It’s been interesting to watch the developing role of private funding in the health tech industry over the last decade. We’re now living in a world where our healthcare system has begun to heavily rely on funds that are coming from the private world — a world where startups with disrupting technologies have a real shot at shaking the very foundation our system was built on.
As an investor in this space myself, I’ve noticed patterns over the years in what types of technology the healthcare industry needs and will pay for. There are some prevalent problems within our healthcare industry which I believe represent the major drivers for not only change but specific types of technology in the healthcare industry.
As a health tech startup, here is your low-hanging fruit:
- There hasn’t been a successful way for physicians to consistently monitor large volumes of patients or stay on top of adherence — we need technology to help medical practitioners deliver better and more consistent care.
- It has become common for individuals to have multiple medical practitioners, which means communication between providers and practices is essential — we need technology that helps to facilitate information sharing and communication between specialists, patients, and care providers.
- Insurance companies, government, and healthcare providers are all under major pressure to reduce spending without reducing service — we need technology to support developing lower-cost, higher-value business models.
The short and sweet version of this is that the healthcare industry is hungry for technology that will save money and improve the patient experience and outcome.
So as a startup with a product that does one of these things, where do you start? How do you get access to the growing amount of private funding being poured into the health tech industry?
Venture Capitalists & Angel Investors
Let’s start by looking at your most common options for investment. First, I want to clarify one thing. There’s a difference between angel investors and Venture Capitalists. Even though it’s the same idea, they’re vastly different types of investors who are typically going after different things and will show interest at different stages of the business.
Angel investors are individuals who invest their own money into businesses, which is the key differentiator here. They are high net-worth people who usually want to invest in an industry they know a lot about and have had previous success in. This isn’t always the case, but it’s what you’ll see most of the time. You’ll also see those angel investors are usually the ones willing to enter a business in its earliest stages before any type of real valuation has even occurred. When there aren’t metrics to consider, the investor is often betting their money on the founder, the team, and the idea.
Angel investors are typically willing to take bigger risks than banks and VCs, but the money does come with strings attached. The investor will bring experience, knowledge, and resources to the table, but you will be giving up a portion of your company and with that a certain amount of control. All of this will need to be decided and outlined in your terms of investment.
Venture Capitalists, conversely, are either owners or employees of VC firms that invest other people’s money — money that’s being held for investment purposes — into businesses. While these investments will often still be considered high-risk, the objective is to find opportunities that demonstrate explosive growth potential. The VCs are looking for a quick return on investment for their clients, unlike angel investors who are more likely to be passionate about the project and not simply seeking ROI.
Because this type of investment is a business model, the exit strategy is almost always part of the plan. Whether it’s an acquisition or an IPO, the VC firm is looking to have a cash-out plan from the onset of getting involved. VC funding comes in large amounts, so there is an expectation to scale and deliver a return quickly. The industry average tells us that only one out of every twenty investments will be a huge win for the VC firm, so the winner’s return needs to compensate for the losers’ loss.
Stages of investment for startups
While there is no jurisdiction around investing in startups and businesses in general, here is how industry experts typically describe and experience this process.
Essentially, there are five investment phases:
- Seed capital
- Startup capital
- Expansion stage
- Pre-public stage
Depending on what stage your business is at, you’re going be seeking out different types and levels of investments and also appeal to different types of investors.
True to its name, this is the very beginning stage of seeking outside investment for a startup. Prior to this stage, the founders have self-funded and maybe even gotten loans from family and friends, but haven’t given up a stake in the company. Now, they’re seeking investment based on their idea and are typically seeking funds for research, expanding the team, and developing the initial product.
This is the stage where a VC firm is unlikely to be interested, but an angel investor might see the potential.
In this next stage, we are still very early on in the process but seed money has established the bare bones. Funding at this stage is most often for client acquisition, marketing, advertising, conducting additional research, and continuing to develop the product.
At this stage, some VC firms may be willing to get involved but it’s likely that many would still be waiting to see the metrics before taking the leap.
Early-growth funding is used to establish and boost manufacturing, production, and sales, and of course for more marketing. It’s often called the “first stage”, even though it follows the seed and startup phases.
At this stage, startups will often find they can gain access to larger amounts of funds than the previous two stages, and ideally will be moving toward profitability as they gain the means to get their product in front of a wider audience.
These first 3-stages of investments are all referred to as early-stage investing and are associated with greater risk, which means that many investors still aren’t willing to become involved yet.
By the time a startup has reached this stage and investment phase, they’ve typically been in business at least two to three years and have plenty of revenue rolling in — if they’re lucky, they’ve even become profitable at this point.
Funding at this stage is about taking a commercially viable product and giving it the fuel it needs to diversify into new markets and sometimes even product lines. The objective is to help the business expand exponentially.
As I mentioned earlier, one of the major differences between VCs and angel investors is that VCs almost always have an exit strategy, because at the end of the day this is about getting a return on their investment as quickly as possible. Once a business has built a solid foundation, the time will come when the momentum is strong enough to take a step toward making that IPO.
At this stage, it’s time to explore mergers and acquisitions, and maybe even try to drop your prices enough to swallow your competition whole. More funding will be required for these pre-public efforts and plans, which should ultimately result in the investors getting their payday.
As startups make their way through these investment phases, more and more funds will become available to them. As the business progresses, more investors are willing to take a risk in hopes of getting their piece of the pie.
As a startup, you want to approach each category appropriately and realistically, ensuring that you understand the investor’s expectations and state of mind. You’ve got to be willing to do the grunt work and earn your way from one phase to another, demonstrating to investors that your product and your team have what it takes to win big in the health tech industry.
Have an investment opportunity you would like to discuss? Get in touch with me here. You can also connect with me on LinkedIn.