay, now you got some money, how are you gonna generate this clinical data and have validation that can in turn turn into an FDA regulatory strategy that can get to your state of grace which is clearance and revenue generation. So, again, a lot of the decision-making process that I…maybe it’s the CPA in me, I’m very detail-oriented, I don’t have problems acknowledging if I don’t understand something and asking questions to understand further. And in doing that, I challenge my engineers whether it was electrical engineers, mechanical engineers, optical engineers, software engineers, my VP of R&D, and I always use the need to have versus nice to have buckets when managing engineers because, God love them, they have some great ideas, but when capital is so precious early on, you do not have time to make mistakes that are nice to haves. And the need to haves in this type of space is on the straight…
Drew: You there?
Brandon: I’m hearing you. I think we’ve lost him. I don’t know, he’s still on. I just can’t hear him. Maybe it’s bad Wi-Fi. Craig, are you there?
Craig: You guys there?
Brandon: Yeah, are you there?
Brandon: We lost you there.
Craig: So, I think where I was going was in the second phase, after I said the need to haves versus nice to haves with engineers was focus on the need to haves to get us efficacious clinical data because that is what is going to lead us to get the additional capital we need to further refine the product, add the nice to haves, in parallel, conduct our regulatory strategy and get to that primary goal at that middle stage of getting FDA clearance.
So, several cycles, two to three if not four of engineering clinical data collection, regulatory strategy and then segueing to manufacturing where that process of never fear asking a question and making informed decisions and making a decision…again, this is phase I didn’t have experience in and going with it, trusting your gut sometimes was really crucial.
And then, third phase, Drew…and it really comes back to people. Getting our product through FDA clearance with all the failures and all the smart money that had failed, I can never be thankful enough to our lead regulatory advisor in Orange County. She plucks individuals from the FDA and hires them, and has a way of communicating as a consultant that I have never observed before. I don’t know if you guys have hired consultants. You hired consultants for work product, for recommendations, for suggestions. The amount of time she said to me, “You know, I don’t know. But what do you think?”
When you’re talking to a regulatory advisor, some people would think that they would be intimidated by them. Like, I have no idea. But she put it on me, which is really where the decision lies. And I respect her so much for that, and she is highly sought after, I think because of her kind of open book policy, but ways that she challenges you as a chief executive and as a team to go about making decisions.
So, we got that FDA clearance. It was probably the day I’m most proud of in our business, to have accomplished something that so many people around the world have failed at doing. It’s a testament to our team. You know, I really consider myself merely just pushing buttons, making decisions, that others are doing the hard work and was fortunate to surround myself with.
But then it comes time to execution, and, you know, over that whole period of time, as I said, I raised $17 million, angel investors, not how I drew it up, but it was by necessity because the venture community had got it wrong so many times. We were not mature enough from a revenue generation standpoint to attract private equity. Crowdfunding did not exist at that time, nor do I even necessarily know if it’d be appropriate. And then it comes down to execution. In our country, the medical device space, life science space, it is just not trivial. You think you get FDA clearance, you’re done. Well, you need capital to build a sales force, whether independent reps, direct reps, distributors. Selling around the world, doing that efficiently, building a customer service department, having it streamlined to your contract manufacturer ensuring that everything is in compliance with the FDA, that you’re not saying anything inappropriately from a regulatory positioning, and generating revenue, building a marketing program, sales training.
You know, the list goes on and on. And in that second phase, you know, I stepped out nine months after our product launch as the CEO and transitioned to full-time board duties for the two years subsequent until our acquisition. And that was a new chapter in of itself is leaving your baby and being involved with it only in a board capacity versus an operating capacity, a lot of tough things that go along with that.
Brandon: Can you tell us about some of those?
Craig: So those are the phases.
Brandon: Can you dive into that a little bit?
Craig: Yes. So, look, you know, this was not one of these situations where, you know, you have a founding CEO riding off into the sunset in their golden parachute to the board. You know, I was fortunate, and this is one thing I’d recommend to any entrepreneur, you have corporate counsel, but you need, you know, a personal counsel as well, depending upon how your company is structured, in particular if it’s a C corp and you have board members and investors.
