Fundraising is always difficult, but perhaps especially so in today’s economic climate. In response, health investors are taking their time in their investments.
“Right now, what we’re seeing is the benchmarks have moved for what investors are looking for, and rounds are taking a lot longer to close,” said Ulili Onovakpuri, managing partner of Kapor Capital, which invests in early stage tech-enabled businesses. “Investors are doing more due diligence. You say you have revenue, investors are like, ‘We want to see your [profit and loss], we want to see what your margins look like.’ Whereas before, I think a lot of times rounds were moving so fast, investors would just take your word for it.”
Onovakpuri was speaking Monday at a panel discussion sponsored by West Monroe, at the MedCity INVEST conference in Chicago. She added that investors are being more “fiscally conservative” with their money. There “is money out there,” but it’s different than it was a couple years ago.
“I think what was happening before, we were just in the streets making it rain. It was like ‘You get an investment, you get an investment,’” Onovakpuri said, harking back to the iconic episode of The Oprah Winfrey Show where Winfrey gave each audience member a car. “I know for [Kapor Capital], we did way more investments than we had normally done. … Because there was so much capital in the market, you had to move fast in order to get those deals. The due diligence period you would normally do was shortened.”
Another investor panelist agreed on the slowing pace of investments.
“In general, we’re taking our time,” said Mike Spadafore, managing director of Blue Venture Fund, a payer fund. “I think there are a lot of moving parts right now from the capital markets environment, particularly in the growth stage.”
How should startups react? It’s important for them to be mindful of the reason for the amount of money they’re trying to raise, Spadafore added.
“Be really, really thoughtful about your capital points,” he said. “Throwing out three to five million because you heard that was the right number, I think that’s the stuff that a lot of people on our teams and the teams we work with are keying in on. ‘Why is it 3 million? What milestones are you going to hit?’ … Just being thoughtful about every dollar you’re taking into the business is probably my best piece of advice.”
Beth Mosier, another panelist and director of healthcare and life sciences at West Monroe, which helps pharma and private equity companies do technology evaluations as part of their due diligence before transactions, advised startups to be more judicious in terms of product development.
“My advice to entrepreneurs would be, just like you need to have your approach to profitability clear, you also need to have a very clear tech roadmap,” she said. “This may be the time to pull back a little bit on that roadmap, focus on the near-term wins rather than passing far outfield. Make sure that your roadmap is clearly thought out and actionable and with cost containment in mind.”
Resilience is also vital for startups in the current economic climate, said Shawn Ellis, managing partner of Distributed Ventures, during a separate interview at the conference.
“It’s probably not going to happen quickly,” Ellis said. “I think building a network of relationships well in advance of when you’re intending to go out and open a round, that’s key. Really listening to feedback and developing a network of folks around you — whether they’re formal or informal — who are going to give you strong constructive feedback, that’s really critical because I think this is a market where you don’t have a lot of room for error. You’ve got to evolve pretty rapidly, sort of fail fast and get to what works if you’re going to survive.”
Ultimately, it comes down to having a thorough understanding of the healthcare industry, Spadafore said.
“Does your clinical model work and improve quality or lower costs? Do you have a team that understands the real nuances and complexities of the healthcare market? … In our view, it’s hard to disrupt healthcare from pure brute force. You have to understand why the system works and disrupt it from the inside out,” he advised.
Photo: santima.studio, Getty Images