As cash keeps pouring into health startups, VC firms work to stay disciplined

From L-R: Christina Jenkins, venture partner, Phoenix Venture Partners; Michael Yang, managing partner, OMERS Ventures; Alyssa Jaffee, partner, 7wireVentures;
Daniel Lubienietzky, manager of life sciences, TMX Group.

Venture capital firms are sitting on dry powder measured in the hundreds of billions of dollars. Much of that cash is finding its way to healthcare startups, which continue to raise money at a steady clip. For some of these startups, the announcements come with a familiar word: oversubscribed. That means that a company that only needs $1 million finds enough interest to raise $2 million.

Alyssa Jaffee, partner at 7wireVentures, said her firm tends to be supportive of such rounds of investment, depending on the other participants and the timing of the financing. Most founders try to raise more money to drive urgency and get other investors to the table, she said. But Jaffee added that there’s a difference between raising too much cash too early versus raising more cash because the demand and the support is there.

Jaffee spoke at the MedCity INVEST conference in Chicago Tuesday. She was joined by fellow panelists Daniel Lubienietzky, manager of life sciences at TMX Group and Michael Yang, managing partner at OMERS Ventures, the venture arm of OMERS, the pension plan for Ontario’s municipal employees. The panel, “Are Investors Spending Too Much, Too Fast?” was sponsored by the Toronto Stock Exchange and moderated by Chistina Jenkins, venture partner at Phoenix Venture Partners.

Yang said when founders can see their peers and competitors raising money, that activity can cause some of those founders to think they should be raising money as well. That doesn’t mean they should. OMERS has the capacity to be flexible with the amount it invests in early and mid-stage companies, but if the company or its strategy doesn’t fit, it’s not a good investment for the firm. “If pays to be disciplined, in good times and bad,” he said.

Early-stage companies are good at raising money to spend it, Jaffee said. What investors want to know is how a company will use its new cash. She noted that many digital health companies can have very lucrative exits—as much as a quarter of a billion dollars. But Jaffee added that the more capital a startup takes in, the more it raises investor expectations. And that means a startup has more questions it needs to answer.

Yang said that one of the best things startup founders can do is get guidance from investors about the milestones that they look for, which can vary widely. Some funds want to look only at metrics, and if the numbers that you provide don’t fit their model, you’re out as an investment candidate. Other funds focus on outcomes, while others look for research that de-risks the R&D and shows progress with regulators. Still others are more focused on the team, such as the addition of key executives.

Some of the new money being invested into healthcare companies is coming from new sources. Lubienietzky said the additional liquidity allows a different type of investor to enter the healthcare market. Yang agreed, noting that some of sources of the new cash are not traditional healthcare investors, but rather they are more like stock pickers that have stumbled into health as a sector that they have not invested in before. These investors may have seen success putting their money into other sectors, and they want to see if they can replicate those results in healthcare.

“That’s a perfectly fine way to invest if you’ve been trained in this and have seen success,” Yang said. “Does it work here? Too early to say.”

A company needs to think about the milestones it can hit between rounds, Jaffee said. It’s O.K. to lose money, but a startup must also show that it can grow. That growth won’t come all at once in one round, but a round can help a startup get part of the way there and set the stage for a future financing. Jaffee said that startups need to show enough to demonstrate to the next stage of investors both the vision and the execution of the strategy.

As startups work to build their companies, they must also contend with larger economic factors that are beyond their control, such as economic correction. To Lubienietzky, there’s always a correction coming. The precipitating factors may be economic or geopolitical. Regardless, startups need to build the business and position it to grow for the long term. Jaffee said that startups shouldn’t care if a correction is coming. Getting wrapped up in that kind of thinking can be all consuming. But what’s happening in the broader economy doesn’t matter if the startup can’t build its business, she explained.

Yang advised startups to grit and persevere, and to try not to succumb to FOMO (fear of missing out). To Yang, the correction is already happening. But he differed slightly from Jaffee in that he said that it’s important to set expectations with startups. If a founder thinks that the company will be able to achieve a certain valuation level because that’s what others got previously, they may need to understand that it’s not possible this time around. Lubienietzky said that as long as startups can address a real market need, they will be able to raise money.

“Build something that solves a real problem, investors will fund it,” he said.

Photo by Walter Lim, MedCity News