We sat down with three prominent investors during the annual Medallion Elevate conference to discuss the industry's current state, opportunities for founders, and how to catch the attention of investors.
Elad Gil is a serial entrepreneur, investor, and Co-Founder of Color Health, which provides the technology and infrastructure to power large-scale health initiatives. Laura Veroneau is a Managing Partner at Optum Ventures, a venture capital firm partnering with extraordinary entrepreneurs to fundamentally change health care. Finally, Julian Harris, M.D., is an Operating Partner at Deerfield, an investment firm dedicated to advancing healthcare through information, investment, and philanthropy—all toward the end goal of cures for disease, improved quality of life, and reduced cost of care.
Below is part two of the conversation. Missed part one? Read it here.
If you enjoy this material, check out more sessions from the Medallion Elevate event. A lightly edited transcript of the session with Elad, Laura, and Julian follows. The conversation has been transcribed and edited to the best of our abilities and please allow for a slight margin of human and machine error. Any questions or concerns, send an email to email@example.com for help.
Derek Lo: Let's transition the conversation and discuss the business side of things. What shifts have you seen over the last year in terms of what it takes to get investors excited?
For context, there's been a few things mentioned. It feels like the average founder is getting stronger. It may be scarier to start a business now; people are more committed, and raising capital is generally harder. I think that intuitively makes a ton of sense. In terms of standardizing a business, and for a founder or someone just getting started, what's different now? Is the bar just higher? What does it take to get over that hurdle, given investors have more time to do diligence and so on? Elad, I would love to start with you, then jump to Julian and Laura.
Elad Gil: Sure, I think at the earliest stages, it just comes down to whether you have a strong idea. Do you have a reasonable, credible team? And then you do have a few proof points? The proof points could be anything from, "Hey, we have two trial customers" to "Hey, we've interviewed 100, 50, or ten customers, and here are the insights we've seen in terms of what they want to be built."
So not much has changed from an early-stage perspective, except people can now spend more time really understanding the market, the problem, the team a bit better, and the team dynamics at the later stage.
“Investors are looking for very different proof points than six or nine months ago.”
Growth is now secondary to strong unit economics with good growth, so you need both now. People are looking at more metrics like burn, multiple retention, and whether or not you're not growing on existing customers; your margin structure matters a lot because what's the actual leverage on the business?
So people are going back to more basic metrics that matter from a later-state perspective. What was happening about nine months ago was you'd have these very fast preemptive rounds where very few people would be doing diligence.
I remember calling somebody to ask about a round they just did and said, "Well, it was only a $7 million investment, so we didn't really do much diligence or call any customers."
I was shocked that that was the kind of behavior at the time. Instead, what people were doing is they'd hear that a company was kind of hot, and they'd offer them a term sheet, and then three or six months later, there'd be another venture fund coming in on top of that at a 3x valuation shift. Then three months later, or six months later, you'd have a follow-on from somebody else, and nobody was deeply doing diligence. I should say very few people; I'm guessing Julian and Laura were, but most people were not.
I think people are back to some of these very basic business metrics and just understanding that you need a good growth rate–at least 2x to 3x if you're at five or ten or 20 million in revenue and with a strong burn multiple ratio so you're not burning a ton of cash to have that growth. That's kind of best to read for a company.
Derek: Julian, I would love to hear your take on that.
Julian Harris: I'm going to build on a point that Elad made earlier, which is, I think part of this is a reset for some folks; it's going back to the basics and taking the time to do the kind of diligence that was standard before.
And some folks didn't shift. As someone newer to the Deerfield team, I will tell you there were definitely some deals we saw, and they were moving really quickly. Our diligence process is our diligence process, and there were times I was frustrated that we couldn't go faster to try to keep up on some of the deals that seemed really hot at the time. But in retrospect, we did the right thing, sticking with our process, and we lost out on some deals. But many of those companies are now having to have some conversations about whether their valuation still makes sense. So it probably is a lesson for all of us.
There will be another bubble; there will be another period like that where the deals are sort of turning around in a week or two. I think [we need to be] taking some lessons and storing them away so that exuberance doesn't catch up when we need that next moment because it'll come back, it'll happen. It's cyclical.
Laura Veroneau: I wholeheartedly agree with what the two just said. We would be more entertaining here if we all disagreed with each other in a big way, but maybe to give another lens on what gets us excited [is that], we're extremely focused on founder grit and our founders. We love our founders. We think that a lot of the company's success is because of the founders, the founding management teams, and all the different pieces. Derek, that's why we love you, and I think both panelists have said it well. I think this period is exciting because jumping into the market and starting a company in this period means you really want it. You have something you are passionate about and probably have a fair amount of grit and expectation of the sort of adversity that you're going to face and excitement or at least a focus on overcoming that. It is a little bit exciting to see the profile and the grit of founders jumping into the space right now, whether that's brand new companies or the companies trying to figure it out at the seed series or A stage after what has been a very different last couple of years.
