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Two Top Health Investors Share Their 2023 Tips for Founders · StartUp Health NOW Podcast

• 0:00
  You can raise money in any market. Mm-hmm. You might not like the terms at a given point in time, but you can raise money in any market. And, and capital is tighter, and so you might have to work a little harder.
• 0:10
  It might take a little bit longer to do that.
• 0:13
  But what I, I would encourage early stage companies to do is to be persistent, to think about some non-traditional sources of capital, which may come from strategic partners as opposed to from a venture firm or from a financial institution.
• 0:29
  [upbeat music] Welcome to this week's episode of Startup Health NOW, the podcast where we celebrate the entrepreneurs and innovators who are transforming health. I'm your host, Logan Plaster.
• 0:42
  Whether they like it or not, and they probably don't, every health tech founder needs to think about money, how much they need, and how to get it.
• 0:50
  For many founders, raising outside funds becomes a whole new full-time job that they have to take on. This year, funding in the sector has dipped sharply, making that job even harder and more stressful.
• 1:02
  On the show today, we'll hear from the other side of the table. We'll sit down with the heads of two major health tech investment firms and hear how they're advising founders in 2023.
• 1:13
  First up is Lee Shapiro, managing partner at Seven Wire Ventures and a longtime collaborator with Startup Health.
• 1:19
  Lee is a luminary in digital health investing, so we asked him for his macro view of the industry and got a few practical tips for founders raising funds today.
• 1:29
  Second, we'll hear from Shawn Allis, managing partner at Distributed Ventures, a one hundred million dollar fund that invests in seed and Series A deals and has a strong health tech focus.
• 1:40
  In our chat, Shawn breaks down where his firm has found success recently and exactly what he looks for in a pitch.
• 1:47
  To start, here's my conversation with Lee Shapiro, recorded at the ViVE conference in Nashville in March 2023. [upbeat music] Lee, thank you for joining me today.
• 1:59
  Logan, thanks so much for having me, and always great when I have a chance to chat with you at these events. Yeah.
• 2:05
  Well, uh, it is a privilege to get to talk to you because you have a advantage point on this market that not a lot of people do.
• 2:12
  And so I just wanna start by, by saying kinda where's your head at coming into this meeting and looking at the health tech market, downs, ups, kinda where do you feel like we're at right now?
• 2:23
  Well, so I'd be remiss if I didn't start off by saying that I got here, ran into meetings, you know, all the energy that comes from being at a conference like this, and it's wonderful getting a chance to see people that, you know, in person after so long when these events weren't happening, like HLTH last year and, and now this.
• 2:43
  Um, but then the news of the school shooting here in Nashville, um, I think brought so many of us back to reality.
• 2:50
  And one of the things that we're not talking about as an industry, um, is the way in which we really need to focus much more on mental health.
• 3:01
  Um, and there's a lot of great work being done by many companies on the floor in this area. Um, but also, what role do we have as a technology industry to play in terms of helping to address some of these issues?
• 3:15
  And there are so many smart people that are here. I think if we put some of that energy towards saying, "What can we be doing to address some of the challenges that we have with school shootings in this country?"
• 3:27
  Um, we'd probably be able to make a difference. So- Yeah... it's a challenge. Um, maybe, you know, maybe one of those things that we can think about for another moonshot. Yeah, yeah. I mean, are there
• 3:38
  strategies being employed in mental health in terms of telemental health or virtual care that particularly excites you that you're seeing?
• 3:46
  Well, I love the fact that we're making it more accessible, and certainly all the statistics that we've seen around telehealth visits is that the predominant use has been for mental health.
• 3:57
  So we're making it more available, more affordable, and more impactful for individuals who need it.
• 4:03
  Um, we have a great company in, in our portfolio that just announced a recent fundraise, NOCD, that focuses on people with severe mental illness, and getting them
• 4:15
  diagnosed more quickly and getting them access to treatment is something that's making a huge difference in improving people's lives.
• 4:23
  And I'm encouraged by the fact that not only are there companies that are approaching this with the use of, of kind of this virtual component, but also tying together kind of the virtual and the physical and referring people in for treatment who might need it, and that's another way in which we can help people manage some of the challenges they're facing.
• 4:44
  How are you guiding your firm through this next season as you just look at the financial crisis as it is or just the financial situation that we're dealing with?
• 4:54
  Uh, how are you talking to your team and the folks that you've invested in? We started having a dialogue with our portfolio companies in 2021 about the need for them to be thinking about cash conservation,
• 5:09
  raising money, thinking about kind of a long-term 24-month plan. Mm-hmm.
• 5:14
  We may have undershot the mark there a little bit because here we thought get through 2022, get through 2023, but now it's also probably 2024 into 2025.
• 5:25
  And the companies that we work with have all had kind of their little bit of a scare based on what the circumstances were, whether they banked with SVB or not, honestly. Sure.
