By Michael Baxter
A time of caution or a time to be bold? Venture Capitalists muse on how healthcare and HealthTech startups should manage during the Covid-19 crisis.
“Think of a safe place.” John O’Sullivan is the General Partner at Act Venture Capital. He recalled advice once given to him and his team early in his career. “Think about a plan where you lay-off everyone but the core team and shrink to a single location.”
It was a drastic suggestion. Only a plan, of course, plans don’t have to be activated. But planning for extreme circumstances, even if those circumstances don’t materialise, is always a good idea.
Mr O’Sullivan was speaking at the latest Galen Growth investors Together Apart webinar series. The focus was the impact of Covid-19 from the perspective of healthcare and digital health venture capitalists.
Sometimes it seems you need tough love, and this is what the four venture capitalists on the webinar had to offer.
“In this kind of environment, where you have strong macro shocks, entrepreneurs and investors alike are going to have to start thinking more about the fundamentals,” said Dave Ng, Head of South East Asia for Eight Roads Ventures.
Cash may or may not be king, but it is undoubtedly the Royal Family
It seems that cash matters more than usual in these circumstances.
As John O’Sullivan said: “The idea that you can rely on the grace and favour of new VC funding the company from endless reserves, is a pretty big assumption.”
In other words, if you’ve got cash, hold onto to it for as long as you can.
On this theme, Lawrence Low, Senior Vice President at EDBI, says that companies need “12 months’ worth of cash.” He continued: “Really look at your business model and operating costs. You need a buffer.”
It boils down to the runway. “How much cash do you have in the bank, if you have a runway of 12 to 18 months, then you are in a decent position to hold onto your valuation, even if you are raising money,” said Seemant Jauhari, Managing Partner at HealthXCapital.
Suppose, however, your runway is not that long. Suppose your cash buffer is getting near.
Maybe, if that is the case, you need to do some work on your runway.
Or, as Mr O’Sullivan said: “Take a piece of paper and describe the worst situation you can think of, way beyond what you think is likely to be. You might not like what it says, but put it in a drawer, you need to know a plan exists.”
“Think of a safe place, imagine what it looks like, you can you build from there?”
Part of the challenge lies with valuations — they are not what they used to be. Or maybe, it would be more accurate to say that they are not what they should be.
As Seemant Jauhari put it: “We have moved from a bullish market to a bear market, but we haven’t seen bear valuations — it is a bearish market with bullish valuations.”
That agreed, many of the panellists at the Galen Growth Webinar, is scary.
Many expressed particular concern about the US. “Optimism is in the DNA of the country,” said Mr Ng. But right now, is there a danger that such optimism might backfire?
There was concern amongst some of the panellists that it might.
Not easy being a startup
For startups or companies looking for early-stage funding, it seems things are especially tricky.
Venture Capital firms seem to agree that now is a time to focus on the existing portfolio. Panellists suggested their allocation of funds towards their current portfolio is between 60 and 70 per cent.
“It’s not fair” on companies seeking early-stage investments acknowledged John O’Sullivan, but that is how it is.
In fact, as Mr Sullivan explained, venture capital, even venture capital targeting techs, is quite old fashioned in one crucial respect — it likes to get close to the companies into which it is considering investing. That means face to face meetings, working with the team from the company they are looking to invest in, really getting to understand its DNA.
And it is difficult to do that by Zoom call; maybe it is impossible to do that by video.
Seemant Jauhari said: “I think that investors will either pause, or slow down a bit, and when they have done that, there will be a little more breathing room.”
But he added that while investors might slow the pace of their new investments in companies at the earlier funding stage, they might pick up on deals at later stages.
So, what’s next?
There is some good news. There is money out there, maybe, however, the nature of the companies that will appeal to venture capital firms has changed.
Lawrence Low sees three key areas to focus on.
The first relates to the adoption of digitisation and AI. “We think this will continue to gain momentum,” he said.
The second is innovations in the delivery of healthcare services — this covers areas such as telemedicine.
Thirdly, he sees a shift towards precision medicine. This shift covers areas such as cell therapy, RNA based technologies, CRISPR/Cas 9, genomics and synthetic biology.
Things are changing super-fast of course.
John O’Sullivan quoted the head of one of the companies he has invested in saying “My industry has moved forward three years in three weeks.”
The challenge, however, is that while Covid-19 has created a new way of thinking and with it, lots of opportunities, realising that in terms of dollars, yens or yuans is not so easy.
As John O’Sullivan said: “The interesting conundrum for existing portfolio companies in digital health and new companies we are looking at, is that, in this new environment, we can’t tell how it’s going to show up on the P&L.”
Advice for HealthTech companies in these times
Lawrence Low has two pieces of advice for HealthTech startups.
“First of all,’ he says, “is to be transparent in your communications to employees and shareholders. As the captain of the ship, engage your stakeholders and align them with your mission and shared values. It’s about reinforcing trust via communication.”
The second thing “is to be agile and nimble.”
But what about raising money? What then? You should be confident that you aren’t losing control” said Seemant Jauhari. He added, however: “The right partner will support you going forward, but you should be more tolerant to variation in your valuation to get that right partner.”
Does that mean, then, that all companies seeking to raise the need to accept lower valuations? “If your business fundamentals are strong and your cash flow is good, you can hold on to what you have,” said Mr Jauhari. He suggested “going for convertible notes.”
It seems it’s good to know you can, if necessary, reach for a safe place, have a plan for survival in case things get worse. And the risk that things might get worse is a danger all the panellists were aware of, especially with the possibility of a second spike in the virus later in the year.
But if your business fundamentals are sound and cash management is healthy, then fundraising opportunities are out there. Just be prepared for the worst.