So I think the founder's grit at this moment and that showing up in the deals is one of the more exciting things for us to see as we look at the new deals coming through. What we don't want to see as much of, and we don't play, we usually play with existing portfolio companies at the growth stage, but we're not as excited by, as Elad said earlier, the million dollars in error and billion dollar valuation. Some folks are still in the market trying to pull off deals like that. So that, to us, is unexciting and uninspiring. It just doesn't set the company up for success in any way.
Bottom line: great companies will still get funded
Derek Lo: Yeah, it makes a ton of sense. Do you all think we will see digital health funding levels return to what we saw in 2021? Are these going to happen a year from now, five years from now? Or do we think that that period was just incredibly anomalous, and we're never going to see something like that again?
Laura Veroneau: I don't know what my answer to this question is, to be honest. On the one side, you have a lot of really large funds raised across growth players, early-stage players, and nontraditional healthcare folks with the healthcare focus.
Now you have a lot of growth funds tied to really successful private equity firms coming into the market, probably the area we've seen most active honestly with our companies in the last couple of quarters. So you have, to Julian's point, a lot of capital there, but you also have a lot of dynamics tied to that capital and the LPs and those funds. If I had to predict, we will see a ton of consolidation in the next six to twelve months, and I think that's going to be once everybody figures out what they're doing from a strategy perspective, takes that step back and figures out how they're going to deploy their capital, comes to terms with some companies that just aren't going to make it, and then causes the ecosystem in many different ways to be creative with consolidation and different funding approaches.
And then I think we'll probably not see the same level of funding. You see the same excitement and commitment to health care, but the funding was sped up so fast by a lot of the growth entrance in the market and changed the time period that deals got done, which pushed all the healthcare investors who wanted to get into some of those deals to move quickly [so there were] a ton of big rounds happening in record speed with not as much diligence.
If we believe we are sort of back to the pre-COVID period and to Elad's point, it might still adjust a bit because that was an exciting time for investing in the market overall. Then we can expect that a lot of capital deals will probably take a normal amount of time. You don't have 100 million dollar rounds happening in one week, with some pressure coming to speed up every round, so I think we still see far above where it was before the growth of the digital health market. But I don't think in the short term here; I don't think we see the pace of deals causing the amount of capital to flow in the way we saw in the past.
“But I do think we will see different uses of capital that might be tied into financial sponsors, helping with some of that consolidation and going after opportunities in that way.”
That's my best shot, Derek.
Julian Harris: I agree with Laura. We probably won't see the same top-line number, but I think great companies will get funded, which depends on entrepreneurs to some extent. If we see people identifying new areas of potential innovation that are different and exciting, that will create another [reason] for people to take a step back. It will determine whether or not funds should get larger, and therefore there's more capital available. It would ultimately depend on establishing new funds and additional dollars going into existing funds.
There's just a lot of 'me too' happening, and we need to see some step function and differential innovation for funding to get back to the level it was before. And I'd be excited to see that happen. But I can't say that I see the beginnings of that in any sub-sector that we look at so far, so I probably lean to the more conservative end, which is less likely in the near term.
Elad Gil: I agree with that. It's kind of interesting because if you look at the Internet bubble of the late 90s as an analog, and it's an imperfect one for all sorts of reasons, fundamentally, what happened is you had a massive run-up in venture capital and funding of companies and IPOs and everything else. Then everything fell off the cliff for a period of time. Things froze. Everybody was in shock in terms of what to do next. Then you had the next cycle. Then it took, I don't know the exact time period, 10 or 15 years for you to get back to the same funding levels from 2000. But eventually, you got back there. And it's interesting because a number of venture firms that are very prominent today at the time had to explain to their limited partners of people who fund venture capital that venture capital, like any other business, is a cyclical one, where you have boom and bust cycles, you have overspending just like semiconductors or other things. Arthur Patterson, who founded Excel, had to show this curve in past venture capital cycles to his LPs to explain what happened in 2000 and a lot of the LPs in Excel took their money out and said, "We're not funding this room anymore."
Then, they famously went on to fund Facebook a few years after that. So I think the same thing on a much more minor scale will happen here, where there will be some retrenchment, some people will exit the market, and people will spend the money they have more slowly in terms of investing.
But fundamentally, we are facing a 20-year transformation in how healthcare is delivered. And that transformation is fundamental, and it will lead to all sorts of very large companies. And that means that fundamentally, eventually, funding levels will return. I think it's [depends on] what is your time horizon and if it's two years, it's not going to get there. If it's ten years, maybe it will. And so it depends on your perspective.
Opportunities are still massive for founders
Derek Lo: Thank you all for sharing. I think it's super helpful because it affects how you operate and when you think about timing the next fundraise and so forth. On that note, maybe the last question is, do you have one or two nuggets of advice for founders and operators? Elad, perhaps we can begin with you?
