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Santé Ventures’ Kevin Lalande on how to drive returns in an era of overvaluation

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Since its founding in 2006, Austin, Texas-based life science and healthcare investor Santé Ventures has backed more than 30 companies and established a steady track record of successful exits including Claret Medical (acquired by Boston Scientific for $270 million), AbVitro (acquired by Juno Therapeutics for $125 million) and Millipede Medical (acquired by Boston Scientific for $325 million).

Last month, the VC announced the close of their third fund, a $250 million fund that exceeded the company’s initial $200 million goal. Santé plans to deploy that capital across 20 to 25 early stage healthcare and life sciences companies. Currently, around 6.5 percent of the fund is deployed into startups like sleep apnea medtech company Cryosa, Type II diabetes med device company DyaMX and personalized cancer treatment startup Geneos Therapeutics.

Sante Ventures Managing Director Kevin Lalande

In an interview, Santé Ventures Managing Director Kevin Lalande shared how the company’s organizing investment philosophy and discipline is intended to “engineer the luck out of fund-level venture capital returns.”

Responses were lightly edited for content and clarity.

Santé’s newest fund has more than 30 LPs including a new investor in the Pennsylvania Public School Employees’ Retirement Systems, can you give a little background on how it came together?

At the end of the day this fund came together for the reason I think any any fund does which is fortunately where we were able to perform with the money that was entrusted to us by our investors in our prior two funds. If it’s in the health care sector and in particular if there is an innovative new way to deliver better health outcomes for fewer dollars invested that is something that we’re potentially interested in. Our investors in our prior two funds have received a really attractive return on their capital with us. We targeted 200 million and we’re fortunate to be oversubscribed and so we closed at our hard cap of $250 million.

You’re one of the only life science and healthcare focused VCs in Austin, how have you used this presence to your advantage?

Austin specifically and then of course Texas more generally is a massive economy. I think it’s the second largest state economy in the country and there’s a deep medical and health care infrastructure here in the state. Now of course with the new Dell Medical School going in particular and the University of Texas MD Anderson and the Houston Medical Center, there is a rich source of of thought and innovation in healthcare. We want to make sure that we see all of the deals that are here in our backyard, but we’re really looking for technologies that can compete on the world stage because you can’t really build a durable franchise unless it really is the best outcomes anywhere.

I saw a whitepaper you wrote in 2011 that pegged optimum fund size in the life sciences at around $250 million, it seems like that idea is consistent with this newest fund.

Empirically it holds up. We’ve updated the data since 2011 and it’s really just a matter of probabilities and how statistically lucky you need to get. Billion dollar outcomes are great, it’s just hard to know that a priori when you’re sitting at a seed or a Series A. There’s a certain set of prior probabilities for what these companies ultimately sell for and we take those and aim for the fat part of that curve. Since these companies are not valued on cash flow, they tend to have a clearing price for what a successful company looks like. And since failure is a common feature of these companies because they don’t generate their own cash flow, then when one os successful it’s got to be able to return a significant fraction of the entire fund to make sense in a portfolio. What we always say is that our product for our investors is the portfolio. We work hard to make every company as successful as we possibly can, but they won’t all succeed and that’s one of the reasons why we invest as early as we do, we’re as active as we are and why we manage the size of fund we manage.

You’ve said you want to drive returns “without relying on exits at unicorn valuations,” is this about setting realistic market expectations about valuation and exits?

In terms of the realism aspect, today there are some massive valuations out there. But these funds have 10 to 12 year horizons. We can’t know what the world is going to look like in another in another eight to 10 years when these companies we’re building today start exiting, but we know we do know that the valuations that we currently have are a bit exceptional. This unicorn phenomena is a bit exceptional and it’s usually rare at any rate. So we want to fund strategy that works whether the economy is expanding or recessing or whether biotech or medtech is in favor or out of favor. The best way we know how to do that is find you know very key unmet medical needs with novel new technologies and exceptional teams and then do it in a fund size and a portfolio structure where our returns will be good even if even if the exits aren’t billion dollar plus exits. 

Everyone says they’re a “hands on investor,” but how do you actually try to prove out that commitment?

If you think about it we need to be very active because our first investment typically will go in at the seed, Series A or occasionally the series B round. In the majority of our prior portfolio, we were the first investor into the company. We were often the only investor and sometimes the organizing investor. We literally created the docs themselves. We’re hands on because that’s what’s required to build successful companies at that stage. In the case of TVA Medical for example we negotiated the license for the technology that was invented at the Beth Israel Deaconess and later got purchased by Medtronic and was sitting fallow on the shelves. We brought a CEO from Minneapolis to Austin and built that company basically from inception to exit here in Austin.

At stage that you’re looking at companies, there’s still plenty of risks and ideas change, so what are the most important factors you consider when cutting checks?

It starts with absolutely compelling healthcare needs. So a healthcare value proposition in terms of quality of life, health outcomes and health economics. Second is the quality and the caliber of the entrepreneurial team that we’re putting together to go after this. That is a combination of everything from just a partnership instinct to an ongoing source of innovation. As you said, many times at these companies the original product conception needs to go through several iterations before it’s ultimately successful. Finally it’s the capital plan, the amount of time required and the economics that the firm would own the deal are all major considerations as well.

Especially at the early stage some of the projections laid out by startups are wildly optimistic, so what metrics are you looking at to inform your decision?

Look, early stage financial projections exist as a discipline in order to make astrology look respectable. We’ve been doing this for a long time and the pattern matching and prior experience is important to developing a sense for what capital plans are going to realistically be. Part of the value that we can add is coming up with realistic capital plans and helping shape the team and raise capital along the way. The nice thing about healthcare is that much of the market and the demand is rooted in biology. If you do the epidemiology right and you do population studies correctly, you can better size these markets than is often the case in an emerging technology market that just doesn’t currently exist. Any kind of investing has its advantages and disadvantages Healthcare has a slower and more complicated regulatory cycle and reimbursement but if you do your homework, you can know what the total cost currently is to the system and you can model out the potential savings.

Photo: bob_bosewell, Getty Images

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