I was fortunate to get really good advice early on from an employment agreement standpoint. And as the company matured, we established a comp committee, you know, because I didn’t want any perceived notions by anyone that what I was getting paid was anything other than what had been approved by other people at the board level. And part and parcel to that is the what happens if things go wrong, or if you wanna move on. And, you know, that, in fact, did happen. There were some differences of opinion between myself and the board as to how we should market, sell, and commercialize the product. And you could have taken this in a variety of directions, creating a world war, if you will.
I had too much care of duty to the existing investors in the company. It had been eight and a half years. Our daughter, our first child had been born, and things change in life when that happens. And I said, “You know, I’ll transition to a board…you know, the full time board role,” thinking in the back of my mind that if things went wrong, there would be an opportunity for me to step back in because things had been in a complete upward trajectory for the eight and a half years that I led the business.
So, fortunately, our largest investor is one of the comp committee members, he saw to it that everything that was appropriately designated to me from a separation agreement standpoint was given to me, paid out to me over time. And I don’t even wanna say it softened the blow because the emotional part of it was like something you could never really imagine. And it really had more to do with the concern I had that the company was not gonna continue to succeed. If you look at the valuation numbers over my time, it was 62% compound annual growth rate when you look at the increase in valuation of the company from nothing when it started, and looking at the money that was raised over time, the valuation ascribed the business, and my biggest fears played true over time once I left the company. The only problem was when there should have been a re-entry of myself into the company which I was open to, we weren’t seeing eye to eye on how that was going to happen.
So, very tough, it was also tough for the employees. I had a mild exodus of…not mild, it was more than mild, a moderate exodus of employees, most all of which I had hired in the business, leaving the company when I transitioned out because we were very transparent as a start-up. When I left, we had probably, including sales force, you know, 80 employees and direct consultants that…well, I wasn’t directly tied to all of them, in some ways I had a touch point with, and a lot of the employees wanted to leave because they kind of knew how things had transpired in some ways at the board level, and they were not a believer in the new CEO of the company, you know, when I had transitioned out. So, that was…these were all very tough things to have to digest at that time.
Drew: By the way, you’re saying this all, you know, pretty calmly. I think I would be pissed if I started a company and, you know, that happened.
Craig: That is a light way of…I mean, look, you know, I’m in the entrepreneur’s organization, a global organization and having a peer to peer network to be able to talk about what you’re going through has been very helpful. It makes you feel like you’re not on an island and you’re not the only person that’s gone through this. It still sucks going through it, not to mention the monetary impact it can have. As I mentioned, I had some liquidity, but kept the vast majority of my equity in the business mostly because I’d had to. And to see that deteriorate in value, obviously along with other investors that you brought in and what you’ve built, and then to have other people, in many ways, be responsible…and look, I say this with, look, I was one of eight board members. I’m not absolving myself of responsibility. But the reality, anyone who knows the situation knows that when you’re a founding CEO and chairman for years and then you transition to full board role, you know, as one of eight in an externally financed company, your influence is literally one of eight.
And you see this even with public companies. You’re seeing a lot of it today with takeovers, with activist investors, and power, ego, greed, control are just ugly, ugly, ugly things that I never saw to the extent that it would affect my business. I experienced it, but it was in ways that, you know, if it’s a consultant I’d…you know, the engagement would end, or if it’s someone I was potentially doing businesses, I wouldn’t do business with them. We turned down nine figures of financing ones because of an egomaniacal type of figure that was leading the transaction. But when you’re in bed with those individuals and you’re trying to run the business and your influence is muted and you just have to stand by and watch it like you’re in a straitjacket, and the plane is crashing in the bottom of the mountain and you’re the pilot, but, you know, you’re not given the keys to the pilot’s seat. It’s excruciating. Without my wife, without my peer network, and honestly moving on to my next thing, it was very challenging, very tough, Drew.
