MedCity Influencers, Startups

Raising your next round? Six qualities that define top healthcare VCs

What are the fundamental characteristics you should look for to find health tech VCs and angel investors that will have the greatest impact on your company beyond their money?

Founders can become myopic during the long, stressful process of fundraising. Many focus solely on the amount of money they’re going to raise, their valuation, and the brand name of the investors they are pitching.

When runway is short, and you have a team relying on you, money in the bank should be the primary focus. In fact, the CEO’s highest priority should always be keeping the company well-capitalized. When you are fortunate enough to get multiple term sheets, as a founder you should think strategically about who should fund the company. In health tech, like any industry, there’s smart money and there’s dumb money.

There are firms with tens or even hundreds of years of collective experience in the field combined with deep domain expertise, and then there are investors who see healthcare as a massive $3 trillion market but fail to grasp the complexities of operating within it.

The question is, what are the fundamental characteristics you should look for to find health tech VCs and angel investors that will have the greatest impact on your company beyond their money?

Let’s examine a story that illustrates the importance of having the right investors.

A case study: When things go wrong

A medical implant startup founded by a friend faced what should have been a manageable problem but ultimately led to serious disruption, including a swap out of the senior management team.

Early in the launch phase, a manufacturing defect with the implant was identified, resulting in an FDA recall. For the uninitiated, FDA recalls are unquestionably a disconcerting and disruptive experience, but such issues are not entirely uncommon when scaling manufacturing of a new device. When responding to this type of recall, firms have to send the right message to the market, communicate with the FDA, fix the problem, and then orchestrate market re-entry.

In the case above, the startup’s board of directors, which had four venture investor members who lacked experience working with healthcare companies, responded with near panic. After all, the words “FDA recall” would evoke fear in the hearts of almost any investor. In a time when the business needed the calm and resolute guidance of people who had weathered this type of storm, its investors did precisely the opposite – they created chaos and fear.  

After the recall, the company’s backers replaced most of the senior management team. The startup was eventually acquired, but the outcome wasn’t a huge success for anyone involved. While we can debate the need to replace the management team, the adage, “you go to war with the army you have” certainly applies in this situation.

As this example illustrates, novice health tech investors can potentially disrupt your startup while investors with in-depth domain knowledge will have the mindset, resources, patience, and experience to help guide you through challenges specific to the bureaucratic and complex healthcare sector.

With this in mind, the question then becomes what makes an exceptional health tech investor?

Based on my experience co-founding five health tech startups and working with hundreds of other companies in the industry, here are a few of the characteristics and value-adds of the best investors.

An understanding of the enterprise healthcare sales cycle.

Enterprise sales cycles in health and med tech can be protracted relative to other industries. How long? Anywhere from 12 to 18 months, and sometimes longer. When you have a notable investor who is accustomed to the shorter SaaS sales timelines, they may question your sales and marketing capabilities.

In fact, their exact reaction might be, “What do you mean it’s going to take 12 – 18+ months to land each major customer? In database software, it only takes three to six.” If you haven’t worked with health tech companies in the past, this reaction is understandable. On the other hand, it isn’t helpful.

If you work with investors who know healthcare, they’ll understand the slow sales cycle and have reasonable expectations about the time it will take to close deals.

Connections to major health systems and healthcare organizations

While the health tech sales cycle is long, connected investors may allow you to shorten it by introducing you to the people in their network who can accelerate access to the people with the purchasing power. This fact is one of the reasons why it’s somewhat challenging to be a skilled healthcare investor as a generalist; it takes time and resources to build and manage relationships with the right people in the industry who can benefit startups. Most investors simply do not have that time when stretching resources across multiple sectors.

Relationships with other investors in the industry

Distinguished health tech investors won’t just invest in your company. At the right times, after you’ve reached your growth benchmarks, they’ll introduce you to other investors and angels who can participate in future rounds of funding.

To assess this factor, consider asking investors who you are pitching about other firms with whom they co-invest or have strong relationships. Then, look at their portfolio companies to assess for yourself with whom they co-invest. Here are a few platforms you can use to find this data:

Experience progressing through regulatory approval and dealing with regulatory setbacks

If you are working on a technology that requires a regulatory clearance, you will have to navigate government regulations and the approval process. Like most things in government, this isn’t fast or straightforward.

Informed, veteran digital health investors will have either navigated this process with their own companies or guided portfolio companies through it. They will know about common pitfalls and introduce you to the right contacts to guide you through the process.  

Inexperienced investors may have little knowledge about the regulatory environment. Although they can learn these things on the fly, this can cause setbacks for your startup, drag out the process for getting to market, and lead to the FDA rejecting an application for approval or slowing down your CE or other global regulatory approvals.

At least five years of operating or investing experience with healthcare startups

This point should go without saying, but when your investors have worked as health tech professionals for years, they will almost always provide you with a better network and more insightful advice.

Someone who has built a billion-dollar e-commerce business may be an incredible investor and operator in several sectors. But, if they don’t put in the time to learn the complexities of health tech, they will often stumble through investing in it. Plus, if you are spending time educating your investors about the ins and outs of healthcare, you are not devoting that time to running your business.

They worked as a payer, provider, or administrator in healthcare

Some VCs and many angel investors may have worked for health systems, health insurance companies, pharmaceutical firms, and other industry titans.

If you partner with investors who are healthcare professionals, they will have the knowledge, connections, and skills to give you valuable product feedback and introduce you to potential customers. Also, they will probably share the passion for improving healthcare that motivated you to start your company in the first place.

Brianna Wronko, founder and CEO of Group K Diagnostics, has worked with several physicians who’ve made angel investments in her company. (Disclosure: Group K was part of a recent Dreamit cohort).

When describing the benefits of partnering with them, Brianna said, “We found special help working with physicians who are also angel investors because they understood the unique need and urgent type of care fulfilled by our product. They have acted as champions of our product while comprehending and appreciating the science behind it.”

This list should provide a framework for digital health and medical device companies to view their fundraising strategy. Hopefully, these points emphasize the value that strategic health tech investors can offer. Want to add to the list of most important criteria? Please comment below and join the discussion.

Photo: Getty Images

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