Considerations around raising capital for HIM start-ups by Lora Lindsey

1. The Digital Health Chessboard:
Considerations for Start-ups

2. Healthcare Information & Media (“HIM”) Universe Defined
Professional
HCIT Consulting Services
DTP Advertising Old CME New CME
Clinical Collaboration
Prescribing Data Data Analytics
Physician Reference Directories Research Data
Practice Management
Management
Spectrum
Professional Journals Smart Monitors
Digital Disease Lead-generation Electronic Medical Records
Management Remote Monitoring
Content Information & Media Spectrum Distribution
Healthcare
Doctor Reviews
Personal Health Magazines Tele-health/V-consults Appointment Scheduling
Patient Education Electronic Health Records
Waiting Room Media
DTC Advertising
Digital Health Management
HC Social Networks
Provider Collaboration
Diagnostic Games/Awards UGC Publishing
Consumer
2

3. Elements of Sustainable Companies
 Clarity of Purpose: Summarize the company's business on the back of a business card.
 Large Markets: Address existing markets poised for rapid growth or change. A market on the
path to a $1B potential allows for error and time for real margins to develop.
 Rich Customers: Target customers who will move fast and pay a premium for a unique offering.
 Focus: Customers will only buy a simple product with a singular value proposition.
 Pain Killers: Pick the one thing that is of burning importance to the customer then delight them
with a compelling solution.
 Think Differently: Constantly challenge conventional wisdom. Take the contrarian route. Create
novel solutions. Outwit the competition.
 Team DNA: A company’s DNA is set in the first 90 days. All team members are the smartest or
most clever in their domain. "A" level founders attract an "A" level team.
 Agility: Stealth and speed will usually help beat-out large companies.
 Frugality: Focus spending on what's critical – headcount is a key metric. Spend only on the
priorities and maximize profitability.
 Inferno: Start with only a little money. It forces discipline and focus. A huge market with
customers yearning for a product developed by great engineers requires very little firepower.
3

4. Raising Capital for Growth
Do your homework upfront
Preparation  Know who your best investors are and at which stage they invest at, return
hurdles, etc.
 Map out your business plan in as much detail as possible – be transparent
 Identify all competitors – having no competition is not a good thing
Approach the Investor Universe All at Once
 Lock step discussions with investors is the quickest way to give away your
Value negotiating leverage
 Ask for as much money as you need to fund your entire plan (< 20% market
share), because the funding window may not be open in the future
Ask for help – don’t go to Court without a Lawyer!
 Try to find “Smart Money” – that can help scale a business
Partners  Incubators, venture investors initially and later on investment bankers
 An Investment Banker’s role is to identify and communicate the underlying
value drivers in the business; bring awareness of the operating strategies of
each potential buyer; maintain assertive control of the auction process; have
hands-on management of due diligence; and enlist skillful negotiation
 Strong advisors build venture credibility
4

5. HIM Investments By Stage in Q1 2012
EARLY CORPORATE LIFECYCLE MATURE
Seed Deals Series A & B Series C & D
 # of Deals: 2  # of Deals: 8  # of Deals: 17
 Amount: $1.4M  Amount: $75.5M  Amount: $107.2M
 Typical Deal Size: <$1M  Typical Deal Size: $5M+  Typical Deal Size: $15M+
Early Stage Smart Money and Angels Sources
 http://rockhealth.com/
 http://www.healthboxaccelerator.com/
 http://www.blueprinthealth.org/
 http://www.startuphealth.com/
 http://www.remedysystems.com/
 http://angel.co/
 http://www.crunchbase.com/
 http://gust.com/funding-resource/california-healthcare-foundation/
 http://www.healthevolutionpartners.com/
 http://www.athenahealth.com/disruption/
5

6. Methods for Valuing a Startup
 Cost-to-Duplicate
• Buy or build decision, ignores intangibles
 Market Multiple
 Discounted Cash Flow (“DCF”) – Market Potential
• <20% market share in 5-7 years
 Valuation by Stage
Est. Company Value Stage of Development
$250,000 - $500,000 Has an exciting business idea or business plan
$500,000 - $1 million Has a strong management team in place to execute on the plan
$1 million – $2 million Has a final product or technology prototype
$2 million – $5 million Has strategic alliances or partners, or signs of a customer base
$5 million and up Has clear signs of revenue growth and obvious pathway to profitability
6

