3 Investment Tips for Health & Life Science Startups
$3 trillion. That’s how much the healthcare industry is worth. $6 billion. The number healthcare venture funding is expected to exceed by the end of 2017.
Over the last few years, we have seen great strides in the way many providers, payers and companies (small and large) deliver, access and think about healthcare. According to a recent Inc. article, most people see these healthcare advances coming from two sources: the government taking an active role to reshape business models, and startups using technology to challenge the status quo.
Scott, along with Susan Preston (Seattle Angel Fund), Mark Kraus (Keiretsu Forum) and moderator, George Aliphtiras (LeapFrog Innovations), led a panel centered around the topic“Convergence of Digital Health”.
The panelists shared information about how to maintain funding momentum, de-risking investment through product milestones and the importance of market analysis to product success.
Disruption Doesn’t Mean Big Money; Keep the Momentum Going
Seattle – a hot spot along the Cascadia Innovation Corridor – is quickly growing and attracting talent, support, and investment dollars in the medtech and life science industries. This rapid growth is enabling startups to bring technology out of academic institutions and into commercialization.
However, as important as these young, disruptive companies are to Seattle’s innovation ecosystem, it can be challenging for many of them to get enough funding from a single source (a problem that even those in Silicon Valley face).
For small companies struggling to get enough funding early on, the panelists urged the audience to think small if their strategy requires it.
“Play small ball, year after year, to keep your momentum going,” Thielman suggested. "Look to diversify your funding sources through networking, a family and friends round, crowdfunding, or by finding small, non-dilutive grants (like SBIR) to continue gaining ground," he suggested.
Speaking specifically of grants, Thielman also noted that they not only help keep your product going, but can provide validation of your approach and technology early on. This is a great way to de-risk further investment.
For anyone concerned about the dilutive effects of crowdfunding, Preston mentioned that Angels are generally accepting of a busier capitalization table than venture capital groups.
Krause from Kieretsu, however, did caution against taking too much money early on. “This is a good way to screw up in the early days,” he said, “it dilutes the value of your company.” It can be easy to yes in the early days to anyone who wants to invest but oftentimes, you won’t know how bad it has hurt your company until the next round of investment. Young companies need to court strategic investors who can guide them, as well as fund them.
Determine Your Product Milestones to De-Risk Investment
Generally, it’s not a good idea for entrepreneurs to take a ton of money upfront (even if it’s offered).
When looking to raise capital, focus on the amount of money you need for the next 12-18 months at most. Also, a lot of money in the pocket is not spent effectively and can dilute the value of your company prematurely, leaving no room for additional rounds.
However, while the focus may be on raising money, it is important to note that the amount isn’t as important as the milestones you want to accomplish in each phase of the product life cycle.
As an investor, one of the biggest red flags in a startup is not knowing how they are going to grow their company.
The number one reason most startup companies fail is due to bad market timing. By focusing on product milestones, rather than just a vague timeline based on budget, you de-risk your product and in doing so, better protect your investors.
When creating a timeline of your product milestones, consider these questions:
Do you have a plan for how you are going to develop your business?
How will the business be successful?
What are your milestones (to show progress)?
How are you going to develop your product?
Have you identified the specific investors (or at least the qualities of one) that you want to work with?
Investors want to see that you are thinking about risk and what your plan is for mitigation.
Early Market Analysis and Product Validation
When looking to invest in a company or product, there are three things investors will analyze – the market, the product team and the technology.
As a startup, you need to show your investors the market pain point and prove how your product provides a solution to that problem in a way that is easily used and understood. Regulatory approvals and insurance reimbursement may be hurdles that must be overcome to have an impact on that particular pain point.
Investors will want to evaluate all of these aspects. Successful startups look for efficient ways to validate their market and their path to market to help answer these investment concerns.