DHIT Press Release | DEC 22, 2017
Region’s Top Investment Firms Offer Advice to Digital Health Entrepreneurs at the DHIT Happy Hour
A special edition of the DHIT Happy Hour saw an unprecedented gathering of the region’s top investment firms with an interest in Digital Health. DHIT sponsor Hatteras Venture Partners assembled an impressive group of VCs including Bull City Venture Partners, Excelerate Health Ventures, IDEA Fund Partners, Cofounders Capital, River Cities Capital Fund Management, SJF Ventures, and Venture Capital Multiplier Fund to provide useful guidance on what entrepreneurs need to do to raise venture funding in the digital health space. The event, hosted at Launch Chapel Hill on December 20th and powered by Bluedoor, was attended by more than 100 people from across the Digital Health ecosystem in the Triangle. Here’s what each investor had to say.
John Crumpler, General Partner and Co-Founder, Hatteras Venture Partners (Sponsor):
“It was such an easy sell to get these eight men and women here tonight as we all share a common vision which is to build our digital health ecosystem here in North Carolina. We don’t view ourselves as competitors, as there is a lot of good work to be done and a lot to be said for working collaboratively.
“DHIT asked us to give folks practical advice for raising money, what is it that we typically look for in an entrepreneur, and also what is our commitment to investing in digital health.”
David Jones, General Partner and Co-Founder, Bull City Venture Partners
Who we are:
“We’ve been investing for the last 16 years and this is our third early-stage venture fund which we’re about halfway through. We focus on seed and early-stage tech, software/Internet-type companies and health IT is the furthest we go into the digital health world. In each fund we’ve had 1-2 companies in the digital health space. We’ve had two with Hatteras that have had great success. I’m now on the Board of MedFusion which is in our current fund with John Crumpler.”
Our investment size and value proposition:
“Our typical check size is anywhere from $250K–$2.5M. Usually, we focus on early stage ventures and are focused regionally on the mid-Atlantic and Southeast.
“In terms of what we’re known for: 1) we focus a lot on the entrepreneur and the team is super important, it typically represents 80% of our decision. 2) We’ve spent a lot of time over the last 15 years going to the Bay Area and New York getting to know all the big corporate companies in digital health and software so that we can jump on a plane with our entrepreneurs, and walk them into customer and partner introductions and M&A discussions. We’ve been known to bring revenue to the table which is the fun part rather than just doing the deal.”
Advice to entrepreneurs:
“We love the digital health space as it applies to every single human and it is so ripe for disruption right now. You are seeing new payers coming to fruition, you are just seeing so much. We are seeing three times the volume of deals in digital health right now, but you have to balance that with a super long sales cycle and some realism about how the system operates.”
Patrick Dunnigan, Principal, River Cities Capital Funds
Who we are:
“We’re a later-stage venture fund, a growth equity fund. We started in 1994 and are headquartered out of Cincinnati. There are three of us here in the Raleigh-Durham area. We’re investing now out of Fund 5 which is a $220M vehicle and recently had a ‘dry’ close on Fund 6 for $150M so hopefully we’ll be investing out of Fund 6 sometime next year.”
Our investment size and value proposition:
“Within healthcare, we invest in everything but drugs and therapeutics. We are somewhat active in digital health IT but it is quite a crowded space: there is a lot of capital, and a lot of start-ups. One local story you may be familiar with is that we sold a company called APS (Advanced Practice Strategies, Inc., a provider of an e-learning and talent management platform for clinicians) to Relias Learning here in town. APS is based in Boston but after that acquisition they moved some of their team down to the Triangle.
“One thing that is unique about us is that we have a number of LPs that are health systems and providers. Also, we can bring customers to the table which can be helpful with due diligence when you are trying to get perspective on, for example, what a hospital system is trying to get better at or trying to fix.
“Given our deep Midwest and Southeast roots we have a lot of relationships at health systems in those markets and a number of our partners in Cincinnati sit on the board of several health systems up there as well. So, in addition to them having a financial interest in our fund, we also sit on, for example, the Patient Quality Committee of a large health system. When you start to get into more of these specific themes around healthcare IT, we have some more angles to give us more perspective.”
Advice to entrepreneurs:
“This is a good segue into how we think about healthcare IT. It’s hard to build something horizontal or to take on too much just given some of the incumbents in the market. Where we’ve had success in the past is picking off something that can operate alongside big healthcare IT company incumbents. APS who I mentioned earlier is a great example of that.
“With regard to the type of investments we make, as we’re a later-stage fund, the team is hyper important. If you talk to anyone in the private capital markets from early-stage all the way to big buyouts, they’ll tell you that you win with the team. That said, given that we are investing in these companies at a point when they typically have a customer base, our investment threshold is $5M. A lot of opportunities that we are looking at now are well north of $10M. At that point you can do some real analysis and have discussions with customers who have been through renewal cycles to get a sense for the ‘stickiness’ of the ‘mission critical’ aspect of the product to the customer. So we spend a lot of time really trying to understand the market they are in, the competitive landscape and then, do we have the team to back it up and go from there.”
