A commentary by Gavin Teo, Co-Founder, Straits VC & Board Member, Galen Growth
As a healthcare and technology VC, I recently had the privilege of moderating an “around-the-world” panel with some of my closest friends and co-investors representing funds in the US, Europe, China, India and SE Asia. Hosted by Galen Growth as part of a virtual series, the event was attended by 200+ healthcare entrepreneurs, executives and investors from every continent. Here are the takeaways:
Macro – “A bearish market still attached to bullish valuations”: The macro market will prove massively positive for healthcare technology businesses. However, P&Ls are lagging, meaning that while usage is indisputably up, bookings and cashflow are not (yet), so adequate capitalisation is important to ride out the wave.
Financing – “Everyone is taking one more year of burn”: Agile and nimble companies should cut costs and raise (if need be, flat or downrounds) to get to twelve months of runway, which is when availability of private capital will safely normalize. Given positive tailwinds in healthcare (vs. other sectors), VC-backed healthtech startups could get by with six months of runway when paired with “good communication” internally and to the market. With less than six months, assets will look distressed.
Themes – “Digitize services and therapeutics”: “Solution-ing” or end-to-end combinations of software and service that close the loop, are drawing attention. In the provider world, AI-based technology for service delivery is red hot. One leading Indian practice management software business has seen 3x panel size expansion per doctor during Covid. In the life science world, disease surveillance (diagnostics, Vx and Tx), precision medicine and genomics are particularly well positioned.
Stage and Maturity – “Focus firmly on fundamentals”: Both early (pre-A and A) and later (B+) stage VCs on the panel agreed on getting “back to basics”, meaning focusing sourcing efforts on companies with a path to profitability vs. only a path to growth. Capital intensive deals that “require $150-200M more to exit” have fallen out of favour (though this is less applicable in biotech).
New Deals – “We’re open for business, but portfolio comes first”: Dry powder is still present and valuations are holding for quality companies. However, when asked, the panel shared that they are averaging 2/3 of time on their portfolio and 1/3 of their time on new deals vs. 50/50 in 2019.
Portfolio Guidance – “Reinforce trust, be transparent in communications and engage shareholders proactively”: Covid presents an opportunity for management teams to practice empathy with employees, vendors and investors in the face of missed numbers and budgets.
Regional Fundamentals – “Healthcare is local and attitudes will change”: China is back to business and vigilant of a second wave. Europe is partially re-opening with some core markets recovering much faster than others. India has taken the deepest and longest steps to maintain a lockdown among the large emerging economies. And the US has worked hard to flatten the curve, but is highly fragmented in local vs. federal responses. Despite the differences in recovery phase, there does not yet appear to be a trend of valuation arbitrage across markets as one might expect (e.g. Asian investors picking up relatively cheaper European assets).
Predictions for the New Normal – “A Q1 2021 story”: Life won’t get back to normal until there is a vaccine, tested and produced at scale. For 2020, expect second, third waves and partial lockdowns. Some sectors like med device and biotech dependent on in-person clinical trials will be on hold for a while. Digital first businesses with models that have elastic supply chains will be in a better place to take advantage of the near term window.
Many thanks to my friends John O’Sullivan, General Partner at ACT VC; Lawrence Low, SVP Investments, Head of Healthcare and Co-Head of Technology at EDBi; Dave Ng, Head of SE Asia at Eight Roads; and Seemant Jauhari, Managing Partner of HealthX Capital – you guys provided invaluable insights and absolutely rocked.