Image: Aroa Biosurgery
Raising investment for a healthtech startup? The team at New Zealand Growth Capital Partners (NZGCP) share insights into what they look for before making an investment, and what a founder should seek from their investors.
There’s a three-legged stool analogy that applies to investing and can be modified for early-stage investment. Good businesses typically combine a great (defensible) product, strong team and a large addressable market. For healthtech businesses, what each of these aspects mean is more nuanced than in other industries and even within healthtech, these can vary enormously from digital platforms to medical devices all the way through to medicines and vaccines. This article delves into what funding providers are generally considering for each aspect and how you can best prepare for presenting to them.
In healthcare, the increased difficulty of getting a product completed to the point of being able to sell it (including varying levels of regulatory approvals and multiple levels or types of decision makers) means that a higher threshold for what is considered breakthrough is typically required.
If a competitor is already selling something that solves a problem and you can do it marginally better, that is far less valuable than if you’re solving a previously unsolved problem or solving a problem in a completely new way that is significantly better / cheaper / easier than existing solutions.
Depending on the type of healthtech business you’re developing, it’s likely that you require funding well before your first sale, and potentially even before having a proven product. This inherently makes doing good due diligence and intimately understanding how likely your product is to be feasible at commercial scale much harder. This can be compounded by the fact that the development costs can be orders of magnitudes higher than for less complex innovations.
The good news is that these hurdles (long/complex development programmes, regulatory approvals and difficult to enter markets), together with a well-established IP regime – particularly in Western markets, means that you should be able to defend your IP for a long time. Investors will therefore likely focus heavily on your intellectual property and its defensibility, development (including regulatory if applicable) roadmap, manufacturing complexity and implementation requirements. Be prepared to share a lot of detail here if you can do so without disclosing any trade secrets.
Imagine solving a problem only to find out no one else experiences it like you do. Investors will look to understand what your solution is worth to those who are most likely to use it, and how widely its use has potential to spread. In doing so, they’ll also need to understand the decision-making criteria of decision makers, and how likely you are to be able to sell. In addition to that, the regulatory approval required in order to begin sales, pre-existing reimbursement pathways and incumbent suppliers will all play into their assessment. The better you can articulate your plans, and the more based in reality they are (i.e. actually tested with the potential users, payers and recipients), the better you’ll come across. Understanding the investment market dynamics relating to your specific type of business is also critical. What are your potential liquidity pathways, and who are the key players in your specific subsection of the industry?
The good news is that everyone needs healthcare and finding better or cheaper ways of delivering it is a critical global problem that is only growing. Whether it’s democratising access to healthcare, making it more efficient or solving for uncured diseases or conditions, the target market can be enormous. The downside is the complexity in navigating and entering these markets and breaking into often very lucrative markets for the incumbents. A clear articulation of what the problem you are solving is, how many people it affects and how you will enter those markets is really important to help convince investors that you will succeed.
For complex new drugs or therapeutics, established global pharmaceutical companies dominate the sales channels, but that isn’t necessarily a limiting factor. These companies are constantly on the lookout to acquire or licence novel technologies - so the issue is then more about ensuring that you can validate your technology through robust and repeatable trial programmes and leave the marketing to the big players.
A lack of regulatory approvals or understanding of the sales process can lead some companies down the path of selling to private individuals. Whilst these are still big addressable markets, the proposition then can be reduced to a marketing play and the complexities faced by that, including less sustainable IP protection, significantly greater competition and the requirement for an exponentially broader market reach. A lot of healthtech investors therefore are less inclined to invest in such approaches.
At the core of every business is a team, and without a strong team progress is unlikely. At a high-level, healthtech is really no different to any other type of investment in this aspect. Good teams understand more, address issues faster and are generally more proactive than reactive. What makes healthtech more complicated is the far greater breadth and depth of knowledge and skills required to do so. From complex biological systems to differing geographical regulatory compliance and healthcare systems, all the way through to the structure of the markets/segments being entered, there’s far more to consider. For that reason, it’s ideal for the team (or advisers / partners) to have a deeper affinity to the problem you’re solving and to demonstrate to investors your motivation behind creating and growing the business.
Whilst being able to answer the above should set you up for a successful business, there’s a little more that makes for a good investment.
Core questions such as how much it is going to cost to develop the technology, and what non-dilutive funding sources are available are likely to be asked. The good news is that there are increasing levels of support in funding and grants from the likes of NZGCP and Callaghan Innovation.
Given there’s typically a longer timeframe and higher costs associated with healthtech, it’s important that you can provide solid (and realistic) answers to these questions as this directly impacts investment returns.
So far we’ve only looked at what an investor is likely to want to know from you, but it is equally relevant that you ask questions of any potential investors. It’s important to get to know your investors well, as you’re partnering for a significant amount of time and expecting them to be there for you whether things are up or down. For that reason, understanding what potential investors are looking for in respect of investment timeframes and future funding is important. Some are patient, some are less so, some provide follow-on funding and others don’t.
Healthtech typically takes longer and is more expensive than other startup journeys and requires the understanding of much more complex existing healthcare systems, so you’re looking for an investor who can support you with this. Every business needs something more than capital, and specialist investors can help bridge some of your own knowledge gaps. This could be as diverse as having them help to translate your technology into a sellable product, connecting you with relevant industry experts, or providing you with the non-technical resources you need.
NZGCP’s Aspire fund has a soft spot for healthtech businesses, with this being the second largest sector we’re invested in. Some examples of our healthtech portfolio companies include Aroa Biosurgery, The Insides Company, Junofem and Formus Labs. If you’re a Kiwi tech startup seeking funding, check out how the Aspire fund can help kick-start your journey of healthtech innovation.