Jeff Terrell, Principal, Hatteras Venture Partners (Sponsor)
Who we are:
“Hatteras started in 2000. We’re actively investing out of our 5th fund which is a $150M fund. Health IT, digital health is going to be about a quarter to a third of that vehicle and we’re about half-way in.”
Our investment size and value proposition:
“The thing that makes us unique and that we care about first and foremost is the culture. Teams couldn’t be more important. You hear that a lot and what does that mean to Hatteras? I think about three things: 1) Kindness is really important to us; 2) transparency and engagement – what we try to represent to our entrepreneurs and what we expect in the board room; 3) our institutional investor base: we have some traditional VC investors but we also have investors that represent a broad array of the kind of customers digital health companies are going after. On the payer side, we have Blue Cross Blue Shield NC; on the provider side, UNC Health Care and Wake Med; on the pharma side, GSK, Johnson & Johnson; and obviously on the diagnostic side which is an increasingly important aspect of healthcare, LabCorp is a big investor of ours as well. This all matters as it is a hugely important component of our due diligence process in how we evaluate opportunities, how they may be used by these constituents and investors, and also for introductions to customers.
“We are seed and early-stage investors so we are not afraid of going in early, but that does mean post-revenue. We’ve invested less than $500K in revenue up to, in MedFusion for example, we invested north of $10M in revenue, so that gives you a sense of the range. Our check size for health IT is in the $2M–$4M range initially and then allocating $6M–$8M over the life of the investment.”
Advice to entrepreneurs:
“If I could give advice in terms of the things we focus on, some of these sound obvious but you’d be amazed at the business plans we look at where these aren’t crystal clear: 1) a laser focus on value proposition and ROI; and 2) since we are investing early, we like to see diversity in the customer base to get a sense of scale and ‘reference-ability’ of the customers.”
Tim McLoughlin, Partner, Cofounders Capital
Who we are:
“We are located in Cary. Our focus is on B2B enterprise software. We also have a geographical focus, looking primarily at the Triangle but also across the State as well. We invest very early-stage, we’re often the first check in to a company. So pre-revenue companies or companies that are just at revenue and possibly have just one beta customer. We like to say that nothing is too early for us. Our check size is typically $300K–$400K and a little follow-on capital reserve after that but we love working with all the other investors locally here to try and grow this community.
“In terms of digital health, out of the 16 investments we made investing out of our first fund, we have five local companies that I think would qualify including Savii Care; Fokus Labs; ImpathIQ; and Tesser Health. One closed last week, which we are really excited about.”
Our investment size and value proposition:
“What’s different about us: as there are typically no financials, and not a lot of track record there, our due diligence is part of helping you grow your business. Whether that be helping you establish your value proposition, your resume with your customers, building your sales decks, going on sales calls, or hiring your early management team, who are going to be your co-founders in this space. We will invest in first-time entrepreneurs. We like to be there in the early stages to help you become a more seasoned entrepreneur.”
Bobby Bahram, Managing Partner and Co-Founder, Excelerate Health Ventures
Who we are:
“We’re located here in the Triangle. We only focus on digital health: health IT, health services is 100% of our focus, we don’t touch devices out of our fund. We are focused heavily on the software side. Geography wise, it could be anywhere in the US. Originally, the idea was to focus around here and the Southeast but we found there are just not as many opportunities so we really want to work with everyone and improve the ecosystem here as there is a lot of talent here.”
Our investment size and value proposition:
“A bit of background: my partner and I come from the entrepreneurial side and have done a lot of start-ups. Our firm is unique in that all the investors come from the healthcare sector. So, for example, hospital executives or physician leaders investing his or her money. We pulled together 80 of these investors in 14 different states and then put a VC umbrella on top of it; so from due diligence to opening doors and connections, this approach has been very helpful.
“We focus mainly on seed and early-stage ventures. We’ve done investments where it’s been pre-product or a first-time entrepreneur that we surround with the right people to coach all the way to Series A. To the extent we can add value, we do get involved. Our check size is about $1M per portfolio company; investing less at the beginning and reserving for the future. Right now we’re a new firm, our fund is 2 years old, and we’ve made eight investments so far. One company sold successfully and one is in the process; we are actively looking for new investments.”
Advice to entrepreneurs:
“I could give a long presentation but I’ll focus on two areas: 1) a lot of people don’t do the necessary up-front homework on market validation. It could be a great team with some interesting concepts but they come to us and have talked to say, five people. So for our last healthcare start-up, it took us about a year, but we talked to 60 hospitals. Not until you talk to that many can you realize who is the right decision maker, what’s the right market and product or how does the budget cycle work. So do that market validation early on. And 2) try to stay laser focused. Google is a great example: they did one thing really well, using little capital, and then started to expand from there.”
Stephanie Nieman, Principal, SJF Ventures
Who we are:
“We are headquartered in Durham. We started there 20 years ago. We also have offices in NYC and in California. We invest across the US. We have one NC company called Validic. We’d love to do more deals with local companies. We are investing now out of our fourth fund which is $125M.
“We are an impact investment venture fund, meaning we have the same financial return expectations as other venture firms do but we also have the initial responsibility to investors and are privileged to select companies that are doing positive things for the world (such as investing in clean-tech business and other companies with the potential to benefit society). Half of our investments are more environmental impact in nature and the other half more social impact in nature.
