While the priorities for healthcare organizations and venture capital firms may have shifted during the Covid-19 outbreak, digital health startups are actually shattering venture capital records by raising $6.3 billion in the first half of the year.
With so many new entrants, it is more important than ever to look for a venture capital firm that has the right relationships and expertise. The process of evaluating a VC firm can be narrowed down to five words: Calm, Vision, Balance, Partnership, and Results.
Many are rushing to invest in health-tech companies, some for the first time, as organizations are rapidly rethinking their consumer and enterprise technology priorities due to shifting needs and financial constraints. Today, digital health is booming as a result but that won’t always be the case.
Startups need a venture partner that will remain calm in a bull or bear market. Now more than ever, it’s critical for investors to lean on the data at their disposal – from their own research as well as from their networks – to identify market trends and make informed decisions. “Going with your gut” is even more of a risk in times like these.
Many startups enter the digital health space by pitching direct-to-consumer healthcare solutions, much like they would pitch DTC products for other verticals. While this may work for some startups, an experienced venture partner can help founders identify – and ultimately sell to – the right enterprise customers.
Payers, providers, brokers, employers, unions, and government agencies all present startups with an opportunity to sell to an established organization with a dedicated user base. However, each pitch has nuanced differences, whether it’s ROI expectations or the threshold for clinical and financial risk. Venture partners understand these nuances and steer startups to the customers whose needs best match their vision.
A digital health startup should seek balance from a venture partner in two key forms.
The first is a balanced team. Investment bankers shouldn’t be the only ones providing advice to a digital health startup. A venture partner with scientists, data analysts, and operations specialists on its leadership team can offer a breadth of assistance, expose founders to a more diverse professional network, and vet opportunities from multiple angles. What’s more, a balanced team is less likely to be siloed – partners work together and make consensus decisions.
The second is a balanced portfolio. Healthcare is often described not as a single trillion-dollar market but many billion-dollar markets. If an investment firm is only focused on one of those markets, then it may suffer from tunnel vision. A firm that has invested across a variety of these markets – such as consumer engagement, care management, medical devices, and core IT infrastructure – has a well-rounded view of what’s happening in healthcare and where the biggest opportunities for innovation can be found.
Some venture capital firms take a hands-off approach to investing. But a true venture partner is just that – a partner in providing expertise, creating connections, and building a pipeline, all with an eye toward long-term growth.
Partnership helps founders fill the gaps. Many startups have great technology but need help executing their vision. This could mean augmenting the senior management team, implementing a governance structure, conducting a financial or regulatory audit, appointing an investor to the Board of Directors – or all of the above. It’s hard to build a successful business from the ground up, and it takes time and effort, but this level of partnership allows a startup to thrive. It also shows that a venture partner won’t bail when the going gets tough.
It’s one thing for a venture firm to help a startup raise capital early on. The real success comes from later funding rounds and exits – the results that can only come from a long-standing partnership.
Here are three examples of success from startups backed by the right venture fund.
- At-home diagnostics provider LetsGetChecked expanded its business model by working with companies to provide Covid-19 tests to front-line workers. This gives the startup access to a newer, larger customer base and complements the availability of its existing cancer screenings, diabetes A1c, sexual health, and other diagnostic tests. Last May the company announced a $71M Series C financing.
- Skin cancer testing startup DermTech announced a $65 million private placement in March 2020. Early investors advised the company through two key parts of its maturity – carving out the new market category of precision dermatology and publishing results of seven trials that pushed diagnostic test accuracy to 98 percent, well above the industry average. [DermTech is an HLM Venture Partners portfolio company]
- Innovative elder care provider Welbe Health has successfully closed multiple financing and grown its business from concept to large scale operations. Welbe’s early investors helped the company develop an innovative financing strategy that has enabled accelerated expansion.
- EMR interoperability pioneer Redox closed three successive financing rounds, each at a higher valuation, and recently announced connecting its 1,000 hospital [and is processing billions of transactions annually]. Redox’s early investors introduced several key executives and facilitated high profile business partnerships that have accelerated growth.
In a changing market and uncertain time, it’s more important than ever for digital health startups to work with a venture capital firm that’s looking beyond short-term gains to ensure long-term success. To find a firm that will deliver these results, focus on a calm demeanor, a clear vision, a balanced approach, and a commitment to partner for the long haul. And these tips aren’t just for digital health startups. There is an opportunity for big strategics to not only invest but gain access to the vast experience and network venture firms provide.
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