Right now, BioEnterprise’s Executives-in-Residence are in San Francisco for the 38th Annual J.P. Morgan 38th Healthcare Conference (#JPM2020). This invite-only medtech investment gathering draws thousands from around the country and is a networking gold mine for startups looking to meet active venture capitalists. While our team spends the week absorbing the latest in healthcare investing trends and evangelizing for our fundraising portfolio companies, we asked one of them what it takes for a company to be successful in the search for backing.
As Vice President, Medical Devices at BioEnterprise and Vice President of RiverVest Ventures, a venture capital firm with offices in St. Louis, San Diego and Cleveland, Karen Spilizewski knows a thing or two about what it takes to bring a new company or product to commercialization. She breaks down the science of bioscience VC investing here.
Know Your Audience
Before you approach investors about taking a look at your company, have at least a rough idea of which firms or funds are right for your sector and stage. If you’re leading a medical device startup that’s still in the ideation stage, you’re probably wasting time chasing that exciting new fund manager who’s spent the past three years on gene therapies nearing exit. And even if you’re theoretically a good fit, a fund that was raised more than a few years ago is unlikely to be interested in a new gambit.
“The average timespan of a fund is about 10 years,” Karen says, as most investors will want to realize returns by that point. “Usually it’s the first five years those funds are committed, with follow-on funding [an additional tranche to an established investment] in the latter half.”
Takeaway: Check out Pitchbook and other online resources to identify the most active investors by sector (medical device, health IT, pharma) and investigate when they last raised a new fund.
Work Your Network
Once you have your short list, start courting process from within. Who do you know who both knows someone in your target’s orbit and would be willing to spend social capital in facilitating a connection? “It absolutely helps to have a warm intro,” says Karen, though you shouldn’t let a lack of one stop you from reaching out.
But how you react when you hear No can mean the difference between ultimate success and failure. “VCs can be really helpful,” she advises, “and you’ll hear many say they invest in the jockey, not the horse.” Stay in touch, accept feedback and consider their perspectives as you make changes to your pitch or business and you may end up with an advocate who can open other doors.
Takeaway: Fundraising is built on relationships. If your venture isn’t a fit now, you might just be too early stage or too late for the current fund cycle. Send periodic updates anytime you hit a milestone and at the start of your next fundraising event. Newsletters to potential investors are rare but can be very effective. If it’s a poor match, move on.
There are many organizations — including BioEnterprise — dedicated to helping startups achieve success. Take advantage of these resources, even if you think you’re on the right path already. In addition to offering standard services like technical assistance or feedback on a pitch, the professionals within these organizations can leverage their own extensive network connections for entrepreneurs they believe in.
BioEnterprise is uniquely focused on assisting innovative bioscience companies in the health IT, biopharmaceutical and medical device sectors. We can help startups in the following ways:
- Connections to top talent
- Affordable wet and dry lab incubation space
- Expert guidance in crafting an effective business strategy
- New market assessment and competitive analysis
- Securing new sources of capital
- Review and feedback on investor pitch materials
- Facilitating new relationships with healthcare institutions and industry partners.
And there are other regional partners that can supplement these services, like the Innovation Fund — which awards up to $100,000 of interest-free, nondilutive loans several times a year — or JumpStart, which maintains three early-stage funds to invest in high-potential tech-enabled companies.
Takeaway: Don’t miss out on valuable, often free, resources that can help push your startup past a plateau or introduce you to your next investment partner.
Convey the Right Kind of Value
As providers shift from fee-for-service reimbursement models toward value-based care, healthcare startups seeking investment must clearly articulate how their product or service delivers value. While this is true for all entrepreneurs, innovators in the healthcare industry generally have to achieve one or more of three key aims:
- Increase efficacy
- Reduce cost
- Improve patient experience and/or safety
It’s not enough to just do something better than it’s currently done, says Karen, offering the example of one startup with a sensor technology that dramatically increased the accuracy of measuring certain bodily fluids post-op. “How are you actually changing decisions about how care is made?” In this case, knowing outputs down to the microliter didn’t impact quality of care or efficacy — and actually increased costs.
Takeaway: “Nothing works 100%,” as Karen puts it. But drill down on the outcomes your solution will deliver and practice different ways of explaining it until you have a succinct and industry-relevant value proposition that can attract investors.
Avoid the Valuation Pitfall
There’s one mistake Karen sees often with healthcare startups that’s simple to explain but difficult to get right: Avoid the temptation of an overly optimistic valuation. Not only does it force you to take a hit if you can’t meet impossible targets in the next funding cycle, but also “overvaluation at the early stage crushes your early investors,” she cautions, and these are usually the people entrepreneurs most want to protect. “Professional angels have figured it out, but friends and family can get stars in their eyes, and they end up getting massively diluted [when they don’t meet those high expectations].”
According to Karen, entrepreneurs generally adopt a valuation based on future projections. Think, “If we can just get X% of the market, we’ll be worth $Y,” she explains. By contrast, VCs do the calculus backward to assess a company’s current value. The math works like this: If a typical sale in the medical device sector is $100 million to $150 million and it will take about $50 million in investment to get from current stage to exit, to achieve a return of at least X multiple on an (optimistic) $200 million exit, the startup’s valuation must be equal to or less than $Y (dependent on equity splits and other complex factors).
Takeaway: While the size of your market is important as a driver of exit value and VCs like to see large market opportunities, “saying you have a billion-dollar market opportunity is useless if you make unrealistic assumptions to get there,” Karen says. Too-conservative figures won’t attract VC interest, but you still need a thoughtful rationale for whatever you determine your market opportunity to be.