In fundraising, a founder’s greatest challenge is not selling any particular product or strategy. Instead, it is often unwinding and realigning the investor’s biases.
The competition is not your market competitor or incumbent. More often, it is the investor’s set of operating heuristics, many of which are quickly influenced by market conditions.
Fundraising in healthcare, especially in a macro environment like the one we’re in, is an opportunity to differentiate and take control of the narrative. When markets start to dip, most companies hunker down and focus on surviving. In moments like these, healthtech companies can take advantage of the status quo getting upset and rise to the top of a crowded field, signaling to the market why they are the horse to bet on.
Reframe the macro view
When the market seems to be trending downward, it’s an opportunity for founders to take control of the narrative and reframe how investors view market conditions based on a deep analysis of their sector.
Broadly compared to other industries, healthcare often remains resilient during times of economic distress. When everything is going well, it’s easy to forget and even easier to underappreciate the acyclicality of the healthcare market as a whole. But a quick look at data from the Bureau of Labor shows that employment in the sector continued to grow during the last recession, a testament to how robust the sector is.
If entrepreneurs and investors treat every interaction as a one-shot game, we will all eventually lose trust.
While employment may not be a comprehensive barometer for all healthcare activity, the demand for real solutions to real pain points in healthcare will continue to be inelastic. If you’re in services, frame your business around this labor demand; if you’re developing solutions for software, operations and RCM, leverage this growing gap between the need and the adoption of technology.
In this environment, funds will be looking for acyclical markets to invest in. This is an opportunity for you to capture this capital pool.
Get granular
In a market inundated with “digital health” startups and “infrastructure solutions,” it’s vital to differentiate yourself.
Move beyond generic labels that no longer tickle the interest of healthcare investors, and instead map out the progression of your company in three acts, from seed to IPO, even if you’re already a late-stage company:
- For the first act, explain what you are solving and for whom. Dig into the details so investors are convinced that no one understands the problem and the solution better than you.
- In the second act, communicate which markets or functionalities you can expand to. How does this cross the chasm from early adoption to markets that can provide venture-level returns?
- For the final act, defend what makes your idea a $10 billion company. How can one investment turn into a fund returner for the investor you are pitching to?
Too many founders focus on midstage expansion but they give neither the level of detail necessary to explain Act 1 nor the clarity of vision that you get with Act 3.
When a founder intimately understands the problem, that’s half the journey to success, because as an investor, I know I can trust the solution being developed.
Be dynamic with runway
Downturns instinctually motivate most founders to preserve cash at the cost of growth, but this kind of approach is too simplistic. Roadmaps that were designed in stronger markets may no longer be relevant, so founders must proactively manage how these changes shift preexisting go-to-market strategies and product build orders.
Remember that it is possible to both reduce and grow headcount at the same time. Doing so in different parts of an organization is neither easy in strategy nor execution, but through detailed scenario planning, you can get to a point where decisions are based less on emotion and more on core KPIs.
I encourage all of my portfolio companies to devise base, downside and upside cases, each with clear market signals that would set in motion a variety of budgets to weather the storm or set sail. Threading this needle requires a multivariable set of quantitative analyses and qualitative signals from the market, but it will elevate the conversation between founders and investors to dynamic runway scenario planning instead of just worrying about static cash preservation.
Know the difference between dilution and tactical dilution
Be wary of optimizing for tactical dilution — the terms at one specific financing — at the expense of cumulative dilution, which encompasses the effect of all rounds.
When evaluating terms, analyze them from a cumulative perspective across the current and next two rounds. The best tactical dilution for one round will not necessarily lead to an optimal outcome for the founder.
For example, all else being equal, the dilution from taking 20% more capital in a round will be offset by a 25% higher pre-money valuation in the next round. In other words, if an additional 20% cash in a round gets you more than 25% more traction for valuation, it will be the more optimal choice for founders.
This is a founder-specific decision, but it’s important to view these choices from a cumulative dilution, multiround perspective. Considering there will be decisions as important as option pools, board governance and runway, being a few inches off at the foundation in exchange for slightly less dilution can lead to meaningful consequences at the top.
Remember this is a multishot game
If entrepreneurs and investors treat every interaction as a one-shot game, we will all eventually lose trust. Your reputation among your employees, customers and investors will follow you to your next enterprise.
It’s important to remember why we are all in this business in the first place: to change the healthcare industry for the better, with the ultimate goal of helping people. If you infuse the humanity of this mission into your investor interactions and business strategy, you will be primed to succeed.
I’ve seen how building human-first relationships can create hope for patients as well as financial success. We first started working with Roland and Ben Buelow at antibody company Teneobio, for which we led the Series A round in 2016. Following an acquisition by Amgen, Roland and Ben went on to build another company, Ancora Bio, and we again invested as a co-lead. The Buelows’ consistency of vision, technical and strategic execution, patient-centered orientation and quality of relationships with investors and big pharma alike drove our continued partnership.
These suggestions will help you control the narrative in this market and present a sophisticated approach to managing deal expectations and investor interactions. Investors who are nimble, eager to learn and build true partnerships with founders will resonate with these approaches regardless of market conditions.