Although the entrepreneurs are mostly confident that they are onto the next breakthrough in digital health technology, what makes a solution scale is how well and by whom it is funded. Digital health tech is booming. Still, it doesn’t mean that investors will hand out cash to anything other than a well-researched, proven technology that will help improve the experience of patients.
By bringing concrete evidence to the table that your product or technology solves real problems, the entrepreneurs will be well-positioned to attract VC investment. Without understanding what the VC wants and the new regulatory frameworks, the pitch is likely to fall on deaf ears.
After years of whiteboard squiggles, Deliveroo dinners, and “sorry I can’t make it” messages to kith and kin, you finally have, what might one day be the next breakthrough in digital health technology. Still, there is a thin line between receiving investment capital and getting nothing.
When a venture capitalist, a clinical research manager, a big pharma executive, and a medical doctor turned entrepreneur sat down together, the result is the suggestions below which every healthcare entrepreneur needs to know to improve the odds for elusive funding.
Bring evidence and solve real problems
Your idea must solve real clinical problems. Value-added services for patients will not result in outcome improvements (mortality, the safety of care, re-admissions, etc.). If your innovation does not address efficiencies to one of several outcome criteria, it’s back to the drawing board. In the aftermath of Theranos, you need to come armed with evidence that your idea works, or investor doors will close. You must make it clear to stakeholders that what you have is a medical product that solves a real therapy problem, as opposed to it being a wellness gadget.
Another way to support your claims is through clinical validation. Unfortunately – like getting approvals and certifications – this process takes time. German e-health tech startup Emperra worked alongside a health insurer on a two-year clinical study to provide evidence of the medical benefits of its digital diabetes patientcare solution. No evidence, no investment!
Understand new regulatory frameworks
Expect to be asked by VCs how the solution fits into the most recent medical regulatory framework. Software and medical devices will start to merge from 2020 onwards after the implementation of the European Medical Device Regulation. Medical startups will have to plan a clear roadmap to prove their medical efficacy and obtain approvals. Article 117 of the medical devices regulation, which stipulates that marketing authorisation applications for medicines with an integral medical device must include the results of the device’s assessment of conformity by a notified body.
Ensure strong founder-market fit
If you can showcase a robust founder-market fit to a VC, you have a significant advantage. You don’t have to be a physician by training. However, a team of MBAs or tech professionals, with no understanding of the healthcare industry will have a difficult time attracting investment. Similarly, a team of researchers with no business background or customer-centric thinking will often be overlooked. Building a business in healthcare is multifaceted, so make sure that you have all the relevant areas of expertise covered within your team (or alternatively make sure to build up robust market insight through in-depth research).
Know what VCs are looking for
Bear in mind that VCs are mostly asset managers and have the mandate to manage the money of their limited partners. VCs expect that each investment has the potential to at least 1x return the respective fund size (with a minority shareholding of 10 per cent to 20 per cent). Thus, a 10 per cent shareholding in a single company of a €100M VC fund means the VC needs to aim for a €1B exit. Make sure you earmark a large enough market that allows for revenues in the region of €100M to €200M.
There are a couple of pre-monetization validation points to work on, before going into discussions with early-stage investors. Depending on who your customers are, pilots with pharma, hospitals or insurance companies will add a lot to your pitch. It might be tempting to work with any interested party, but vetting partners can help a company set itself up for the future. Before partnering, ask yourself: “Is this organisation innovative?” “Are our interests aligned?” “Do we share the same goals for the study?” and “Can they be a customer in the future?”.
Make sure the innovations are bulletproof
Healthcare startups often cite big pharma as their target customer, if not their exit strategy. Bear in mind that big pharmaceutical companies are under massive public scrutiny and cannot afford to take even a slight risk to their reputation, which might slow things up, at times frustrating the startup. There is no “move fast and break things” for pharma, and the innovation must be bulletproof before it hits the market. While developing your solution, keep in mind how pharma companies develop their products: investing 6-7 years in testing them with clinical trials costing more than $2B on average. For pharma, tech is often an enabler toward their mission of making a positive impact on the lives of patients. Don’t expect them to jump into new ideas, just because it is a cool new technology. What is important is how it will have a measurable improvement in the efficacy of their treatments.
About the authors:
Sven Jungmann is Vertical Lead, Health at FoundersLane in Berlin, Germany. He is also co-founder of career service and education finance firm Filentia and serves as a medical advisory board member at Direct Health Services.