7. Potential Buyer List: Investors in the HIM Space
Investors Recent HIM Investments Contact Information
Connecticut Innovations MyCare, Innovatient Solutions http://www.ctinnovations.com
Aberdare Ventures Jiff http://www.aberdare.com
Aeris Capital Jiff http://www.aeris-capital.com
BlueCross BlueShield Venture Partners Change Healthcare http://www.bcbsvp.com
Bluff Point Associates DocuTAP http://bluffpt.com
Charter Life Sciences Health Fidelity http://www.charterls.com
CHV Capital PerfectServe http://chvcapital.com
Draper Triangle Ventures OnShift http://drapertriangle.com
Early Stage Partners OnShift http://www.esplp.com
Easton Capital TigerText http://www.eastoncapital.com
Emerald Stage2 Ventures Halfpenny Technologies http://www.s2vc.com
First Round Capital Truveris http://www.firstround.com
Frontier Capital Healthx http://www.frontiercapital.com
Galen Partners Sharecare http://www.galen.com
Glengary OnShift http://www.glengaryllc.com
HLM Venture Partners Silverlink Communications http://www.hlmvp.com
Insight Venture Partners Kinnser Software http://www.insightpartners.com
iRobot InTouch Health http://www.irobot.com
LORE Associates Halfpenny Technologies http://www.thresholdpartners.com
HLM Venture Partners MedVentive, RedBrick, AventuraHQ, Teladoc http://www.hlmvp.com
Cardinal Partners Awarepoint Corporation, Teladoc, lifeIMAGE http://www.cardinalpartners.com
Chrysalis Ventures Intervention Insights, meQuilibrium, MyHealthDIRECT http://www.chrysalisventures.com
Founders Fund 100Plus, Practice Fusion http://www.foundersfund.com
Innovation Endeavors HealthTap, PharmaSecure http://innovationendeavors.com
Kleiner Perkins Caufield & Byers RedBrick, Teladoc, Awarepoint Corporation http://www.kpcb.com
CHV Capital MedVentive http://chvcapital.com
Versant Ventures Advanced ICU Care, RedBrick http://www.versantventures.com
7

8. Buyer Hot Buttons
Barriers to Entry
Growth Rate & Market Size &
Outlook Share
Intellectual
Competition
Property
Audience Capture Value Management
Drivers
Multi-Channel Business Model
Distribution Maturity
Geographic Potential for
Markets Acquisitions
Customer
Brand Strength
Concentration
8

9. Writing a Business Plan – Pitching Potential Investors
 Presentation: 15-20 slides with a lot of information in as few words as possible.
 Company Purpose: Define the company/business in a single declarative sentence.
 Problem: Describe the pain of the customer (or the customer’s customer). Outline how the
customer addresses the issue today.
 Solution: Demonstrate your company’s value proposition to make the customer’s life better.
 Why Now
• Set-up the historical evolution of your category.
• Define recent trends that make your solution possible.
 Market Size: Calculate the size of market
• Top down (e.g. analyst projections, externally reported)
• Bottoms up (e.g. calculate users/usage/rev$)
 Competition: List competitors, competitive advantages
 Product
• Product line-up (form factor, functionality, features, architecture, intellectual property)
• Development growth/investment roadmap (keep market share under 20%)
 Business Model
• Revenue model (unit economic analysis), pricing
• Average account size and/or lifetime value, customer/pipeline list
• Sales & distribution model
 Team: Founders, Management, Board of Directors, Board of Advisors
 Financials: P&L, balance sheet, cash flow, cap table, sources & uses
9

10. Software Revenue Models
 Software as a service (SaaS) is a software application delivery model in
which customers pay to access and use software functionality over a
network through a hosted, web-native platform operated by the software
vendor (either independently or through a third-party).
10

