INSIGHTS / Blog

The COVID-19 pandemic has accelerated innovation in health and wellbeing technologies. The challenge for growing start-ups in the healthcare sector is how to secure public or private investment to launch their products in a competitive market.

At SETsquared’s most recent investment showcase, over half of the companies pitching for investment were early-stage health technologies. It is a trend that is also recognised in a recent report from the Silicon Valley Bank, which found record levels of capital were allocated and deployed to support innovative companies in the healthcare industry in 2020.

With this boom set to continue, SETsquared held a webinar to explore how company founders should package their opportunity to successfully secure investment. A panel of specialist investors, as well as academics, shared their insights on how start-ups should prepare their pitch.

This event was chaired by SETsquared’s Investment Manager Rosie Bennett and organised by SETsquared’s Scale-Up Programme, which supports growing, innovative companies to raise public and private funding.

When is the right time for healthcare start-ups to look for investment?

Joe Stringer, is a Partner at Octopus Ventures with more than 24 years of experience in healthcare, including founding his own business and leading Google Health and EY’s Ventures and Healthcare practices in the UK.

“Rather than ask when you should go for external investment, I would say decide when you want to go to institutional investment. Map out your business – the dream five years – and then work out how much of a cash injection you need.

“Go for the low-hanging fruit of EIS (Enterprise Investment Scheme) grant funding first. That’s relatively low maintenance and comes with relatively low expectations. Try to maximise your growth that way. Then time the point at which you go to an institutional investor – a VC (Venture Capital) fund – at the optimum point where your cap table is still attractive enough, but also where you need strategic value.”

How can universities help growing healthcare start-ups?

Professor Ian Craddock is from the University of Bristol’s Faculty of Engineering and, as Institutional Lead for Digital Health, heads up a programme of investment and research development across six faculties.

“There’s an opportunity for start-ups to partner with universities for grant funding to take them to the next step. Grant funding is almost a narrative; it’s about imagining a better future and how to put together a team to achieve that vision. There are a lot of experienced grant winning people at universities who, although they may not be very experienced in the commercial world, are quite good at constructing those narratives.

“We also want all our students to get fantastic, meaningful and impactful jobs. Universities in the region have thousands of talented students who are often very strongly motivated to work on industrially related challenges. So, if there’s opportunities for students to work on a particular issue that will improve their CV, demonstrate their skills or give them real world experience, then it’s a win-win for the company and the student.

“Something else we’ve been very keen on within our taught digital health programmes, both PhD and MSc, is to make sure that they’re internationally facing.

“In the UK there’s a temptation to consider that healthcare is something that the NHS does. Whereas the world’s a big place and you have a huge variety of different models of health service delivery. Students come to us from China, India, other places in Asia and the developing world.

“This gives a much more international flavour to our teaching and also to any university spinouts or student enterprises; equipping them with talent who have an understanding of the health domain in their own native countries. They are positioned to explore that market in a way that a student from the UK perhaps wouldn’t be. So, I think that is incredibly useful to start-ups in healthcare.”

What do investors look for in the founding team of healthcare tech start-ups?

Dr Louise Rix from Forward Partners is an investor in next-generation e-commerce, marketplace and applied AI start-ups. She has experience in founding her own healthcare start-up and as a medical doctor.

“I think it’s quite stage dependent. At the pre-seed stage we’re investing in one or two founders.  Hopefully they have a big vision and a well thought out plan to get there, but they’ve perhaps not started on their journey yet. We recognise that they’re going to need to get in external team members to fill the skills gaps that they have.

“At seed, things are a little bit different. By this stage, health tech companies often have some clinical validation. They’ve hopefully become regulated and perhaps done some market testing and already be in the market. Obviously, that’s going to require further skills within the team.”

What detail do investors want to see in pitch decks?

Isabel Fox is a Co-Managing Partner at Luminous VC specialising in healthcare. She is also a UKRI Council Member and sits on the board of Oxford Sciences Innovation.

“It’s all about the team. Strengthening your team with the right people for the right lifecycle of the business.

