Investing in Healthcare Startups

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:

  1. Physicians have a broad knowledge of science and technology that gives them unique insight into new and emerging companies.
  1. 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.
  1. 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.
  1. 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.

  1. 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:

  1. 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.
  2. 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.funding-for-startups-2
  3. 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.
  4. 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.

  1. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.


  1. 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:

  1. 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.
  2. 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.
  3. 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.


  1. Series C Investment and Beyond

There is no technical limit tostartupdiagram 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.


  1. What Now?

Understanding the basics is just the beginning. An internet search in an area of interest is another. and 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 or click here to view our website at www.


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)

The Company Model– What It Means for You!

Recently, a confidential Qui Tam federal motion by the Florida Society of Anesthesia (FSA) has been made public. In this suit, the FSA alleges unlawful “company model” schemes by several practice groups, mainly gastroenterologists, and filed a federal false claims act complaint.


Anesthesiology has seen a rise of proceduralists utilizing the company model. In this model, anesthesia providers are hired, turn over billing rights, and then are compensated below market rates. Alternately, CRNAs can replace physician anesthesiologists. Some believe this loss of business and income has larger implications. In an era of health reform, this may alter the value of Anesthesia Care in fee splitting/value based models of care. The company model is currently illegal under some state laws, such as Maryland, but not necessarily federal law. Other arrangements exist, however, that are legal. This article reviews the basics and the implications.

Get Ready To Do A Lot More Endoscopies For A Lot Less!

The National Colorectal Cancer Roundtable set a goal to screen 80% of eligible patients by 2018.  To accomplish this goal, the Centers for Medicare & Medicaid Services (CMS) decided to waive copayments and deductibles for screening colonoscopies.  Section 4104 of the “Patient Protection and Affordable Care Act” waives the beneficiary coinsurance for covered preventative service that have a grade of “A” or “B” from the U.S. Preventative Services Task Force (USPSTF). Colorectal screening has an A grading.colonoscope

While this may be good to increase access to colorectal cancer screening, CMS followed this change with endoscopy related payment cuts in 2016.  Those cuts effectively decrease payment to gastroenterologists by 9%, facilities by 9.5% and offices by 2.3%.  So drastic were those cuts, that a recent survey of 327 gastroenterologists conducted by Dr. Matthew McNeill, MD found that the surveyed gastroenterologists may cut procedure volume by about half.  

If this survey result comes to fruition, a collision course is on its way that spells trouble for most gastroenterologists and anesthesia providers. More patients seeking screening colonoscopies but dwindling payments for those procedures.  If this reality wasn’t bad enough, private insurers have paired specialists against each other in an effort to further reduce payments.

Are Ambulatory Care Centers Really the Future of Anesthesia?

The past 10 years have seen an increase in surgical volumes as health reform has brought more people into the health system.  Dr. Thomas Miller, in a recent ASA Monitor post (link),  notes that Medicare beneficiaries increased 10% and the Anesthesia claims count increased 136%!  Underlying this trend is something less reported– there is a big shift in case volume away from Hospital inpatient settings into freestanding Ambulatory Care Centers and Hospital owned outpatient centers


This trend is likely true among all payers as well.  AnesthesiaStat is performing an analysis of data in an HCUP database to look at these trends.  There appears to be a shift of of both acuity and volume across the board.

What does this mean for Anesthesia groups?  How should you position yourself for the future?

Mark Weiss, JD, in a stimulating and provocative article called,” Impending Death of Hospitals: Will Your Anesthesia Practice Survive?“, argues that hospital consolidation and employment of physicians will be a failure.  He believes the shift of volume in to more efficient ASC’s will lead to the failure of hospitals. He concludes with the following, “Freestanding facilities, even mobile ones, will be the future of the huge bulk of surgical care. If your practice isn’t already heavily focused on freestanding facility care, begin pivoting in that direction. ”

So, what does that mean?  A simple answer is to start acquiring ASC’s. However, surgeons are getting wise to that solution.  In fact, many are utilizing “company model” type solutions to employ Anesthesiologists at below market rates (or replace physicians with CRNA’s to profit) .  In Maryland, a coalition of surgeons is attempting to roll back the state self referral law to allow for the company model.  In many areas, surgeons are working to create accountable care or bundled payment models that allow them to control the money.  Of course, they cannot entirely be to blame.  Surgeons are facing decreasing reimbursement and facility fees.  Insurers are rejecting out of network models of care, reducing their options.  A future article will develop this concept futher and specifically, look at the pressures in GI Anesthesia.

Anesthesiologists must be ready to fight for their independence.  Part of this is data driven.  Don’t know how?  Click here to get in touch.  We are happy to help you develop the data driven message your practice needs to show its worth and the value you provide.