Brandon: Not just the pilot, you own part of the plane.
Drew: Not just the pilot, you owned part of the plane You birthed the plane. I mean, you basically, you know, started this, you financed it, you, you know, put everything on the line and, you know, I mean, I know for me at that point I’d have a strong emotional connection. And really, founder CEOs, when they’re replaced, typically it does not go well because there’s just an intangible passion, vision,, ability to make things happen that didn’t exist before that.
Craig: Yeah. And what’s even more though is this wasn’t a situation where as a founding CEO where I wasn’t willing to take on another role in the business. I actually volunteered to do that. But again, it became an ego, control, a greed thing. “We can do it better, we can do it our way.” That’s what was frustrating because it didn’t make business sense. It just did not make business sense because you will have, whether it’s technical founders, maybe they can’t, you know, in some situations maybe they don’t have the skillsets around the business. I mean, I was a business guy, I went to business school. So, after we got FDA clearance, and we’re launching product, it’s like finally now is the time where I can actually deploy a lot of the things that…excuse me, are in my arsenal.
So, to not be a part of that fabric from an operating standpoint was very disheartening, and as I said was also disheartening employees in the cultural, the cultural standpoint. To see that evaporate in many ways, the business that was virtual for so long became brick and mortar with people coming in the office everyday and enjoying themselves to be there, and believe in what we were doing.. So, yes, so that was all challenging and then to, you know, the value of the company, and it’s public information, it’s been disclosed, and the business grew to $35 million valuation. Yes, it was on paper, but several investors validated that, and if you look at where we were going and what we were trying to accomplish in a completely unadultered space from a competitive standpoint, no other non-invasive diabetes diagnostic device is cleared by the FDA. And, you know, for lack of a better analogy, you know, you’re getting in the way of yourself is what I felt, you know, as far as, you know, our company. It didn’t make it easier to digest, so. Yeah.
Drew: We’ll send you a good article in the “Harvard Business Review,” which basically is a study on founder-led companies and why they outperform the market and businesses where the founder leaves, and they kind of talk about this idea of this business insurgency, this mentality of just being able to go in and like you, almost like the ignorance is bliss. You were trying to overturn, you know, a whole way of thinking in a market. But, that’s, you know, irreplaceable. I know Brandon wants to talk probably a little bit about like, you know, with your accident, and, you know, other accidents, you know, how did that all kind of transpire?
Brandon: Yeah. Absolutely. You know, when did they decide…you know, I mean the board decided to exit, like can you tell me a little about that process and what it looked like? You there? Hello? Drew?
Brandon: Craig? Anybody?
Drew: Well, that’s a great question. I’m glad you ask.
Brandon: You there?
Craig: I’m back. I lost you guys. Yeah.
Brandon: Okay. All right.
Drew: Brandon cried for a little bit, just passion, so.
Drew: You missed that.
Brandon: So, at what point did the board decide to sell, and how did that process go? Can you tell us a little bit about that?
Craig: Yes. So, let’s talk about the end. So, you know, after I transitioned out, as I mentioned, there was a new CEO, that experiment failed quickly. And the board brought on actually an admirable gentleman, huge experience, that I thought was gonna, you know, get us back on track, and the experience in M&A, personable, employees really enjoy him. And the job though, you know, there were two primary ways to go, get the sales execution figured out, which there was some experience there and his ability to do so, and the cards had been stacked a little bit with some personnel that he was expected to execute with, and if that didn’t work or as we were monitoring cash flow, raise additional capital, which in the CEO’s previous experience, there really wasn’t a lot of capital raising experience. I had a very strong network of individuals in the community and venture resources and otherwise.
Long story short, it really was within six months that it became apparent that the CEO himself was having challenges raising capital, as well as not improving the sales yield as much as we had needed to. And at that point in an entirely, for all intents and purposes, majority angel finance company, their investor fatigue began to settle in where we weren’t gonna be able to get the re-ops in investment internally or otherwise, so it was kind of by necessity, what are you going to do at that point? I mean, you do have a fiduciary duty as a board to maximize value for the shareholders, and it became apparent, this being a year and a half after I left, that the strategies being deployed were not working. They were not able to raise additional capital.