“We also want to see a MVP (Minimum Viable Product) or some sort of prototype as quickly as possible to be able to get in data to show traction. And that can mean many different things. It could be on the R&D (Research and Development), on IP (Intellectual Property), revenue, on POC (Proof of Concept) or feedback. Essentially, it’s a data set to show that you have a commercially viable B2B or B2C business.

“If you don’t do your customer discovery early enough to see whether you’ve got a viable product and even if you’re taking too long building that MVP to go to market, that’s dangerous for us as VCs. We prefer to see websites or little prototypes that you can push out there quickly to see what traction you get before doing a big build.

“And then the third thing for me, which I’m always looking at, is storytelling and how you can evolve that story with the learning that you’re getting from customers and data sets. We also want to see your ability to story tell in order to be able to attract the best talent, get the best VCs and POCs.

“So, for me, they’re the three areas I’m really looking at. Depending on the business, there’s obviously regulatory FDA (US Food and Drug Administration agency) approvals or IP protection and things like that. But for me, that’s the ‘day-to-day’ rather than the inflection points that I’m really looking for to drive us to the next valuation stage.”

Dr Louise Rix added: “I prefer as much information as it needs for me to understand the story. I typically think that’s more than an executive summary, but if you can get your pitch deck under 40 to 50 slides, that’s also appreciated.

“I would suggest getting two mentors to help you with your pitch deck. One an informal investor mentor; someone that you can show your deck to ask them about timing, traction and they can help out with intros. This is a better approach than preparing to go out to the market before you’ve spoken to someone who’s within the market. You then need a founder mentor who’s six months ahead of you in the process. They’ll have an up-to-date idea of what that process is like and can help guide you through it.”

Joe Stringer added: “We see 25 decks a week. You just want those decks to really scream out at you and tell that compelling story. A key part of that is the opportunity. We don’t often need to be told too much about a problem statement. It’s more about: what is the scale of the opportunity?

“Also being able to show that you can hustle and partner strategically with other businesses is a win in our minds. If you’re targeting the same customer as another start-up founder, but with very different propositions, pick up the phone and see if you can work together.

“Part of our pitch to investors is creating a network effect within our portfolio. So, if you can help spell that out, brilliant. It makes our lives a lot easier when it comes to our own fundraising.”

Why do financial projections matter for early-stage healthcare tech companies that have no sales?

“We all know that a five-year financial plan normally lasts the best part of about two weeks,” said Joe Stringer. “We don’t ask for them to try and trip people up in the expectation that it’ll be followed to the letter. The key reason for asking for projections comes back to actually putting yourselves in our shoes and understanding the expectations of our investors, which vary hugely.

“We have a vast variety of different investors, all the way from retail investors who might be putting £10,000 into a tax efficient EIS fund through to major pension funds or insurers putting £50 million into an institutional fund. With that variety comes very different return expectations. We ask for financial projections to help us bracket the best fund for your business.

“In terms of how you do it before there is any money, it really comes down to your track record as a founder. Have you done this before? Have you got the right team to be able to deliver on the vision and the plan?

“If you’ve got some of that, then we as investors have to think about what we can bring to try and de-risk this opportunity too. Do we have a network in your specific sub-sector that we can use to help you grow, to help de-risk those financial projections?

“So, I’m not going to say financial projections are not important because they really are. They’re important to everyone. But it’s more about de-risking the whole process for everyone.”

Isabel Fox added: “The reason we do the modelling on the financials is we also want to see the thinking behind it. Have people done comparables? Have they looked at the business model changes that are taking place? Have they worked out what this looks like?

“For us, valuation is a mix of the team, the IP, and the solution that you’ve got today with that market opportunity for the future, and how quickly you can get to those inflection points. I personally would prefer to invest in a brilliant team with very little that’s developed than a really developed but poor team that’s not going to be able to execute on that next phase.

“A lot of it comes down to the confidence of the founders; confidence in the way they present this, how they present the way they’re going to get to the next stage, and whether we believe they have the ability to do that. As investors, we are regularly fundraising and having to show upticks to our LPs (Limited Partners), so to be able to get in at a good valuation and know it’s going to have a 3X or 5X at the next stage is really important to us. Companies that take five or six years to get to Series A are difficult for us to back.”