Ketamine Infusion Clinics- Is this Off Label Practice Right for You?

From time to time, we like to offer information about new services that you should consider. This article from AnesthesiaNews about Ketamine Infusions gives some useful background.  Contact us for more information or help:

“A growing number of anesthesiologists are opening private clinics that provide off-label infusions of ketamine to patients suffering from treatment-resistant unipolar and bipolar depression, post-traumatic stress disorder (PTSD), anxiety, suicidality and other disorders. Psychiatrists and other physicians have also recently opened clinics.

The cost per infusion ranges from $400 to $1700, with most clinics charging about $500. Patients pay out-of-pocket since most health insurance plans do not cover the off-label procedure.

Despite the cost, patients seek the treatments after their antidepressants and other therapies prove ineffective. Proponents claim that, when administered as an IV infusion in a subanesthetic dose (typically 0.5 mg/kg body weight) over 40 to 45 minutes, ketamine begins reversing symptoms of depression for two of three patients in less than 24 hours, with effects persisting for a week or more. Nearly three of four patients suffering from suicidality experience an almost immediate reversal in thinking.”

Contact us to help evaluate this practice for you.  Here is a link to the article.

Medical Practice Buyouts- Are We In A Bubble?

Physicians have been slow to catch on, but we are finally learning about the new marketplace. Wall Street and private equity financed companies; hospitals and large physician groups are competing for physician practices. Our past articles have explained why the market has changed. There is still a lot of confusion, however. The number one question I continue to get asked is, “Are we in a bubble?”. The number two question is, “What happens to me when it pops?”.   In this short article, I’ll give my opinion on the excitement in the market and what may happen if/when sentiment changes.


Despite growing financial pressures on practices, many colleagues are cashing in by selling.   Many of us are accustomed to the periodic irrational exuberance of the stock market and worry about something similar happening in medical practice valuations. The answer, as always, is a very personal assessment of risk and benefit.


Confused? Start with the concept of the bubble itself. Many economists have attempted to answer this question. There is never a straightforward answer. The basic idea is that when excitement leads to an increase in asset prices or valuations beyond traditional metrics, you may be in a bubble. Notice I used the word “may”. There is no accepted straightforward definition of a bubble. More important: on an individual basis, as a famous investor once said, “the market can be irrational much longer than we can stay solvent“.


Getting beyond the “bubble” really changes things around. The question becomes an individual one rather than a macroeconomic one.   Is the price someone is willing to pay for my practice high enough now that I am willing to accept future risk to my practice? What are the opportunity costs of not selling now?


What are the future practice risks? This is somewhat nebulous. Let’s look at one scenario. The large entity you sell to may be better at managing expenses and risk in an era of health reform. For some time, you may benefit from practice efficiency, technology and income stability/repair that the new entity provides (see previous articles for more details). Is there a point at which they maximize efficiency? What point will growth cease to impress the capital markets and multiples (price above earnings the market will pay) start to come down? What affect will that have on operations? When companies leave the rapid growth cycle, it creates pressure to decrease costs. Salaries and staff are reduced.


In our past articles, we argued that corporations are buying practices at earnings multiples of 3-9 and “reselling” them to the capital markets at multiples of 15-30. They use the money raised to purchase more practices. As corporate valuations go up, they can easily fund more practice acquisitions (of note, they also use the free cash flow of the practices to fund acquisitions as well). This means that practice valuations can be subject to the whims of Wall Street. Here is the 52-week chart of Envision Healthcare (EVHC), Team Health Holdings (TMH) and Mednax (MD). Notice the volatility. If their access to capital is decreased due to a declining valuation, that could mean decreased prices for practice acquisitions in the future.


The recent buyout offer by Amsurg for TeamHealth underscores that this is a dynamic marketplace. Consolidation will reduce the number of potential acquirers.


We must also consider macroeconomic pressures. Eventually, rising interest rates will make acquisitions more costly and reduce prices. The lending market is still tight because of the financial crisis of 2008.


The uncertainty raised in the previous paragraphs explains the dilemma but also points to the solution for those worried about a bubble. Our best guess is that most providers/owners are better off now with the investment and efficiency of a large entity. If the underlying business of anesthesia deteriorates, the smaller groups will be hurt more than the bigger ones. Even if the business falls apart, you will likely have fared better in a large company than on your own during a downturn (“popped bubble”).


In the end, I cannot say with certainty that we are in a practice valuation bubble. Bubbles tend to be impossible to predict. Are we saying you should sell now? Not necessarily. Just that you should think about it systematically and not run away because of fear. Start with a practice and risk assessment. Then you can choose among several options, which may or may not involve a sale of your practice.