Startups, BioPharma

A growing problem for healthcare startups seeking investment: (Almost) no one wants to lead

OK, it’s a cheap shot to call them sheep. But there are too many followers among healthcare investors.

It’s early on at today’s Redefining Early Stage Investments (RESI) Conference in Houston. But here’s one phrase I’ve already heard too often: We don’t lead.

Anyone in any sector that’s tried to raise capital has heard that phrase — sometimes for good reasons. But it’s going to be heard too often as healthcare investing continues to evolve.

Healthcare needs leaders.

More and more corporate venture capitalists won’t lead, for example. Yet, in many cases, they ask an awful lot from a startup.

A Shire representative told attendees in Houston that Shire invests largely to acquire, will look to acquire the technology but not the whole company, and won’t lead. That’s not ideal for an early-stage company, which would prefer to keep its M&A options open.

Corporate investors also don’t lead because of various legal, governance and regulatory responsibilities that come with leading (athenahealth, you may recall, won’t take more than 49 percent of a company for that reason).

Other corporates at RESI’s Houston conference told me they avoid leading because it’s often hard for them to properly price a company (one of the reasons startups like corporate VCs!). They also admit there can be conflicts: Can a lead investor angle a portfolio company toward their acquisition while also being responsible in governance?

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However, add their policy to the others that won’t lead a round and it gets ugly. More and more angel groups say it, though sometimes with caveats. For example, Tech Coast Angels said at RESI it only leads on investments within that state (too much work and travel for due diligence outside the state). But many simply say it outright these days. Venture philanthropy is also slouching toward this approach.

These are the tradeoffs when it comes to healthcare startups seeking investment, of course. Don’t like the terms? Then don’t take the money. Also, there are some people who probably shouldn’t lead, like most family offices.

But that simplistic thinking keeps us away from the real question: How can investors position themselves to bring the best products to market? Put the phrase “We don’t lead” in that context.

So who leads? Traditional venture capital.

For all the talk about alternatives to traditional healthcare investing, it looks like venture will retain the most important role. VCs may have less money than in the past, but they sure know how to lead and, as a result, they will continue to set the price for healthcare’s next great breakthroughs.