Q&A: How New Enterprise Associates will approach healthcare investing with that new, $3.1 billion fund

Looks like NEA will invest about $1 billion in healthcare startups over the next few years. Areas like immuno-oncology, electrophysiology and

Last week, New Enterprise Associates announced its fifteenth – and largest – fund, coming in at $3.1 billion.

I spoke with NEA partner Justin Klein about the kinds of healthcare investments that NEA is chasing in this latest fund – and his thoughts on the overall performance of the healthcare markets.

The following interview has been edited for clarity.

How much will you be investing in healthcare? How will you break down your investments by subsector, and what is your typical investment size?

We traditionally invest 30 to 40 percent of our funds in healthcare. Within that, 50 to 60 percent will go to biotech and therapeutics, another 25 to 35 percent will go into medical devices and healthcare tech, and the rest will go to healthcare services and IT.

We’re not really changing our strategy in terms of stage or sector or investment size – we’ve been active from seed to later growth equity investments. Historically, our average investment has been $25 million. If a company’s scaling rapidly, we might contribute $50 million to $100 million.

What healthcare subsectors are the most compelling for NEA? 

As far as medical devices go, we’ve been very active and interested in markets like peripheral vascular disease, electrophysiology, and treatment of atrial fibrillation.

In biotech, there are a number of emerging approaches to drug development and therapy delivery that we believe offer significant opportunity. We’ve been very active in immuno-oncology, gene therapy and CRISPR.

And in healthcare services, we want to leverage technology to make it more efficient – delivery new systems and services, and optimize the relationship between payers and providers.

What do you think is a better venture exit? M&A or IPO? 

We look at it case by case, and obviously it can be somewhat market dependent. In this window where going public has been an option across multiple sectors, the IPO itself is a financing event that not only provides a liquidity opportunity to existing shareholders – but help fund the company’s development plan.

It’s frequently our practice of not at all selling our shares in a company post-IPO.  In certain categories, an IPO is really a significant opportunity to build a company that’s well-financed. In other cases, it can make a lot of sense to sell, and pursue an acquisition.

We’ve had 25 liquidity events from the last fund – 16 IPOs and nine M&As.

Speaking of biotech IPOs, you think we’re in a boom or a bubble? 

We continue to believe that there will be investors in the public markets, as well as acquirers. It’s obviously cyclical, so I don’t think at all we expect this ebullience of the public markets to be sustained in perpetuity like this. We expect a downturn, but whether it’s six months from now or three years – no idea.

Either way, our fund and our size allows us to invest for the longterm and be patient, waiting for those ultimate, significant events.

What sort of attrition rate do you see among NEA investments? How many have healthy exits, versus not? 

I don’t have that exact figure for you. What I can say – I think one of the things we try to do is ensure our companies are well-financed to navigate periods where they may need additional capital to achieve some milestones. Otherwise, if a startup runs short of capital, it may find itself in a business situation where it has to go public or get acquired when it isn’t ready.

I can’t say we’ve got a better batting average in specific sectors or clinical areas than other firms, but we’ve really tried to put the company first and make sure the capital is there.

Any advice for healthcare startups that want to approach NEA for funding? 

Entrepreneurs should think longterm about their financing needs, and shouldn’t hesitate to approach NEA, even if they’re still early stage. It doesn’t hurt to think today about subsequent rounds of financing – because we might be the right partner for a second or third round of financing. We might also want to participate in seeding – we invest in startups from A-Z.

So what are you looking for in a startup? 

We like to start with an experienced team that knows their market well, has a clear-eyed view of the path to create value. They must understand the regulatory landscape, and ensure that the process of generating clinical  evidence is meaningful for groups like FDA – and also payers. Ideally, this new therapy or service fits attractively into the landscape of other therapies in how healthcare delivers today. We’re looking both at things that are disruptive and those that can be adopted and integrated well commercially. Basically, even if startups are at the earliest conceptual stages, they have to try to think all the way through.

This isn’t your first fund. Historically, how has healthcare compared to, say, tech?

Broadly, healthcare has performed really well. It’s been a balanced performance across biopharma and medical devices. Certainly IPO and M&A has been robust, so it’s been a very positive environment – so we’re finding increasing opportunities to syndicate with a broader variety of partners.

Tech has performed really well as well – it’s been an interesting cycle. NEA has long believed in having a diversified fund, investing in multiple tech, healthcare and some international companies. We’ve see a number of different cycles, offsetting periods periods of highs and lows with the diversification – healthcare and tech even each other out. Healthcare has performed unusually well over the past three years.