It’s not only a competitive market for founders raising capital today, it’s also highly competitive for investors looking to partner with the most promising startups and even lead rounds of funding. There has been a record-breaking amount of investments in U.S. startups in 2021, and the second quarter was the most active for IPOs globally in 20 years. With such a glut of capital available, the game has fundamentally changed.
Investors may now find themselves pitching to in-demand startups versus the other way around. In these cases, it’s not only critical to choose the right company to invest in, but also to differentiate yourself from the competition in any way possible to develop the long-term relationship. Because it’s no longer about who can write the biggest checks—it’s about who can bring the most value to the table.
Earlier this year when we pitched ourselves for, and successfully won, the opportunity to lead a series C round of funding for the buzzworthy digitally-enabled healthcare startup Thirty Madison, which is revolutionizing how patients of chronic conditions (including hair loss, migraine and allergies) access ongoing care. Alongside other notable investors, we ultimately led a $140 million financing to fund the growing enterprise.
How did we decide this particular healthcare company was worth the extra effort, and how did we land the deal in such a crowded field? Here are four key takeaways for other investors looking to strike successful deals with the most promising healthcare startups:
- Identify value where others do not
There is a growing trend of patients becoming consumers, taking health care into their own hands and demanding convenience over traditional models of treatment. Thirty Madison directly addresses this need with a number of individual brands that each provide innovative, convenient and effective treatments for different chronic conditions—that was no secret. However, it was something else that really piqued our interest and drove us to keep in close contact with them through two rounds of funding, eventually leading their series C.
What made the difference? We knew that Thirty Madison was evolving its business to focus on addressing patients facing higher acuity conditions and building out enterprise solutions to provide solutions for pharmaceutical companies and employers. While other investors may have only focused on the existing direct-to-consumer business, we saw significant potential in this enterprise expansion.
By taking a different perspective and seeing value in companies where not everyone does, you can more easily identify, and invest in, winning companies.
- Don’t be afraid to pass on a deal initially—but do stay in touch when you see potential
The market today is so competitive that, if you’re just now hearing about a hot startup raising capital, it’s probably too late to land the deal. That’s why one of our secrets to deal-sourcing success is something we call “passed track,” which is essentially a system for staying in touch with companies that aren’t quite at our stage of investment yet, but could be ideal for an investment in the future. We often meet companies that are at an earlier stage than where we invest, but we prove our differentiators early on, make ourselves available for advice and guidance and stay in touch in an ongoing, programmatic way.
Devising a way to identify the winners and stay in contact not only helps to ensure promising companies don’t fall off your radar, it also allows you to continue developing your relationship with their leadership team. That way, when they do reach a stage that merits your investment and are ready for another round of funding, you’re more likely to win the deal because a) you’ll know about it sooner and b) they’ll know you. When founders already know your capabilities, your style as an investor and board member, and the value you bring, that’s half the battle.
- Showcase the actual value you bring to the table
A huge reason we won the Thirty Madison deal was by proving the power and breadth of our ecosystem and our ability to expand their business. In addition to capital, we offered them access to individuals and ecosystems that could accelerate their business. For example, my partner Randy Scott was valuable to the Thirty Madison team as a resource and mentor, leveraging his extensive expertise as a medtech entrepreneur and investor, as well as his experience on the founding team of Lens Crafters (an early disruptor in healthcare delivery) and at Procter and Gamble. We also introduced the company to select members of our advisory board with experiences leading blue-chip healthcare organizations, including the former CEO of Aon Hewitt to advise on further penetrating the employer market, and the former President of P&G, to advise on best practices in consumer healthcare.
To set yourself apart from the competition, bring additional resources or value to the deal beyond simply capital. What can your firm provide founders that others cannot? Can you offer connectivity, advice, and industry or management expertise? There’s no price tag on transformative value. Proving to founders your firm will position them for long-term success makes a much greater impact than capital alone.
- Genuinely believe in their team and core business
A startup can have the most innovative, beneficial, highly desired concept on the planet, but it doesn’t mean anything without a solid management team and the ability to run a profitable business. This is simply table stakes.
When vetting a prospect, remove the future potential side of the equation and look at the baseline of the business: Do they have a good, solid management team? Can they run their core business profitability, even if all other ventures were to fail?
For example, Thirty Madison co-founders Steven Gutentag and Demetri Karagas had proven their ability to not only launch a competitive, innovative new company, but also to run their core hair-loss business profitably, in addition to expanding into new markets with three new brands and a planned enterprise expansion. They had also recently tapped Eli Lilly veteran Michelle Carnahan as company president, significantly boosting their leadership strength supplementing their consumer expertise with deep pharma industry know-how and network. Put simply, we had confidence in the complementary nature of their team.
Approach every investment with this ethos and, at the end of the day, you’re more likely to achieve optimal outcomes and work with terrific, high potential companies.
In an extremely competitive market, it can be difficult to develop the long-term relationship with promising startups. The most successful investment firms focus on identifying winning companies early on, staying in touch until the time is right, and then leveraging the additional value they can offer to differentiate themselves from the competition.
Photo: alphaspirit, Getty Images
Editor’s Note: Our editorial guidelines for Influencer articles like the one above explicitly state that no self-promotion is allowed. As with every good rule, there are exceptions. So it is with this article – the investment climate in health tech is indeed hyper competitive, and this article addresses how to navigate that world.
