A number of venture capital firms said they’re still open for business, in spite of the Covid-19 pandemic. But deal-making has slowed substantially, as companies weigh what will be needed to survive the coming months. How you invest in the midst of a health crisis that has left a third of the U.S. population stuck at home, and with many businesses struggling?
MedCity News interviewed venture capital firms focused on digital health, biotechnology and medtech by phone and by email. Six investors shared their strategies for weathering this storm, and what advice they’re giving portfolio companies:
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Dennis Depenbusch, director of New Ventures Initiative for Blue Cross and Blue Shield of Kansas
The New Ventures Initiative is the corporate venture arm of Blue Cross and Blue Shield of Kansas, with investments in healthcare technology and population health.
Notable investments: Healthify, Payfone
MedCity: Are you still investing?
As a corporate venture capital arm of Blue Cross, we always look to see if our investments can be integrated into our operations. Since our operations have been significantly impacted, it’s going to take longer. We’re going to look with an eye if we can realistically implement anything in the next 12-18 months.
Has your investment strategy changed?
My investment thesis hasn’t changed. I look at those companies that create operational efficiencies within Blue Cross and also impact our highest cost members with chronic disease, or any other type of member engagement. With or without a pandemic, those problems will exist.
It has created a huge opportunity for telemedicine and telehealth. With the relaxed regulations comes the risk of bad players coming into the market or people taking advantage of the weakness. There will be winners and there will be losers. I’d expect once we get back to normal operations, those regulations should tighten up.
How are your companies handling the pandemic?
As the lockdowns continued, we had the realization that every one of our startups or portfolio companies needed to prepare for the worst, which means at least collectively with some of our co-investors, we were seeing that revenue would stop for 60-90 days.
Most of our portfolio companies have acted proactively and made the needed changes, such as executive salary reductions, layoffs, or furloughs. There are varying levels of pain, and it all depends on where they are in the fundraising process. Some of our portfolio companies fortunately had recently been funded. They had the flexibility of holding on to cash. A few of ours were caught in needing additional funding during the pandemic, lockdown and recovery.
There’s a lot that has changed over the past two weeks. In general, valuations are going down and terms are getting more stringent. The macroeconomic profile has changed.
Julie Grant, general partner with Canaan Partners
Canaan Partners invests in software, medical device and biotechnology companies.
Notable investments: Protagonist Therapeutics, Cellular Research
MedCity: Are you still actively seeking out new investments?
The last 14 days were definitely slower when it pertains to new deals. The priority has been and will be to help the portfolio shift its operations and problem solve in real time.
I’m taking a few new investment meetings this week. We had a virtual pitch by Zoom to the full partnership last Monday. Canaan had already decided to implement work from home a week before the Bay Area shelter in place notice so we were ready to go. Virtual pitches are already a regular part of the venture business, so that is not a change.
When the reality sunk in that this pandemic was here in the U.S., how did you consult the founders that you work with?
I’m having frequent calls, Zooms, and conversations across our portfolio and with our CEOs. We are trying to help solve problems faster so they can have more of their time and mind free to be forward looking. Everyone is considering ways to extend runway and also keep work moving forward where possible.
How have they been handling this?
Executives in small biotech companies are going to heroic efforts right now. I see them first and foremost taking care of their team and ensuring they are transitioned to remote work.
From there, the focus is understanding in detail the dependencies related to critical activities. For example, are key partner organizations such as CROs, academics, clinical sites, or suppliers working and are key individuals able to operate? People are thinking hard about forward-looking hiring and spend to ensure that the activities to be enabled really can move forward.
What advice have you been giving them?
If you can make forward progress, keep going. If not try to get facts and take a deep breath before making decisions.
Big picture, what are you seeing?
I would definitely expect the pace of funding to slow down nationally as a result of the crisis for a number of reasons. But deals will still get done. There is capital and a lot of great companies out there.
Michael Greeley, co-founder and general partner at Flare Capital Partners
Flare Capital Partners invests in digital health and healthcare technology companies.
Notable investments: Suki, Iora Health, Bright Health
MedCity: Are you still making deals?
This is the fourth correction I’ve lived through. It’s almost impossible to make investment decisions in the near-term. … How do you structure an investment given all the unknowns, and the inability to actually sit with people?
The best companies get created coming out of these horrible disruptions. We’re very aware of that. We’re not out of the market. What did we just learn about supply chain, analytics, and care at a distance that could create a new company?
For me, the biggest frustration is, I just can’t meet with these people. It’s nearly impossible to make a judgment on the people, the team, if you can’t see them together in action. … It’s a weird experience. We’re all learning collectively how to use Zoom at the same time.
How have you been working with your portfolio companies?
The initial wave of work over the last two weeks has been what are the immediate needs in the portfolio. Most firms have triaged what companies are raising and what companies need to raise.
We did some stress testing in the fall. We ran scenarios where what if a recession were imminent? We thought valuations were way ahead of themselves. … We were encouraging them to raise capital sooner.
In January, we began to look at scenarios, not that we knew it would be this devastating, but we thought it could be a difficult year because some of our customers were overseas. What if revenues were down 20% or 40%? Are there cost-cutting steps to take now?
What are your thoughts on the broader market?
We have a couple companies in processes to get sold. So far, that hasn’t changed. If you say today, ‘I’m going to sell this company,’ that’s been pushed off six months. The run-of-the-mill M&A activity, that’s been severely delayed. Obviously, there’s no IPO market.
I do worry about what if we haven’t flattened the curve, what that means for our collective psyche. … If we haven’t flattened the curve and the numbers enormously skyrocket, I worry that as a society we may have this real malaise set in. … I don’t know what that means for business activity.
