From LR: Christina Jenkins, Venture Partner, Phoenix Venture Partners; Michael Yang, Managing Partner, OMERS Ventures; Alyssa Jaffee, Partner, 7wireVentures;
Daniel Lubienietzky, TMX Group Life Sciences Manager.
venture capital firm is sitting on dry powder In hundreds of billions of dollars. Most of the cash went to healthcare startups, which continue to raise capital at a steady pace. For some of these startups, the announcement comes with a familiar word: oversubscription. That means a company that only needs $1 million has enough interest to raise $2 million.
Alyssa Jaffee, a partner at 7wireVentures, said her firm tends to support such investments, depending on other players and timing of funding. Most founders try to raise more money to drive urgency and get other investors on board, she said. But Jaffe added that there’s a difference between raising too much cash too early and raising more cash because the demand and support are there.
Jaffee was speaking at the MedCity INVEST conference in Chicago on Tuesday. She was joined by Daniel Lubienietzky, life sciences manager at TMX Group, and Michael Yang, managing partner at OMERS Ventures, the pension plan for Ontario municipal employees, the venture capital arm of OMERS. The panel discussion, “Are Investors Spending Too Much, Too Fast?” was sponsored by the Toronto Stock Exchange and moderated by Chistina Jenkins, a venture partner at Phoenix Venture Partners.
When founders can see their peers and competitors raising money, this kind of activity can lead some of them to think they should raise money too, Yang said. That doesn’t mean they should. OMERS has the flexibility to invest the amount in early and mid-stage companies, but if the company or its strategy isn’t right, then it’s not a good investment for the company. “For better or worse, just being disciplined is worth it,” he said.
Early-stage companies are good at raising capital to spend, Jaffee said. What investors want to know is how a company will use its new cash. She points out that many digital health companies can have very lucrative exits — as much as a quarter of a billion dollars. But Jaffee added that the more funding a startup gets, the more it can raise investor expectations. That means a startup needs to answer more questions.
One of the best things startup founders can do is get guidance from investors about the milestones they’re looking for, which can make a big difference, Yang said. Some funds just want to look at metrics, and if you provide numbers that don’t fit their model, you’re an investment candidate. Other funds focus on outcomes, while others seek research that de-risks R&D and shows progress for regulators. Still others are more focused on the team, such as adding key executives.
Some of the new money invested in healthcare companies comes from new sources. The extra liquidity allows different types of investors to enter the healthcare market, Lubienietzky said. Yang agrees, noting that some of the sources of the new cash are not traditional healthcare investors, but more like casual health stock pickers who haven’t invested before. These investors may have successfully poured money into other areas, and they want to see if these results can be replicated in healthcare.
“If you’re trained in this and you’re successful, it’s a really good way to invest,” Yang said. “Is it useful here? It’s too early to say.”
A company needs to think about the milestones it can reach between rounds, Jaffee said. It’s okay to lose money, but the startup also has to prove it can grow. This growth won’t happen all at once in a round, but a round can help startups make some progress in it and set the stage for future funding rounds. Startups need to show enough to show the next stage of investors the vision and execution of the strategy, Jaffee said.
As startups work to build their companies, they must also contend with larger economic factors beyond their control, such as economic adjustments. For Lubienietzky, there will always be corrections. Contributing factors may be economic or geopolitical. Regardless, startups need to build a business and position it for long-term growth. Startups shouldn’t care if a correction comes along, Jaffee said. It can be exhausting to immerse yourself in such thoughts. But she explained that if the startup can’t build its own business, it doesn’t matter what happens in the wider economy.
Young advises startups to be gritty and try not to succumb to FOMO (fear of missing out). For Young, corrections are already taking place. But he differs slightly from Jaffee in that he says it’s important to set expectations for startups. If founders think the company can reach a certain level of valuation because that’s what others have gotten before, they may need to understand that this time it’s not possible. As long as startups can address a real market need, they will be able to raise capital, Lubienietzky said.
“Build something that solves a real problem, and investors will fund it,” he said.
Photo by Walter Lim of MedCity News
