A primer and suggestions on making it work
The recent ups and downs of the market have many physicians looking for investment alternatives. As our careers face the risk of new payment models and population health care, many physicians are looking to diversify their career. Medical Technology startup investing may be an answer.
There are a few reasons why many doctors look to startup investing:
- Physicians have a broad knowledge of science and technology that gives them unique insight into new and emerging companies.
- Doctors can identify problems in need of solution or provide guidance and support to those in development. They can also help test, evaluate and improve new products.
- Physicians want to have an ownership stake and be part of the team. It does not necessarily need to be passive like late stage investments.
- Doctors generally have capital and need to extend their finances beyond their own practices.
At the same time, one of the biggest barriers for health care entrepreneurs is finding investors comfortable enough with the sector to invest.
As Rebecca Lynn, a managing director and co-founder at Canvas Ventures, said early-stage investments pay off more because the investors get more of an ownership stake and are more a part of the team. “Later-stage investing is more like a stock bet,” she said. “You’re along for the ride.”. If you want to have influence and be part of the company—you have to start early. There can be excitement in being part of something new. Physician partners, particularly in Health Tech, are often part of the team in helping to design, test, market or develop products.
Since there is little research about non-publically traded companies (and less about seed funded startups), it takes a big leap of faith to put your money into one. Management, which is typically founder led, is understandably excited beyond. Investment advisors, particularly those with little startup experience, will likely balk at high levels of debt compared to equity or a lack of foreseeable profit. Cash burn and the prospect of dilution in future equity raises can seem daunting. How can you identify the next Apple, Medtronic or Facebook? Its not easy…. But there is a process that can make that better.
Lets start by understanding the basics:
Investment rounds are an essential part of the startups.. You will encounter them progressively as you negotiate a deal either with a startup founder, or as an investor looking to attract further capital to an existing organization. Either way, an understanding of each round and why it exists is critical.
- Seed Investment
This helps a startup founder establish the direction and goals of their business. The seed stage of any organization more speculative than other rounds of investment. It is there to establish the startup as a company or go as far as to bring a product to market.
A seed investment should aim to achieve one of the following:
- Product Identification: A startup founder may have an idea about the type of product or service he/she hopes to develop, but seed investment is usually a big part of cementing design elements and settling on a product for launch.
- Marketplace Orientation: At a seed stage,` a startup may be looking to carry out research into available marketplaces, understanding the competition and how best to sell a product or service within that niche.
- Demographic Targeting: It may still be necessary to identify the specific demographic or target audience for a product or service. This might include market research and other exploratory measures to define this more clearly.
- Team Creation: There is the possibility that a seed investment could be used to establish a working team beyond the founder(s) of the startup. This could be needed in order to bring the right expertise needed to create or launch a product.
Seed investment is not always necessary, as many startup founders will have much of the infrastructure in place before seeking capital. In some instances, however, this type of investment can be critical to bring a startup idea out of its infancy.
- Series A Investment
This type of investment is often the first encountered when the seed stage does not require outside funding. At this juncture most startups have a strong defined idea of what the central goal is behind any product or service and may even have launched them commercially.
Series A investments should achieve one of the following:
- Distribution: Optimizing the way that products/services are distributed is a key part of series A investment. This can lower overall costs or increase sales; hopefully both.
- New Markets: Launching a successful product in a new region can be costly. This is why series A investment is often sought by startup founders.
- Stage 2: The primary function of a series A investment is usually to take a company to the next level. Capital raised during this round is often used to implement a new business plan. This could include launching a new product or reaching a new sales target.
- Shortfall: Series A investment can also be used to make up for a shortfall in capital. A startup may still be a promising investment opportunity, but unforeseen expenses can use up available funds, and so another round of investment might be required to offset this.
- Series B Investment
By the time Series B investment is being actively pursued a startup is usually well on its way to being a truly established business. Production is well managed, advertising in in full flow, and customers or users are actively purchasing an associated product or service as planned. While scalability is a factor in Series A investment, here it is the main focus. This includes:
- Team Expansion: As the company grows it is likely that more employees will be required in order to ensure smooth running of the business. This may involve an initial outlay beyond using sales to pay for salaries. It is likely that employees will need new equipment, office space etc., in order to perform effectively.
- Globalization: A startup might be selling in one or two regions, but this is often the stage where capital is needed to establish a company on the global stage. Trading in every region can require a significant outlay depending on the nature of the business, and this is exactly why Series B investment rounds exist.
- Acquisitions: If a startup has grown sustainably, it may be in a good position to bolster its operations through acquiring another business. This could be in the form of a competitor, or perhaps a related technology or patent which could be incorporated into the company. Rather than using its own reserves it can be beneficial to pursue new investment to fund such an acquisition or merger.
- Series C Investment and Beyond
There is no technical limit to the number of investment rounds a startup can pursue. This depends heavily on any anti-dilution agreements previous investors have acquired, ensuring that their stake is never watered down. As each investment round progresses, more and more equity from the company is released. Dilution hurts existing shareholders!
Understanding the various machinations of each investment round will help a potential investor decide on the most appropriate course of action. With the information contained in this article hopefully such rounds will no longer appear so confusing.
- What Now?
Understanding the basics is just the beginning. An internet search in an area of interest is another. Fundingpost.com and Healthfundr.com. A new phone app called shotpitch allows startups and investors to come together. Visit local technology incubators that house and develop start up companies. You will get exposure to founders, other investors and developers. There are also funds which excel in start up investing. These are more passive ways to get involved.
A new, and perhaps more exciting, way is to become part of a physician investment club that allows you to learn about new and emerging tech. After discussing with like minded physician investors, you will be in a better position to make a decision for yourself. AnesthesiaStat is creating such a discussion group. To be involved, email us at firstname.lastname@example.org or click here to view our website at www. Anesthesiastat.com
The foregoing article is for educational purposes only and should not be construed as legal advice. The information described in the above article is just an example of fundraising rounds and may not apply in every deal. There may be overlap between specific rounds. The round terms themselves, “Seed,” “Series A, B, C,” etc., may also be interpreted differently by founders, investors, and institutions. Prospective investors should carefully review the documents of any offering which they are considering for purchase and should consult with their legal counsel and professional advisors.
(AMIE TSANG. Morning Agenda: Start-Up Investors Are Not Waiting for Growth Wsj 3/14/16)