And what happens is in this FDA stories is…and I had a VC say it to me once, and it’s a lot different than it used to be 10 years ago. 10 years ago you’d be striving for FDA clearance and then you sell the business on the valuation bump from accomplishing in the greenfield that lay ahead of you. But because the healthcare system in this country is so challenging with insurance reimbursements, selling to doctors, all of the money that goes into building a sales force, ongoing regulatory costs, the VC said, “If you haven’t sold the business prior to FDA clearance, you failed,” and that’s such a tough, tough, tough, harsh viewpoint, but I think there’s some merit to it.
And so, investor fatigue settles in. What are you gonna do? You gotta maximize value for shareholders. So, we brought on a boutique investment bank, campaign the company for sale, and the problem is is when you’re 18 months out from when you got clearance, as each month goes by that you have not improved your sales, it’s kind of another nail in the coffin because it’s a tougher and tougher story to sell on expectations or what could be because there will be the, “Well, what have you been doing, or what’s been”…you run out of, for lack of better word, excuses, or rationale as to why. You know, and again from my belief, it was just we weren’t executing. We didn’t execute well, which we’re not the first company. But there was nothing with the products, there was nothing with the customers, the customers loved the product. Pricing, it was a low-cash pay for patients out-of-pocket. You’re talking $10, $15, this is not a several thousand dollar genomic test or several hundred dollar 23andMe test.
So, what you’re gonna do? You hire a bank, we ran a process, we found out pretty soon within…typically you can find out between three and six months if it’s gonna sell for a single, or a double, or a triple, and if not, you go to plan B, which is sell for what you can and try to avoid it becoming a fire sale situation or close the door situation. And the process took about a year, and the acquirer of the business, and this was an asset sale of the business, ended up being a party that when we had, I don’t know, three to four offers on the table four to five months prior to the acquisition closing, they weren’t even one of the offers. So, it was, you know, definitely…it’s due diligence in any capacity, whether you’re raising capital or trying to sell the business. It’s imperative to be patient, to build trust, to get them what they need, and not be defensive if there’s holes that are being shot or concerns. Be open about it, acknowledge it, understand, it may be tried to be used against use as leverage in negotiation, but just treat it as that and it’s just part of the negotiation.
Brandon: If they were not on the table, how did they get ahead of the other bidders?
Craig: More money.
Brandon: Yeah. How much runway did you have at this time? Were you guys almost out of cash, did it come down to like a last minute thing?
Craig: Yeah. So, I mean, look, I’m gonna be on a panel in a couple of months to talk about how we raised capital. I think it was about 85 angel investors, oh, you know, $70 million. I don’t know, you could do the math on it, but we were pretty good at never raising less than $50,000 a person. I wasn’t out looking for $1000 here and there. And as I started doing that over time, I was successful in bringing on, you know, what is termed by many as some super angels. So, you know, quarter million dollar checks, making multiple investments over time, had a handful of investors that were seven-figure investors, and…so, when it got to that state of grace, you know, there was a little of, you know, not gonna let it go down to nothing as far as fumes or cash in the bank. Bridge money was gonna be provided. But we raised the bridge around when we kicked off the banking process, and we campaigned it only to internal investors, with the complete transparency as to…and I think there were some legal reasons why we couldn’t say it was solely to sell the business, but we made it clear that that versus ever before in the company was one of the objectives in why we were gonna raise a bridge around to give us runway to sell the business.
Brandon: Sure. Can you share any of the terms when you guys finally closed, or can you give us any sort of ranges there?