“We view digital health from a health and wellness perspective. We look for what our entrepreneurs are doing for outcomes. That could be outcomes for the patient or the system (e.g. ROI, or real changes in health outcomes). We care about this from the perspective of income and shortening the cycle and demonstrating those outcomes to customers. We are also very interested in areas of overlap in healthcare. I’m speaking with companies now with overlap in healthcare and workforce, or healthcare and finance. We’ll do everything except life sciences and medical devices or firms involved in therapeutics. We are generally believers in digital health, in the sense that digital is helpful to scale but remembering that healthcare is a human offering, meaning that tech alone won’t solve the problem. Great delivery systems, the right networks and distribution partners are needed but sometimes you need caregivers and clinicians alongside of those. This goes hand in hand with our thinking on outcomes: whatever your model, show me it’s working.”
Our investment size and value proposition:
“We are looking for companies that have somewhere between $1–$20M in revenue, so we are comfortable joining Series A and Series B rounds. Our check size is $3M–$8M and we’re looking to partner with great digital health companies. In terms of value add, we help companies with whatever they need help with at the time: putting in independent board members, recruiting a head of sales, advising on follow-on rounds, etc. We really dig in there and find out what the company needs and then use our networks in healthcare and sometimes beyond to support them.”
Advice to entrepreneurs:
“In terms of capital, don’t take more capital than you need. Don’t think more capital is going to change something fundamental like your business. Capital might make you do things faster but it won’t change the value proposition.”
Lister Delgado, Managing Partner and Co-Founder, IDEA Fund Partners
Who we are:
“We have been around for 10 years as a VC firm and making investments as a team for 15 years. We invest in seed and early-stage in a broad range of sectors. Digital health, from a horizontal perspective, touches a lot of things we do: core technologies (hardware components), software, healthcare IT, and services.”
Our investment size and value proposition:
“Our typical check size is $100K–$500K. In the future, we hope to increase this. We’re wrapping up our second fund. According to Facebook, we are the most active early stage venture fund in the Southeast! Whether it’s true or not, we’re certainly busy. We write a lot of checks, small but a lot, which allows us to co-invest alongside a lot of other funds in the country. The benefit of this to entrepreneurs is introductions to a lot of other larger funds throughout the country. We think funding risk is the biggest risk to companies in the Southeast. So by bringing more capital to you, we make it easier for you to raise money simply by making an introduction to somebody we have co-invested with. This is probably the best thing we can do for you: raising more money for our companies which is the most impactful in the end.”
Advice to entrepreneurs:
“My biggest piece of advice is to get a referral. Don’t cold call somebody. If we get a referral from someone we know and trust, we’ll pay attention to you. We get a lot of emails and calls and, without referrals, we really don’t pay much attention.
“The three things we look for: 1) the team, it really is the most important thing and will determine if we invest or not. We don’t necessarily look for experienced teams, we look for great teams. We don’t need to invest in people who, for example, set up lots of companies or are a former CEO etc. but we do need to invest in exceptional people who can bring with them exceptional teams. 2) We are definitely looking for uniqueness in terms of technology and innovation. We don’t invest in any two technologies, products or services. We want you to think of yourselves as trying to be the number one, maybe at the very least the number two company, in whatever you do in the world one day. If you don’t think like this, you probably shouldn’t be talking to us. And 3) we like to invest in big or fast-growing markets. Sometimes new markets.
“In summary, we look to help, advise and connect companies. We have a great portfolio of companies and great track record. The best thing we can do for you is connect you to the investor that will write you the next check.”
Charles Merritt, Special Advisor and Manager, Venture Capital Multiplier Fund
Who we are:
“I am a special advisor to the Hatteras Venture Capital Multiplier Fund. We invest in companies in North Carolina. Simply put, if you can convince a VC to invest in your company and you have a base in North Carolina, we will consider you for investment. We operate under a mandate from the State of North Carolina – it is really designed to leverage other early stage investment dollars that are already going into companies here in NC.”
Our investment size and value proposition:
“Our check size is from $75K to $250K. Our job is really to fill the capital gap here as not all funds are as big as general partners or entrepreneurs would like them to be. So the State had a good idea to put more money into that space and I help to manage it. Hopefully, I’ll see a lots of you folks coming through after you’ve convinced someone else to invest.”
Advice to entrepreneurs:
“Customer validation. I taught entrepreneurship at UNC for four and a half years. If your value proposition is right, that is a fantastic thing but unless your customers will change their behavior and pay you and not pay the person they are already paying to solve that problem, you really don’t have something new and unique. So we are looking for an idea that is going to change customer behavior and put money in your pocket. The world does not lack for good ideas. All our firms see collectively hundreds of deals in a year. It probably averages about one per day but we only do a handful of deals every year. That’s the competition you are up against. So we look for dogged determination. Prove to us that you have something that someone else doesn’t have and someone is going to pay you for. You have to convince someone to write a check to you. if you can convince us of that, Venture Capital Multiplier Fund is here for you.”