Raising Capital in Health IT

29 Oct

By Cole Bunn, Research Analyst, LSN

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Successfully articulating the value proposition of your digital health/medicine product or service and receiving funding requires a great deal of thought and careful consideration to your message. Not only is it a particularly noisy space, the fact that it garners interest from both traditional tech as well as healthcare investors means you need to tailor your message considerably based on the investors level of understanding and expertise in the various aspects of your opportunity.

Each sector differs in key characteristics affecting business models, including metrics of success; typical timelines and financing required to bring a product to market; product attrition rates; the importance of regulatory oversight; the types and importance of IP; reliance on, timing of, and types of revenue; and relationship to the eventual consumer and target markets [1]. In order for the health IT entrepreneur to succeed in such a laborious endeavor, a well-thought-out, cohesive business model and a complete understanding of the investment landscape is a must.

As with any fundraising campaign, the importance of understanding the types of investors who are playing in a space can’t be overstated. Additionally important is understanding that these different types of investors are going to have different rationales for investing in Health IT, and your strategy for approaching them should reflect this.

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Figure 1 | LSN Investor Platform | Data as of October 28, 2015

Taking a look at the LSN investor database gives an idea of what types of investors are most interested in Health IT companies. Nearly 500 of the investors that LSN has spoken with have stated an interest in Health IT companies. Figure 1 shows a breakdown of the investor by type that are interested in looking at these types of companies.  Although traditional venture capital and private equity firms are highly involved in Health IT, if you aren’t targeting the rest of the field, then you’re missing half of the investors interested in your type of technology.

Given the stringent regulatory requirements healthcare products face, partnerships with pharmaceutical companies are very valuable for companies in the digital health realm. These companies have many valuable assets and capabilities in healthcare, such as large clinical trial networks, existing patient, physician and payer relationships, and deep biological and medical expertise that can be brought to bear on challenging digital medicine problems [1]. These strategic value-adds can accelerate the progress of an early stage health IT company.

Depending on what camp you are coming from (biotech/pharma or tech/SaaS) you will need to meld pieces of each into your pitch to investors. The most drastic differences between the two industries would be the time to get a product to market and the funds required to do so. Being able to foresee and address special situations that are likely to arise in this dynamic, emerging field will be a big difference maker for investors and partners alike. Given that digital health companies are somewhere in between the tech and healthcare industries (or rather a combination of the two), that puts them in a unique position, and will require that they approach fundraising with very tailored and well-thought-out messaging.

Click here to watch a panel of VCs discuss the Health IT landscape at last year’s RESI San Francisco conference.

  1. Steinberg, D., Horwitz, G., & Zohar D., Building a Business Model in Digital Medicine. Nature Biotechnology 33, 910-919 (2015).

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