A high amount of VC investing is often seen as an indicator of the health of the digital health space. But while investors agree there’s a lot of opportunity in the space, some investors think there may be a little too much money.
“There’s a lot more money,” Risa Stack, general manager for new business creation at GE Ventures, said in a panel discussion at Health 2.0's Fall Conference in Santa Clara, California this week. “There’s more incubators, so there’s more series A funders, but there’s also more groups coming in at the later stage. So you’re getting more companies being funded through these incubators, but then there is some later stage capital that’s a little less price-sensitive than some of the traditional VCs. So that’s kind of what’s driving the frothiness of the market. I do believe there’s too much money.”
Stack took the stage with Canaan Partners General Partner Wende Hutton and Ruchita Sinha, senior director of investments at Sanofi Ventures in a panel moderated by independent investor Emma Cartmell.
Too much money isn’t a problem in and of itself, Hutton said. The problem comes when new investors enter the space who don’t understand the realities of healthcare timelines, which can lead to good companies failing.
“What I think is going to be interesting to see with the flood of money that’s come in is our expectations,” she said. “Is the new money aligned with a model that’s feasible in healthcare? Funding companies with high valuations with big rounds, sometimes I think lots of money can’t boil the ocean fast enough because it can’t drive adoption in a provider budget when you’re trying to squeeze out every penny. … What I worry about overfunding into these companies is when there’s disappointment because you can’t drive markets this fast. Good ideas that got pushed too far and couldn’t develop into the market appropriately.”
The danger of having an investor with an unrealistic expectation is one reason that startups should think carefully about who they let invest with them, the four investors said.
“That’s a really good point, not to take money for money’s sake,” Cartmell said. “Your VC is a business partner and they’re just as important as hiring your CFO or what have you.”
Sinha suggested that investors should be strategic when looking at investors’ backgrounds and expertise.
“As you start scaling your company than you want to build a very diverse skill set around the table,” she said. “If your first investor was a tech investor, you want a healthcare investor the sooner the better. The targeting has to be very specific based on where you are. At an early stage you have to think about what specific types of investors are adding value to the company. But the more you scale the more you’re adding in diverse voices.”
Stack added that, in addition to one who is a good fit, companies should pick an investor they can count on.
“Is this person going to be a partner when things get tough? If the market goes down are they going to give you advice?” she said. “It’s really important because companies have ups and downs. So you have to figure out how to be someone that someone’s going to stick with you and help you solve problems. And if you’re in a process where you don’t feel that with an investor, maybe stop and look for someone else.”
The upside is a frothy market makes it more likely that startups will have their choice of investors. But, Hutton warned, the more interest investors show, the more important it is for startups to be picky.
“When there’s so much money, it’s great to feel the rush of the option around you. But we have watched great management teams fall into the rush and the auction, when you’re a hot company,” she said. “If you’re a very experienced management team, that may work out. … But if you’re less experienced, you can go through that auction process and the exhilaration of getting top dollar and getting three term sheets and then you find out a year later that investor doesn’t do any heavy lifting and they’re on 15 boards. They’re really good at that front end auction, but they’re not very good for the next four years you have to work with them.”
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