Venture Investors Share Their Strategies for Navigating the Shifting Health-care Investment Landscape

Health-care sector investors took a hard look at industry changes that have impacted their investment strategies and decisions during a panel discussion on Wednesday at the Michigan Growth Capital Symposium.

A major driver of those changes, the panelists agreed, has been the Affordable Care Act, which has precipitated a shift in reimbursement for health-care services away from the traditional fee-for-service model and toward the new value-based care model. This transition has placed more financial risk on hospitals and rehabilitation facilities, which must provide better clinical care and health outcomes for their patients at a lower cost while achieving favorable financial results for their institutions.

At the same time, the new reimbursement model has opened up opportunities for entrepreneurial companies offering innovative solutions to help institutions meet these formidable challenges. However, start-ups seeking venture capital must have the capability to demonstrate, based on strong analytical data, that their approaches to patient care and care management can improve outcomes, save money, increase profits and meet the new reimbursement requirements.

“As a health system, we are taking on a lot more risk,” said Christiana DelloRusso, a partner at Providence Health and Services Venture Investments, a $150 million venture capital fund aimed at driving innovations that will improve quality and convenience, lower cost and create better health outcomes. Key areas of focus include standardizing service and work flow and aggregating clinical and cost data. “As a venture fund, we want to know how a new technology will improve care, how it will be paid for and how a company will get its data,” she explained.

“As investors, this environment is really exciting to us,” said Leslie Henshaw, a partner on the Private Transactions team at Deerfield, where she works with a variety of health-care services, IT and medical-device companies. “With all the changes through the ACA, we have an opportunity to identify both the outperformers and underperformers.” One growing dynamic in the health-care investment arena, Henshaw noted, has been the formation of venture groups by strategic investors, such as pharmaceutical companies and drugstore chains. This has created challenges for institutional investors. “These new players can inflate pricing and escalate valuation,” she said. “They also can foreclose exit opportunities. On the other hand, they can be supportive partners.”

Kirk Nielsen, managing director of San Francisco-based Versant Ventures, commented on the dramatic rebound that has occurred in the health-care investment sector. “Three years ago in health-care finance, funds were unable to raise additional capital, companies were struggling to raise rounds and the IPO window was shut,” he said. “Today biotech is on fire. Health-care IT is on fire. Only medical devices are still stuck in neutral, and early-stage device companies are finding it hard to raise money.” Entrepreneurs seeking seed and early-stage funding now have a wider choice of options, including cross-over investors from technology and other sectors, hedge funds, corporate investors and debt providers, according to Nielsen.

The panelists offered this advice to entrepreneurs:

  • Ensure your team and technology are outstanding
  • Develop a fully evolved business plan and a convincing pitch before you approach investors
  • Be able to show how your company adds value for customers and investors
  • Begin creating touch points and setting concrete milestones six to nine months in advance of fundraising and deliver on them to validate your business model.
  • Follow up with investors in a timely fashion and put some pressure on the decision process.
  • Map out your return at each exit value and don’t give away all your returns.
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