In today’s complex and ever-changing healthcare environment we, as private equity investors, get thousands of requests from young healthcare technology companies looking to secure capital. While there are many intriguing new products and services, we must conduct our due diligence to ensure that the company we partner with is right for us. I’m often asked, “What are the basic characteristics that you look for in a healthcare technology company when deciding whether or not to invest?” The answer is not always simple, as there are many varying factors that come to mind. However, here are five pieces of advice that nearly always hold true for companies seeking to secure a capital partner.
Know your market
This might seem like an obvious one for most entrepreneurs, but it can’t be stressed enough. Know the market that you’re entering – inside and out. Understand who will be paying for your product or service. There are various players that make up the healthcare ecosystem. For example, are you targeting patients, care providers, or health insurers? Your customer base plays a huge role in what you can charge and how you will market it to reach your audience. Ensuring that you have a targeted, succinct value proposition is critical. Additionally, identify your competitors and be able to demonstrate why your product or service is more effective than theirs, and what are the key differentiators and competitive barriers of your offering. If you can’t do that, then most – if not all – private equity firms are likely to pass.
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Have a disruptive business model
Healthcare technology companies that are the most impactful have innovative business models that are completely disrupting their target market. Specifically, companies with business models that generate revenue by providing cost-effective, simple solutions to complex problems are often the most attractive. It is also important in healthcare that these solutions fit into the existing workflow of the user, such as a clinician. Investors are always looking to increase gross profit margins while decreasing unit prices. This approach often requires the innovative use of technology and human capital, and these are the business models that will sustain success in an ever-evolving healthcare environment.
Be able to clearly explain your business model
When meeting with a group of investors, it’s crucial that you are able to clearly communicate your business model – the “elevator pitch.” Investors hear hundreds of business pitches from healthcare technology companies and don’t have time for overly complicated schemes that take a lot of guess work. Quite simply, we want to understand how your business model works, what and how large is the addressable market, and why it will be successful – in the most succinct way possible. Clearly articulate your vision for the future and how you plan to get there. In the end, investors must be convinced that you’ve checked all the boxes to become successful in a crowded market.
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Establish a strong management team
A strong management team is vital to any successful company and therefore, thoroughly assessing the capabilities of these teams is a top priority for most private equity investors prior to making an investment into an organization. An investor must be absolutely certain that the management team in search of investment capital is fully capable and prepared to take on such an investment, as well as the responsibility that comes with it. The most effective leaders will possess the necessary tangible characteristics – such as educational background and experience – and intangible characteristics – such as leadership skills, loyalty and work ethic – that will help determine whether or not they will be effective. Additionally, a management team or Board with real life experience in your target market is always preferred. For example, a computer programmer might be an expert at building a machine learning algorithm that can reduce hospital readmissions, but won’t have the firsthand experience of a former Chief Medical Officer. Healthcare domain expertise is key to succeeding in the market, and investors also look very favorably on teams that have worked together at organizations previously with successful outcomes.
Demonstrate success
Finally, nothing is more reassuring to an investor than showing ROI. Companies that already have demonstrable customers, are post-revenue, and have positive EBITDA are considerably more attractive. These accomplishments show investors that the company has a proven business model that has reached a certain level of success and sustainability, which in turn greatly minimizes the risk an investor is about to take on.
Photo: Free images/ Paula Navarro
Brian Murphy is General Partner at NewSpring Capital and NewSpring Healthcare Capital, which partners with management teams to accelerate the growth of differentiated healthcare companies across the healthcare services, specialty pharmaceutical and medical technology sectors, delivering capital for growth, recapitalizations and mergers & acquisitions.
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