Craig: Yeah, so, I mean, it wasn’t unusual as far as how these deals in the medical device space are structured. So, we had an upfront payment, seven-figure upfront payment. We have a second milestone payment that has been delayed a little bit. I just actually texted our corporate development contact this morning. It’s pushing to early fall, but that will be the largest payment. So, the combination of those two payments, you know, are gonna make money for the last round of investors. And then we have a royalty structure over time. So, unfortunately, you know, Brandon and Drew, and for your listeners, I can’t disclose the total price, but if things go well over time with the sale of the product, you know, you’re looking at, I don’t know, a low eight-figure, you know, potential remuneration.
Drew: And what’s kind of your feeling about the whole deal? I mean, you know, like you said, I mean, there’s deals where people get, you know, home runs and you kind of talked about that earlier, you know. How are you feeling with the deal closed?
Craig: It’s this weird thing. I mentioned it earlier. Part of the mental anguish and despair when I left the CEO role was, you know, I’m not clairvoyant, no one is, but I kind of felt like I knew what was gonna happen. And I prepared myself so much for that eventuality. And honestly, when the second, you know, the second CEO was brought in after me and he’s a good person, and he was doing everything he could, you know…you are a board member, and I take the fiduciary duties seriously. So, you turn into…look, you’re there to give advice, and perspective, and take care of the investors, and I kind of became desensitized to it, to a certain extent so that when this all did go down with the banker, yeah, the expectation’s raised again when you kicked off the process with the bank, and you could see all the companies that are listed that you’re approaching and talking to, and you’re getting updates on diligence and you’re getting feedback from the CEO that we may get a term sheet here and there, but it’s not done until the money is wired, let alone an offer until an offer is extended.
So, once you went through that first batch, and I think any entrepreneur can probably have this approach, is once you go through that three to six-month period, you’re gonna know what the kind of eventuality is. And it looked bad at one point, even when we had those three to four offers, they were low ball, low offers. And I was shaking my head. I felt bad at that point. Like, I was. “I can’t believe this is gonna happen,” I thought we were gonna have to shut the doors, but there was a part of me that was like, everyone knows from the investor’s standpoint, selfishly speaking, that this is not my doing, you know. They knew what the company was worth two years ago, and they knew how things had changed. And many of them knew that I had offered to, you know, come back in the business.
So, in some ways it was like sadistically, you know, the egg is on the people’s face who it should be on. But you never want people to lose money, you always want people to make money, and…
Drew: You said that people knew the value a couple of years early. Had you had an offer prior that was much higher?
Craig: Well, no. I’m just speaking to being a privately financed company, your ascribed evaluation of the business. So, we had three different types of investors that came in at different times that all, you know, this is on our product launch. You know, and I’m happy. You know, for your listeners, you know, we did a convertible debt raise to start the business, about a half a million bucks. We continued to subscribing to that until we closed the series A of $2.3 million. We then did another bridge note of convertible debt with a discount, and bridged thus until we raised $7 million series B. That is what got us to FDA clearance and through FDA clearance. And then we raised a $5 million series C which included strategic investor leading that $5 million. So, at each of those phases, we had up around valuations from $4 million, to $12 million, to $20 million, to $35 million, something of that nature.
Drew: What was your final percentage and kind of the financial impact to you when the deal closed?
Craig: Yeah. So, when the deal closed, I was the largest shareholder. So, now, I was a common stock shareholder. So, with how you’re structuring these deals, we had a participating preferred structure, so money that came in comes out first. So, I, over time, had put money into the business. So, I believe all of that I’ll get back out plus some since I participated in the final bridge round. But other than the liquidity that I was provided upon my separation from the CEO role, the vast majority of that common stock, you know, is sitting in…
Brandon: I think we lost him.
Drew: Lost him.
Brandon: He’s still on. He must just have a bad connection. Where are you at, Craig? Craig, are you there? He’s still on. He’s just not…I wondered if he muted or…let’s see.
Drew: No, he didn’t mute.
Brandon: Are you there, Craig?
Craig: Yeah, I’m here. I don’t know if that’s my end or whatever. I’m sorry, it keeps happening.
Drew: So, the last thing you said was the vast majority of the common stock, what were you saying about what you’re…?
