How To Pitch Your Early-Stage Healthcare Startup To A VC? The Three Main Challenges

Tau Ventures is a seed fund and digital health is half of our portfolio; our strong view is in healthcare market size is rarely a major issue. VC funding in a space is arguably a very specific but overall useful metric and before covid hit the US full force, 2020 was poised to be a very strong year per Rock Health (full report here):

More commonly early-stage entrepreneurs face three challenges: long sales cycle, high amount of regulation, and low differentiation. Other verticals like automotive and even certain segments of enterprise like cybersecurity and govtech operate under similar constraints. But healthcare is especially high on all three, creating vast perils for entrepreneurs and VCs alike.

1) Sales Cycle — Frameworks do not yield perfect answers and there are always exceptions, but they are overall useful guides. A framework for the US but that works in many countries — if you are selling into providers expect 9 months of sales cycle, for payers add another 9 months, for pharma add yet another 9 months. What the VC is especially looking for is the full pipeline, understanding how you got a particular, how you are cultivating it, and how that lead can open further doors. Another framework — pre-seed is about a powerpoint, seed is a prototype, A is product-market fit, B is business model taking off. So before even pitching make sure to be clear with yourself at what stage your startup truly is and what the VC’s expectations will thus be. Finally, a third framework that is more specific to the US is the $1M ARR. This magical but not so magical number typically implies multiple recurring contracts and line of sight to it continues being the yardstick for raising the series A.

2) Regulation — Regulation is arguably the single biggest reason for the dearth of early-stage funding for healthcare. Understanding regulation requires expertise and also throws in an existential uncertainty that is not market-based. Even the simplest of regulatory approval can take at least a year because a company needs to demonstrate valid results through clinical trials. There are some shortcuts such as by leveraging existing data or the pre-certification process the FDA is currently piloting which would approve a company altogether rather than individual products. But short of that a startup has to spend time observing patients, which means they need enough cash to sustain themselves, which almost always implies series A. Which is why most healthcare VCs are set up to invest in the A and beyond, creating a disproportionate opportunity for other types of capital (angels, family offices, corporates) in the pre-seed and seed relative to other verticals.

Entrepreneurs can build more conviction with investors by demonstrating there are predicate devices ie they can leverage the other products’ approval. Even if limited in cash, paying a consultant to validate the FDA application before submission is almost always a worthwhile investment. You may think your product is Class I but if you judged at a higher standard for effectiveness and safety, it could be a miscalculation that turns fatal for the startup. Finally, savvy investors will respond favorably if 510K ie premarket submission is a legitimate possibility.

3) Differentiation — Until the day we have robots dispensing healthcare, caring for other humans invariably has a service component. As such, what ends up happening in healthcare is business innovation is comparatively more significant than in other verticals, rather than it being simply about tech innovation. Add to it the fact that healthcare inherently resists giant leaps of innovation, it is in many ways about minimizing the potential of something going wrong rather than maximizing the possibility of it going right. Which means VCs will obviously give credence to disruptive innovation but by and large they will be looking for incremental change in the early-stage of a healthcare startup. Differentiation comes from three main factors: can you do it faster, can you do it cheaper, can you do it better. Entrepreneurs will often focus just on the last one (“better”), arguing their technology gives the company an edge. When it comes to early-stage healthcare it is crucial to factor in how you integrate with the workflow (“faster”) or how you can increase revenues or take advantage of CPT codes (“cheaper”).

Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.