Venture Meets Equity: The New Frontier of Health Tech Investment

The boundaries separating venture capital (VC) and private equity (PE) have begun to blur, particularly in the dynamic sectors of health tech and med tech. This shift is profoundly reshaping the investment landscape, bringing both opportunities and challenges for founders.

Uphill Migration of PE Asset Class to New Ventures

Historically, VCs focused on early-stage startups, while PE firms concentrated on mature companies with steady cash flows. The primary reasons for PE's uphill migration to newer ventures include:

1. Seeking Higher Returns: Traditional mature markets are becoming saturated, offering lower growth rates. In contrast, health tech and med tech offer the possibility of disruptive innovation and consequently, higher returns.
2. Diversification: Investing in newer ventures allows PE firms to diversify their portfolios, spreading risk across different stages of business maturity.
3. Technological Evolution: The rapid advancement in technologies like AI, telemedicine, and genomics has created more opportunities for investments at various business stages.

What Founders Should Expect

1. Different Deal Structures: PE firms might offer different deal structures than traditional VCs, including preferences on dividends, liquidation, and board composition.
2. Operational Expertise: PE firms often bring a depth of operational expertise, guiding companies toward profitability and efficiency.
3. Longer Investment Horizons: PE might operate on a longer time horizon compared to VCs, which can be both an advantage and a disadvantage for founders.

Impact on the Pace of Innovation

The influx of PE money can fuel faster innovation as companies have more resources to invest in R&D. However, PE's emphasis on profitability might also lead some companies to prioritize short-term gains over long-term innovation.

Valuations: Startups vs. Established Businesses

Increased competition between VCs and PE firms can drive up valuations for startups. For established businesses, the PE interest might bring more rigorous evaluations based on cash flow and profitability rather than just growth potential.

Realignment of Investment Bankers, M&A, and Capital Brokers

With PE's increased interest in newer ventures, there's a likely realignment in the M&A space:

1. Broader Services: Investment banks might offer a wider range of services, catering to both VC and PE interests.
2. More Complex Deal Structures: Capital brokers will need to navigate increasingly intricate deal structures as PE and VC converge.

Real-life Examples

1. Tempus AI : This health tech company, which utilizes AI to personalize cancer care, secured significant investment from both VC and PE players, reflecting the high confidence both types of investors have in med tech's transformative potential.
2. 23andMe : Originally funded by venture capitalists, it drew attention from PE as it matured, illustrating the overlapping interests of VC and PE in the med tech sector.
3. Butterfly Network, Inc. : This innovative company developed a handheld, smartphone-connected ultrasound device, drawing investments from traditional VC firms due to its cutting-edge technology. As the company grew and demonstrated market potential, PE firms also jumped in, viewing it as a scalable opportunity in the medical device market.
4. Flatiron Health : Initially a darling of the VC world, this oncology-focused tech firm attracted significant investments from venture capitalists. It was later acquired by Roche, a move that demonstrated the intersection of VC-backed innovation and interest from more traditional, established entities that might typically be associated with PE-style plays.
5. Heartflow : A digital health company that uses data to create a personalized 3D model of a patient's coronary arteries, HeartFlow has attracted investment from both VC and PE sources. Its combination of deep tech and vast market potential made it appealing for a diverse range of investors.
6. One Medical : A primary care platform that initially started with VC backing, One Medical's rapid growth and scalability eventually attracted PE interest. The company's integration of tech and healthcare delivery demonstrated the potential for high growth combined with profitability.
7. IORA HEALTH TEXAS, PLLC : Another primary care disruptor, Iora Health's model of value-based care attracted attention from both VC for its innovation and PE for its scalable and sustainable model. The company's approach showcased how tech can be used to reinvent traditional healthcare delivery models.

These examples further underscore the increasing overlap and convergence of VC and PE interests in the health tech and med tech sectors. Both early-stage innovation and scalable growth potential are drawing diverse investments, changing the dynamics of funding in these industries.

Private Equity (PE) Firms Investing in Health and Med Tech Startups:

1. Silver Lake 's Investment in 23andMe: In 2020, Silver Lake, a well-known PE firm, along with other investors, injected funds into 23andMe, a direct-to-consumer genetic testing company.
2. Welsh, Carson, Anderson & Stowe investment in Leidos Health: This PE firm took a significant stake in Leidos Health, which provides EHR implementation services, demonstrating interest in digital health solutions and services.
3. 凯雷投资集团 s Investment in One Medical: The global PE firm took a substantial position in One Medical, a tech-driven primary care provider.
4. Warburg Pincus LLC 's Investment in Helix: In 2017, Warburg Pincus led a large funding round in Helix, a genomics startup, marking its interest in the cutting-edge of med tech.

