How Investors Evaluate Healthtech Startups

For a country with over 1.3 Bn individuals and a $400 Bn healthcare market, we have very few healthcare-focused VCs. As the healthtech ecosystem matures over the next decade, we are entering the phase where VCs with deep sector expertise will be able to add a lot more value to their portfolio through their cumulative experience, collective wisdom and shared knowledge. 

This begs the question, how do these investors (who were erstwhile healthcare professionals or operators) perceive the ecosystem and do they evaluate healthtech startups any differently? Let’s break down that question:

The Problem

Total Addressable Market (TAM) is a well-known term and features in almost every pitch deck we see, but unfortunately it still remains one of the most misunderstood terms in the ecosystem. Often in healthtech startups, we see TAM as being calculated in ‘billions of dollars’ based on the number of potential patients times the average lifetime spend on the healthcare condition. 

The real question is how much of this is going to be potential revenue for the company and we always appreciate a bottom-up calculation to understand the exact way to reach the Serviceable Obtainable Market (SOM). 

Competition is another key consideration. As a template, this is shown as ‘the other 3-4 start-ups in the space’ in a 2×2 based on two convenient axes such that the current startup stands out! Healthcare delivery is not just about identifying startups, it is about how patients get care today. Competition should include everything: 

• Legacy solutions: To answer the question, “Why can’t hospitals do this?”
• Traditional solutions: To answer the question, “How does this differ from a home remedy?” 
• Non-healthcare tech solutions: To answer the question,  “Can Whatsapp solve this?”
• Adjacent player solutions: To answer the question, “Why will Practo or 1mg not start this?”

The last thing specific to Indian healthcare is the detailed understanding of its unique stakeholder dynamics when thinking of the problem. The reality of average income in India, skewed healthcare access, and poor insurance coverage, among other factors, must be factored in when thinking of a solution. It is disheartening to see wonderful technology solutions without a deep understanding of how and why will doctors, hospitals or even patients ever use these!

The Solution

Is it a painkiller or a vitamin (or candy!)?

We in healthtech investing deal with this question every day — literally and figuratively. We must understand that healthcare delivery is a multi-stakeholder machinery and the introduction of new elements is very difficult unless the solution is exponentially better. Just another EMR, online pharmacy or surgery aggregator has no room for value addition to stakeholders unless it offers an exponentially better value proposition. This must be tested by speaking with relevant stakeholders on whether they will pay for or partner with this solution today or not.

As a healthcare-focused fund, our diligence focuses to a large extent on care protocols and clinical outcomes. There must be a way to measure and show improvement in patient health! That is the core reason this industry exists. Engagement and patient satisfaction scores are critical, and clinical outcomes are of utmost importance to build a long-term defensible business in healthcare. 

A key part of the puzzle is technology scalability. Healthtech should ideally give us the ability to kick start exponential growth at some stage of its journey where the rate of care delivery exceeds the rate at which we invest in resources to deliver that care. We look for founders and companies to have a ‘technology-first’ mindset even if they are solving for a traditional problem in an offline setting. 

And last up is regulatory compliance. As we see Aadhar, UPI and ABHA adoption, we will move towards more regulations in healthcare record maintenance and data privacy. We evaluate the potential tailwinds or risks that a solution is exposed to, based on these trends.

The Problem Solvers!

Fundraising goes beyond providing capital, it is about forging a business partnership. To ensure a successful collaboration, investors closely look at who the skipper of the ship is. In healthcare, it is important to understand the motivation of the founders, to be aligned on the vision and values and always being on the right side of healthcare. 

The founding team ideally should have a strong sense of the healthcare system and its workings which leads them to a key insight that no one else has. The success of VC investments is linked to finding alpha founders. 

Proof Point Of The Solution Working

The problem is large enough and important, the solution makes sense and the founders are stellar. Now the only thing to probe is execution. The proof points for measuring this vary according to the stage of the company and some are specific to healthcare. 

• At the idea or pre-seed stage, we over-index on the team’s prototypes, speed and depth of experimentation and early indicators of execution (like pilot results, partnership commitments etc). The vision and work plan of the founders are important guiding documents.
• At the seed to series A stage, we look for more quantitative customer measures to see customer adoption and engagement (Number of days to 100 customers and D30 retention), Net Promoter Score (ideally more than eight) and successful clinical outcomes from early pilots and studies. At this stage, we do like to see some stability in the financial metrics as well (ideally LTV/CAC greater than 5) and the infrastructure in place for clinical validation or trials. In the case of an EU/US GTM, we pressure test the understanding and practical feasibility of getting CE/FDA approval if relevant.
• At the series A+ investments, the focus is a lot more on operations excellence, detailed review of financials and robustness in regulatory and clinical protocols. We are also stricter about the financial projections and scrutinise all assumptions based on traction thus far and industry comparables.   

In Summary

Every evaluation is followed up by thorough due diligence. The quality of the data room is a critical indicator of the company’s internal processes and should never be underestimated. The diligence spans across legal and financial details and involves a lot of time, capital and resources from all parties. Hence, it is crucial that healthtech startups accurately represent their company and stay transparent.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.