Craig: Majority of…well, the majority of my equity, you know, I put in money in the business over time, and I will have gotten most of that out plus some return on the bridge that I put in. But, you know, when you’re building the business, it’s the common stock, and as a majority shareholder really by way of the common stock, we raised money and each of those amounts with a participating preferred preference so that when proceeds from the sale were generated, you know, money is going back to the last round of investors with the premium that’s ascribed to that, and then in a cascading fashion, to the previous rounds of investors.
So, not a happy ending as it relates to my common stock holdings, but, you know, that’s why I did negotiate and I encourage any entrepreneur in their employment contract to try to get liquidity even if it’s from an insurance policy standpoint, if there is a separation, and then kind of segueing to what I do today as an investment advisor, there are a lot more opportunities through the JOBS Act and otherwise and through firms that have been created the last three to four years, which really weren’t in existence as much when I left the CEO role of my business, that can provide liquidity. They’re really into business of providing cash to employees of businesses that are private companies from the standpoint of those investors who think they can make money holding that private company paper and at the same time, those employees of the businesses can get a little bit of liquidity in situations where they’re not public or there’s not, you know, dividends or there’s not buybacks or, you know, sale of business imminent.
Brandon: Yeah. It’s really interesting. Good advice. Can you tell us a little bit more about what you’re doing now, and what you’re kind of working on next? It sounds like you’re a financial advisor, right?
Craig: Yes. So, it took me about six months to get bored after I left the CEO role in my company, even though I was still on the board, and I wanted to do something next. And I was approached by a few different investor groups to, you know, be the CEO of other medical device start-up companies. And just frankly, with everything I went through, I didn’t have the appetite to just go raise capital again in that capacity.
I started day trading on my own account. Granted, it was at a period of time, two years ago, where chimpanzees and all sorts of other mammals could make money. I wasn’t doing anything special.
Brandon: Just don’t take it out.
Craig: Yeah. So, it really opened my mind up to the capital markets and global macroeconomics. And an opportunity was presented by my firm, Bernstein, to join them in a role that both assist our private equity funds in raising institutional capital, as well as finding deals that we can write checks for companies toward. These are, you know, $30 million, $50 million checks.
Part and parcel to that, yes I am Series 7 licensed, and I am an investment adviser, not just managing wealth and devising investment strategies for individuals and foundations and endowments, but I’ve chosen to spend most of my time working with entrepreneurs, closely-held business owners, executives at public companies, all of those situations with which there is a high concentration of single stock that they’re holding, and they want to try to create some sort of tax efficient liquidity or planning related thereto which may include trusting the states, tax planning and diversification plans because again, I mean, I just get the joy out of helping other people out. And there’s definitely things that if you’re not prepared can cost you a lot of money in the long run. So, yes, that’s what I’m doing today.
Bernstein is a firm that’s been around 50 years. All we do is manage money. We manage $502 billion around the world of client’s money.
Brandon: Wow. I think that’s really interesting. I know a lot of financial advisors, and I’ve spoken to a lot of them. And they just don’t get it kind of where I’m coming from as an entrepreneur. So, I think that’s really powerful and really unique that you kind of have the background, you have the experience in, and you’re not just saying, “Well, if you put a little bit of this in your IRA, you’re gonna really paint the whole picture.” I mean, you really know what you’re talking about, and you’ve kind of walked the walk. So, I really like that.
Craig: Well, thank you. Yes, I’m not building my practice right now at a nursing home, just let me say that.
Brandon: Absolutely. Well, thanks for coming on the show. How can people get ahold of you? Maybe they, you know, have questions on something you went through or maybe they’re interested in the financial advice. How can they get ahold of you?
Craig: Easiest way is e-mail, firstname.lastname@example.org, c-r-a-i-g-dot-m-i-s, an in sam,-r-a-c-h @gmail.com, also on LinkedIn.
Brandon: Perfect, Craig. Thank you so much for coming on today. It was great having you on the show.
Drew: Thanks, Craig.
Craig: Brandon, Drew, thank you very much for your time.