VC Firms Investing in EBIDTA Positive Established Businesses:

1. Sequoia Capital 's Investment in Natera: Natera, a genetic testing company that had already reached a positive EBIDTA, received investments from venture capital firms like Sequoia Capital.
2. Kleiner Perkins 's Investment in Livongo: Prior to its massive growth, Livongo, a digital health platform focusing on chronic condition management, attracted VC investment even though it demonstrated a strong business model typically attractive to PE.
3. Benchmark 's investment in Zephyr Health: Zephyr Health, an insights-as-a-service company that had strong financials, received VC investments from firms such as Benchmark.
4. Bessemer Venture Partners in Welltok: Welltok, a consumer health SaaS company that caters to population health management, was EBIDTA positive and had traction, yet it managed to pull in investments from VC firms like Bessemer.

Case Study: Roivant Innovative Approach to Drug Development

Roivant Sciences, under the leadership of Vivek Ramaswamy, presents a fresh paradigm in the pharmaceutical arena. Distancing itself from traditional models, Roivant's strategy revolves around breathing new life into drug candidates that other pharmaceutical giants have shelved or overlooked. Instead of developing these candidates under one roof, Roivant establishes or acquires specialized "Vant" subsidiaries, with each focusing on specific therapeutic areas such as neurology (Axovant) or women’s health (Myovant).

Central to Roivant's approach is the provision of a centralized operational backbone, enabling its Vants to prioritize drug development. This unique combination of acquiring undervalued assets and rapid development within specialized entities has resulted in a faster trajectory toward late-stage clinical trials and even regulatory approvals than many industry counterparts.

Yet, it's not just the pharmaceutical world that's taken notice. Roivant’s model has drawn interest from both the venture capital and private equity sectors. While the firm's agility and innovative approach echo venture capital strategies, its structured, operational support mirrors the principles of private equity. This dual resonance indicates a potential future where collaboration between these investment models could amplify healthcare breakthroughs. In essence, Roivant Sciences deftly merges venture-like agility with the structured support typical of private equity, offering a potential roadmap for future collaborations in healthcare investment.

Case Study: General Catalyst Venture into Healthcare Transformation

General Catalyst (GC), a prominent venture capital firm, has historically delved into reshaping care delivery in healthcare settings. Recognizing a bigger potential, GC recently unveiled the Health Assurance Transformation Corp. (HATCo), piloted by the former Intermountain Health chief, Dr. Marc Harrison. The overarching vision, shared by Harrison and Hemant Teneja, GC's CEO, is akin to forging an "Amazon-like healthcare ecosystem." Their ambitious roadmap outlines making healthcare more accessible, cost-effective, and forward-looking.

A cornerstone of their strategy is to acquire a health system during HATCo's debut year, establishing it as a paradigm for nationwide healthcare evolution. This move intends to lay the foundation for a holistic digital platform, with the objective of eliminating siloed operations. Furthermore, HATCo is poised to work closely with GC's extensive health system partner base, over 20 in number. The collaboration seeks to foster a health assurance ecosystem underscored by seamless interoperability, tapping into innovative solutions from a select coterie of healthcare portfolio companies.

What sets HATCo apart is its for-profit status. Dr. Harrison is a firm proponent of the transformative prowess of capitalism. He, along with Teneja, underscores the importance of aligning stakeholders' interests and emphasizes the long-haul nature of genuine transformation in healthcare—a journey they believe might span decades.

Three pivotal elements shape HATCo's ethos:

1. A shift from the prevalent cost-cutting private equity model in healthcare to one emphasizing platform innovation. HATCo aims to unlock new revenue avenues for health systems, promoting reinvestment in cutting-edge community technologies.
2. A commitment to unbridled collaboration, promoting an open architecture platform, facilitating shared learnings, innovative tech, and transformation guidelines.
3. An unwavering dedication to value-based care, affirming that a patient-centered approach can coexist with business profitability.

HATCo, backed by General Catalyst, is poised to revolutionize the healthcare landscape, melding innovation, collaboration, and patient-centricity into a transformative blueprint.

The convergence of VC and PE in health tech and med tech is reshaping the investment and startup landscape. Founders should be well-prepared to navigate this evolving terrain, leveraging the unique strengths of both VC and PE while being wary of potential pitfalls. The ultimate impact on innovation and valuations remains to be seen but promises to redefine the future of health tech investments.