BIll Taranto
More posts from BIll Taranto
It’s an entrepreneur’s market in digital health today, with startups raising record-breaking funding at soaring valuations and debuting on public markets to eager investors.
According to CB Insights, as of March 3, 2021, there are 51 healthcare unicorns — “startups” — worth $1 billion or more around the world. Global venture capital funding, including private equity and corporate VC, into digital health was the highest ever in the first quarter 2021 at $7.2 billion, according to Mercom Capital Group.
The massive influx of capital to healthcare should not be surprising; the pandemic has made it starkly clear that digital health is the future of healthcare. To that end, we should anticipate additional healthcare exits worth more than $1 billion in the near term. Which again, is great for entrepreneurs — as long as they understand how hard it is to build a unicorn in healthcare. Today, becoming a unicorn requires founders who are long on vision and operational experience.
Company founders most often turn to veteran investors for help with grand-slam strategies to create the next healthcare unicorn. That’s why many of them seek counsel from the Merck Global Health Innovation Fund: Because we have the experience, resources, successful track record and networks to build real scale in digital health.
During the pandemic, lots of investors jumped in to invest in digital health for the first time. But we’ve been investing for more than a decade. Two of our portfolio companies, Preventice Solutions and Livongo, exited last year as unicorns, rounding out the $6.2 billion in digital health market value MGHIF has exited over the last two years. And we are expecting two more unicorn exits in 2021. But we’re not stopping there; we’ll be investing our $500 million fund in drone-supported supply chain technologies, telehealth, AI, digital pathology, remote clinical trials and Internet of Medical Things (IoMT).
Given our success, here are four instrumental strategies to building a unicorn in digital health that we know work.
Raise the “right amount” of capital to build the right company
We often ask entrepreneurs: Would you rather own 20% of a $50 million company or 5% of a $1 billion company? To most, the answer is obvious. In our experience, too many entrepreneurs worry about dilution and never raise the right amount of capital.
It’s well known that companies with rapidly growing revenues are valued at a premium — but it’s important to remember that this is hard to do in healthcare. Getting to scale takes time because healthcare is so complicated and involves so many stakeholders.
This means an entrepreneur has to have a different mentality when it comes to exiting. The time horizon to exit is more likely between years four and seven than between years two and three. This brings us back to thinking about the right amount of capital (and partners) to build your company. If you don’t raise the right amount of capital, over time you will likely find yourself in a recap and end up with little or no equity. Not a good place to be.
Hire the most important roles first: CFO and sales
Entrepreneurs don’t automatically think strategically about how to build their company. We tell them that just because you created the company, invented the product or even got it initially to market, do you think you can scale revenues meaningfully on your own? No.
Therefore, hiring a professional CFO is critical. All investors are entrusting you to be a good steward of their money. It needs to be managed and spent in a professional manner. Hiring just a bookkeeper or an accountant will create headaches for you later as you look to raise capital and support business development. You need a veteran CFO who knows how to manage a P&L, balance sheet, cash flow, spending, investment and reporting, as well as how to raise capital and structure commercial deals.
The other important hire is a top-notch sales professional to lead sales. That means someone with deep relationships who knows how to build an organization of highly competent salespeople and how to ensure customer success. They also need a strong understanding of healthcare sales cycles and hurdles to adoption. Generating revenue is an existential issue for startups and most entrepreneurs think they can do it themselves. They can’t.
Ensure your healthcare technology solution is integrated
Healthcare is a highly fragmented, complex market. For this reason, point solutions are unlikely to scale. New technologies need to integrate seamlessly into workflow and reimbursement schema, as well as into the technology infrastructure.
Furthermore, solutions need to fit into existing regulatory and privacy mandates. The bottom line is: Your technology likely needs to be part of an integrated solution. We push our portfolio companies to work with other companies that have complementary capabilities toward solving the entire problem, instead of a piece of the problem. We often pose the question: Would you buy something that didn’t integrate with your home operating system? No, of course not. Taking an ecosystem approach greatly helps to reduce barriers to adoption in healthcare.
Partner with the right investors and the right companies
The syndicate you put together is as important as your solution — this is another instrumental piece of advice. Scaling in healthcare is highly dependent on channel presence along with a deep understanding of how those channels work.
This means that capital, though important, is not as instrumental as the relationships the members of your syndicate have and their strength as board members. You’ll need access to key channels, so choose partners who have direct access to those channels.
You’ll also need experts who really understand the market to provide good counsel on how to grow your business. You want to know what builds scale as well as attractiveness for exit. Oftentimes it can be strategic (corporate) venture capital investors who can provide the market access and expertise you’ll so desperately need.
There are significantly more corporate venture organizations today than there were a decade ago, when Merck GHI Fund was making its first investments. Corporate backers wield tremendous influence in the market, and this is something we will see grow even more in time.
CVCs get invited to participate in a range of deals and can also pull together syndicates of top investors quickly. And when corporates are ready to invest, it is done very differently — and often on a much larger scale — than it is with standard venture firms. Corporates also deploy different kinds of capital to build an ecosystem around a company. This is necessary because healthcare companies don’t generally scale quickly the way consumer technologies do.
Despite it being an entrepreneur’s market in digital health today, that does not mean every good idea or new technology will scale to make a meaningful difference in the lives of patients, let alone become a unicorn.
To even have a hope of building a unicorn, entrepreneurs must think in terms of building a good company, raising the right capital, hiring the right team and lining up the right partners. It’s hard work. But the good news is there’s no shortage of opportunity to improve healthcare, which will allow for the creation of many more unicorns.
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