Elad Gil: Sure. I mean, if you're an early-stage founder, I think the fundamental advice is to find something for which people will pay money and make sure that there's a payer. Because one of the confusing things in healthcare for people who come from outside of healthcare is the person who pays for things is often the insurer, the person who actually decides what you get is the doctor. Then you, the patient, are the one who benefits. There's a little bit of a distorted series of steps in healthcare that don't exist in other market segments. But fundamentally, if you build something valuable and figure out how to distribute it, you'll do very well.
It's back to basics for a later-stage company if you can [plan to] have 30 or 36 months of cash or more because the environment may get worse before it gets better. So I know a number of people who are going out and doing small top-out rounds will raise another twelve months of cash based on the last valuation or sometimes a slight bump, or I'm seeing other ways for people to make runway last. They may be doing layoffs, maybe doing other things. The flip side is that if your business is working very well right now, this may be the perfect time to be offensive. You can buy other companies or hire great employees; you can price things to get customers from others. You can do all sorts of very aggressive tactics if you have the financial wherewithal to do it. And so really focusing on that financial plan and how you're going to approach it and that operation plan will matter a lot. And so for some people, this is the time you should be going for it. And so it may be a very exciting period for a reasonable subset of companies.
Laura Veroneau: I like moments like this. I see it as a massive opportunity and just an opportunity to flex different muscles and think about things with a new lens and problem-solve in different environments. So for the entrepreneurs and founders, healthcare has so many opportunities.
We are in the early innings of a very long journey here on the healthcare side, and a lot of low-hanging fruit is still out there; a lot of massive innovation needs to come more broadly, and I think the opportunity is there. We're extremely excited about it, and I think the moments we saw over the last couple of years pushed the industry forward in many different ways. And not to say everything that was done was scalable, but it created opportunities for partnerships and a deeper understanding for the incumbents to have of the early stage innovators that fundamentally changed the actual opportunity for folks overall. And I don't think that that's going backward in any sense. I think the opportunity is still massive, and it has been pushed really, really far ahead because of the last couple of years.
I think the most important thing in healthcare, or one of the most important things in healthcare, is the know-how on the commercial side. And it's very different depending on what you're going after. If you're a vendor, if you're a provider, if you're focused on Medicare, if you're focused on Medicare, if you're focused on something else altogether, and you almost have to start with that after you know what you're going after because the real problems sometimes actually surface because of that structure and because of that know-how. But regardless, the commercial strategy often dictates who wins in healthcare, and I think that can't be overstated enough.
Julian Harris: I think part of the opportunity is for entrepreneurs to take a step back and ask how they can build a truly differentiated product. It's not to say that you can't. Again, there are a lot of great companies that were 2nd, 3rd, or fourth to market. But if we're looking for ways to build on some of the secular trends that Elad was alluding to, it's really about disruptive innovation, and you know it when you see it. I mean, those conversations you had even in pre-bubble times where you meet with a management team you've got an entrepreneur with who's seen a problem, in certain cases, it's not the sexy problem. It's an unsexy problem that people are applying technology differently.
That's what's interesting about Medallion. You're taking a problem that people have been talking about forever. It has been a pain point forever, and what's happened is that the technology has evolved in some differentiated ways that allow you to take an unsexy but problematic issue and try and bring new technology and solutions to it.
“I think for entrepreneurs taking that view, there really is a lot of opportunity, and there will be investors who want to partner with them, who want to fund them, and have an opportunity to think about how they scale and grow. It is a fun time as an investor because there is an opportunity to be creative.”
Deerfield is nothing, if not extraordinarily creative, in terms of how we approach capital structure with partners. And we always try to take a blank sheet of paper and understand what the partner is trying to solve. We have the ability to flex up and down the capital stack to support them, whether it's through equity or debt or debt plus warrants or royalties or any other sort of range of pretty creative financing structures.
There are times when those tools are more and less interesting to companies, but we're at the moment now where nothing is really off the table. We have conversations with folks who would never have thought about debt at this point, are interested in thinking about debt, or are interested or open to more creativity from an equity perspective. So that makes this work more interesting because you do have to put your thinking cap on in a different kind of way. But if this business is in part around meeting your partner's needs, it really is a moment where you can take a step back and understand the business, the product, the strategy, and then the management team's goals.
In some way, we get to be even more service-oriented and try to align what we offer to a potential partner that aligns with their goals from a financing perspective, which is fun for us.
Derek: Amazing, and thank you, Laura, Elad, and Julian, for your insights and joining us. I hope folks in the audience walk away with some great insights on where venture is going and what it takes to stand right now as a business.
Julian: Thanks, Derek.
Laura: Thank you all.
Elad: Take care.
About Medallion Elevate: The Future of Healthcare Operations
At Medallion's inaugural debut, Elevate: The Future of Healthcare Operations, healthcare executives, founders, and leaders came together and highlighted the collective optimism of an industry that's ready to elevate and advance the industry.
It represented actionable insights, disruptive ideas, and ground-breaking insights from some of the best healthcare leaders, visionaries, investors, and founders. For more information and to view the sessions on-demand, visit: https://elevate.medallion.co/events/medallion-elevate-2022/registration