Daniel Haders, managing director of healthcare for Nex Cubed and operating partner for Sway Ventures
Haders heads up Nex Cubed’s digital healthcare program. He also manages Sway Ventures’ healthcare technology portfolio.
Notable investments: Elly Health, Medcrypt, Trials.ai
MedCity: Are you still investing?
We are open for business, both at Nex Cubed and at Sway Ventures. That being said, when it comes to new investments, of course inevitably I think it would (slow). Timelines are going to change in the midst of this process. … You think twice as hard as you were thinking before, with twice as many questions that go into the due diligence process.
What types of companies are you looking to invest in?
Today is a stress test for any company that you’re evaluating. Any company that is going to be truly great in the next 10-20 years, is a company that should not only be able to weather the current storm, but also be part of the solution.
Things are clearly serious right now, but the digital health community has a moment of time to justify what is the potential of this technology, not just the potential for themselves and the industry.
How are you helping your current portfolio companies?
When this became real, we as investors were thinking about this in two ways. There are real people at these companies that are going to be impacted. We jumped in to start speaking with our portfolio companies. Worst case scenario, how do they weather this situation? How do you keep as many of your employees as possible?
Many great companies will be born or accelerate during the pandemic. But there are many great companies that we will lose just because what they are and this pandemic don’t fit. We want to help those companies.
Once a company is stabilized, and we figure out a plan so that everyone can survive, then we ask how can we help (with the pandemic)? … We’ve seen a number of companies spring into action here.
Repurpose AI, a company that has developed an AI drug discovery platform, looks for opportunities to repurpose drugs that have an NDA or failed late-state clinical trials for non-safety reasons. They rebuilt their drug discovery platform to target the ACE-2 receptor that the medical and scientific community believes is required for infection.
What are you seeing in the market?
Investing will occur but it will be extremely selective. People will be looking for companies that can impact the pandemic today and become market leaders tomorrow as we emerge from this.
The volume of deals I would expect to be reduced. There’s no question that will occur. But I do not expect the entire market to seize up. Funds have been raised. Healthcare is at the front of what is going on.
Tom Shehab, managing partner for Arboretum Ventures
Arboretum Ventures invests in medical devices, diagnostics and healthcare technology
Notable investments: Aira, nVision, Pear Therapeutics
MedCity: How are your portfolio companies responding to the pandemic?
We have a number of our companies that are actively engaged in efforts to assist with coronavirus pandemic. … We have a telemedicine ICU company that is helping to support ICUs throughout the country. We have a molecular diagnostics company that is developing a rapid turnaround Covid-19 diagnostic test. And we have a company that’s in the healthcare provider education space that is working to educate surge physicians.
Are you actively seeking new investments right now?
We are continuing to look at new deals. We’re spending a disproportionate amount of time on our existing portfolio companies right now. … We’re doing teleconferences and staying very closely in touch with our companies, but remotely.
What are you seeing in the broader market?
There has been some slowdown in deal-flow but we continue to take calls. I think that there’s going to be some slowdown in the closing of new deals while we get a clarification of what’s going to happen in the market and there’s some market resetting. Everyone is stress-testing the plans within their companies regarding the adequacy of capital reserves and how this crisis affects their business model.
I think that a time of crisis like this, you pull back to the basics. How is your team? How do you meet their needs? What are your cash reserves and your runway? How do you need to adapt your product or offering in the near term? How do you adapt to what might be a different healthcare marketplace post the virus? … I think this will be impactful to some degree through 2020.
What advice are you giving startups?
Lean on the networks of their investors and advisors for help. Focus on the key parts of their business, the health and wellness of their teams, their runway and how their product or products fit. And despite all of the unknowns and the uncertainty of timing, figure out the opportunities in this difficult time.
I want them to remain optimistic. … It’s going to be rough, but at some point, things will improve.
Steve Tolle, Partner with HLM Venture Partners
HLM Venture Partners invests in digital health solutions, medical devices and health IT companies.
Notable investments: mPulse Mobile, Rubicon MD, AbleTo
MedCity: Are you still investing right now?
We still have a couple of deals we’re doing diligence on. We’re doing diligence over Zoom, which for some of my partners is new.
What types of companies are you looking at?
We’re always looking — we have to look five to seven years down the road. … Say you have a vaccine for this in a year and this issue goes away, the company has to be valuable beyond that.
We’re always a little hesitant to invest in a company that is completely dependent on selling to hospitals. The sell is challenging, and margins have always been an issue. … Companies that sell technologies to hospitals right now are going to find it very difficult to sell anything unless it directly benefits the response to this pandemic.
We’re looking at some companies in point-of-care diagnostic testing. One of those companies is doing rapid development of a Covid-19 point-of-care test.
Things that happen in the home or with telehealth, I think this is a fundamental shift and those are good areas to invest in. … We were the first investors in Teladoc back in the day. It’s great to see telehealth get the adoption that we are hoping it will get.
How did your companies react after the market dropped?
Most of our company CEOs are immediately worried about the financial health of the business. They need to survive and be able to provide services. … That’s where we’re trying to help them. The issue for investors is how long will this last. When will we be able to return to a sense of normalcy?
If it’s a 30-, 40- or 60-day reality, that’s very different than a 180-day reality.
How are they doing?
Compared to the ‘08 downturn, our companies are in a much better position right now than what we experienced in 2008 to 2009. Up until this happened, many of our companies were having really strong quarters. It hasn’t been a financial crisis. It’s been a health crisis. Most of our companies have done recent financing rounds and have healthy balance sheets in the near term.
Some of them are going to benefit from this because they’re providing a valuable service that healthcare systems or providers need. … One company (mPulse Mobile) does patient engagement and mobile messaging. They’ve seen a huge uptick in demand just to get the word out to members on where to go if they have symptoms.
These interviews have been edited for length and clarity.
Photo credit: StockFinland, Getty Images