What salary can founders expect in a pre-seed funding round?

Louise Rix said: “We really want founders to be paying themselves enough that they’re not concerned about money, and they can focus completely on their business. However, the higher your salary it will reduce your runway. That’s particularly important at the early stages – the pre-seed stage when things can get very tight.

“As a founder, you aren’t or hopefully shouldn’t be starting a company because you want to be on a high salary. Your goal should be wanting to build a great business, so your equity rapidly increases in value.

“The way to approach this is to understand what you need to live on comfortably, so you’re not concerned about money. Then understand how that’ll impact your runway, but with the expectation that your salary will rise quite rapidly as you go down the later stage rounds of funding.

“In the pre-seed stages, we see a small minority of founders not paying themselves anything – we actually don’t advise this. Where founders are paying themselves a salary we typically see quite a large range, starting at £35k. At Seed and again at Series A we would expect founder salaries to increase significantly.”

Is aiming for US market entry important for gaining investment in healthcare tech?

“It’s one of my personal bugbears that too many of our brilliant founders rush to the West Coast far too quickly and that takes a lot of value with them,” said Joe Stringer. “Part of our mission is to maintain that entrepreneurial talent within the UK and Europe. So, I’d say don’t just assume you have to aim for the US market.

“One of our first investments was actually scaling into 300 hospitals in India. We see just as much opportunity in the fast-growing emerging markets of the global south and the developing world, often because it moves quicker. There’s less bureaucracy, there’s more unmet need and there’s a higher volume opportunity.”

Isabel Fox added: “Staying in the UK market is probably not enough for most healthcare businesses. You’re going to have to scale somewhere else to achieve your full potential. If you’re not looking to the US then the options are either Europe or Asia, but you’re going to have language issues.

“If you do decide to enter the US market, you need considerable cash. You’re going to need to find the best talent to help you open doors. They will have already sold to providers in the US or know the consumer route, and they’ll expect good equity and very, very high salaries. Probably double what you’d be making as a CEO over here. You’ve got to be prepared to pay for that talent.

“There’s also a huge risk involved. If you hire the wrong people in the US, you’re going to be set back a long time. Even big VCs with a lot of cash behind them, struggle to find the right talent. So, if you’re a small UK business, it’s very tricky.

“If you go down this route, you’ve got to go to the US and build relationships. Whether it’s with Mayo or Keizer or Texas Medical Centre. Get a POC and start working with them to get the data and clinical trials to secure FDA approval. You’ll either swim or you’re going to sink very, very quickly. Staying in the UK may be slower, but you’re probably going to survive for longer.”

In summary

The pandemic has triggered several years of digital transformation seemingly overnight, prompting the creation of a new wave of health and wellbeing technologies, and accelerating those that were already in development.

The panellists set out how founders need to prepare before presenting to investors, including the importance of pitching at the right time and having the right skillsets. Demonstrating you have the right team in place was seen as a key factor in winning over VCs, who want to know that you have the talent to take your enterprise to the next level.

Start-ups should collaborate with universities to make joint grant applications in the pre-seed stage, using academic expertise to develop a narrative and the evidence needed to secure investment. Founders can also offer mutually beneficial opportunities to students who are keen to work on commercial challenges and boost their own employability.

The investors gave insight into the elements of a successful pitch deck and advised that founders should find mentors to guide them through the process. On the topic of financial projections, there was acknowledgment that these can be difficult to predict for early-stage enterprises that have not yet made sales. However, they are a critical element of the pitch for VCs who need to convince investors about potential return on investment.

There was also guidance on how much financial return founders might expect in a pre-seed funding round, taking into consideration personal circumstances and their long-term business strategy.

Finally, the panellists explored the importance of the US marketplace to healthcare start-ups, how they should prepare to enter it and other key markets to consider.

The SETsquared Scale-Up Programme provides support to high-growth SMEs around the key challenges of R&D, raising investment and accessing new talent. It includes a direct-link to leading research expertise at six scale-up partner universities – Bath, Bristol, Cardiff, Exeter, Southampton and Surrey.

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