11. The Dynamics of the Sales Process
Key Factors
Valuation – Closing – Probability – Confidentiality – Business Disruption – Negotiating Leverage
Negotiated Approach Targeted Auction Broad Auction
A carefully selected group of buyers are A limited group of highly qualified buyers are Indications of interest are solicited from a broad
prioritized according to their acquisition interest contacted and offered the opportunity to spectrum of potential buyers with the goal of
& ability, and are contacted one at a time evaluate the Company creating a highly competitive auction
Advantages Advantages Advantages
 Highest degree of confidentiality  Promotes competition among a select  Creates maximum competition
 Best control over information group of prequalified buyers  Asserts pressure on buyers to submit
 Seller can terminate process easily  Confines information distribution to a fully financed bids
relatively small group  Maximizes likelihood that all viable
 Minimal possibility for information to
leak outside small group  Some flexibility to cancel the process buyers will be contacted
without contaminating the market  Most likely to achieve the full value of
 Least business disruption
 Effective approach when there are the asset
 Leaves opportunity to conduct clearly identifiable buyers
another transaction process at a later  Provides early insight on buyer
date  Allows for a faster time-schedule than perspectives on value, structure and
a broad auction issues
Concerns Concerns
 Lack of competition typically will not  Information is broadly distributed
result in the highest value being  Can attract tire-kickers
achieved
 More difficult to unwind the process;
 Negotiating position is weak risk of contaminating the market
 Can take a long period of time  Significant interaction between
 Process lacks urgency greater number of buyers and the
Company
 Two-step approach extends process
11

12. Targeted Auction Process Overview
Preparation Marketing Selling Closing
2 – 4 weeks 1 – 3 weeks 4 – 6 weeks 4 – 5 weeks
Initiation Phase Qualification & Outreach Demonstrate Value Execution
 Review sequence and  Finalize prospective  Receive and analyze  Select winning bidder
timing buyers list indications of interest  Facilitate confirmatory
 Complete internal due  Contact potential buyers  Select second round due diligence
diligence and negotiate CAs participants  Negotiate and finalize
 Develop financial model  Distribute information  Conduct management terms of Purchase
memorandums presentations Agreement
 Gather market data
 Assemble data room  Manage data room  Sign Agreement
 Refine positioning and
access
investment  Conduct listen-only  Closing
considerations management  Facilitate buyer due
presentation diligence
 Compile buyers list
 Prepare and rehearse  Manage interactions
management between management &
presentations buyers
 Finalize draft Purchase
Agreement
 Solicit final bids
 Evaluate bids and/or
contract mark-ups
12

13. Advice to Potential Sellers
 Determine key objectives to be achieved in a transaction, such as strategic and access-to-
Understand capital advantages
Sale Objectives  Agree on importance of buyer characteristics like tax status, commitment to seller’s mission,
market position and reputation
Manage Internal  Involve only critical staff required for due diligence, decision making; limit morale impact
Communication  Minimize market disruption and buyer leverage with limited external communication
 Compile internal information on financial, operational, legal, and market matters
Perform Rigorous
 Resolve any identified contractual or regulatory issues (e.g. assignability of contracts, etc.)
Internal Due Diligence
 Define key value drivers and prepare supporting evidence
 Take advantage of higher pricing environments and natural market cyclicality
Time Market Entry
 Negotiate from the strongest financial position through early market entry
Move Quickly &  Avoid the potential of negative changes to organizational profile and local/national market
Decisively  Hire a transaction advisor when ready to actively pursue options
 Maintain leverage with a dynamic, systematic simultaneous buyer search; avoid sequential
exploration
Involve Multiple  Run an iterative bidding process to identify highest bids, best terms and best strategic fits
Potential Buyers  Negotiate comprehensive terms with multiple bidders to avoid re-trades
 Explore breakup fees for bidders demanding exclusivity
13

14. Stay In Touch!
Lora Lindsey
Healthcare Information & Media
Passionate about connecting People and Ideas
in Health Information & Media (HIM)™
Email LLindsey03@gsb.columbia.edu
Mobile 646.734.8375
Skype Lora.Lindsey1
Twitter @HIMBanker
LinkedIn www.linkedin.com/pub/lora-lindsey/0/185/225
Pinterest www.pinterest.com/HIMBanker
Crunchbase www.crunchbase.com/