• 5:37
  Because you have to recognize that what SVB stood for was emblematic of our industry as a whole. They were the banker for early stage companies. They were willing to take risk. Yeah.
• 5:49
  And so the question becomes: Who will step in now and be able to act with these companies and give support at a stage when maybe they're not profitable yet, and they, they need access to capital.
• 6:03
  They need banking services for companies that-May not have the traditional- Yeah... framework of a large Fortune 500 company.
• 6:11
  So I, I'm encouraged by the fact that the community's rallied together, um, that we were able to quickly transition the assets of, of SVB with a government guarantee, and many of the good people who worked there, um, are going to be now with either First Citizens or other institutions that hopefully will provide that type of support.
• 6:30
  Yeah.
• 6:31
  Um, I mean, besides telling your portfolio to b- be cash [laughs] responsible f- over the next couple years, what other strategies are you encouraging them to employ, um, just to thrive in, in the face of conflicts, you know?
• 6:44
  Well, we've seen this transition in the market, and, and it occurs from time to time. The pendulum swings. We were very much focused in 2019 and 2020 on growth, and now it's about profitability.
• 6:57
  And we've been helping them to appreciate what they need to do in terms of being able to demonstrate, if they're not already profitable, what's that path to profitability? And what they have to be able to do is to focus.
• 7:12
  Uh, many times early stage companies are like what I experienced coaching my kids in soccer. Mm-hmm. Um, all the kids run to wherever the ball is. Mm-hmm.
• 7:20
  And if there's more than one ball on the field, then you're chasing a lot of balls at the same time.
• 7:24
  And I think that you have to find ways to be able to focus right now, make sure you have good product market fit, are able to demonstrate value to your customers, and to be able to show that path to profitability, and, and to do that in a way that's convincing to your investors by actually doing it.
• 7:41
  Yeah. Um, and so that's part of what we're working with them on. Got it. So you've got portfolio companies that, you know, have worked with you to raise funds, and they're in a privileged position with that.
• 7:51
  We work with a lot of companies that are maybe in a dicier position, who are maybe thinking of raising funds in the next few months or, you know, are in that, that crucible moment.
• 7:59
  And I wonder if you have any advice for... There are hundreds and hundreds of startups who need to raise now. Um, what are your thoughts about that?
• 8:07
  We invest in seed and Series A companies, and we're f- fortunate to have a great partnership with StartUp Health in terms of being able to work with great companies. Um, you can raise money in any market. Mm-hmm.
• 8:19
  You might not like the terms at a given point in time. Yeah. But you can raise money in any market. And, and capital is tighter, and so you might have to work a little harder.
• 8:27
  It might take a little bit longer to do that.
• 8:30
  But what I, I would encourage early stage companies to do is to be persistent, to think about some non-traditional sources of capital, which may come from strategic partners as opposed to from a venture firm or from a financial institution.
• 8:46
  And many of the companies that I know that are in the StartUp Health ecosystem are serving some great communities where there might be opportunities to reach out to those who are being serviced and to say, "We're gonna help make a change.
• 9:00
  Why don't you be part of that and invest alongside of us?"
• 9:03
  So as an example, um, we have companies that are working with health systems or health plans that are trying to kind of change some of their behaviors, but they're getting capital from them.
• 9:12
  Or we have strategic partners on the distribution side that are also willing to make investments into the future of those companies. And we'll see more of those interesting collaborations as we go forward. Yeah.
• 9:25
  Uh, to, to paraphrase the saying, some people say, "Don't let a good crisis go to waste," and I wonder what your thoughts are in terms of talking to a founder and saying, "Look, learn the lessons of this moment and actually come out stronger."
• 9:36
  You know, whether it's a silver lining in what's going on, or whether it's just learning during challenging times, what would you hope a founder would take away from this moment?
• 9:46
  I think founders should learn that the way in which they operate, um, has to be with a mindset towards who are they serving.
• 9:55
  Um, oftentimes many companies are focused on bringing that dream to the market and bringing that product to market, and not necessarily recognizing how it will fit into the workflow of a provider- Yeah...
• 10:08
  or the life flow of a consumer. And just because you can build something doesn't necessarily mean that it's a sustainable company.
• 10:16
  Um, many companies that you've met here and that we've also met with, um, have some great offerings, but they may not be sustainable as a standalone company.
• 10:26
  And so that means that the founders should start to think about where, what's the right home for this offering longer term? Yeah. And it may mean that they are building something with someone else- Yeah...
• 10:38
  but not necessarily independently. Yeah, yeah. Um, and that can be a good thing.
• 10:43
  So I mean, an underlying theme I'm hearing from, from that is, like, the humility to recognize, like, what am I really building and who is it really helping? Exactly. Yeah. Lee, thank you so much for taking time with me.
• 10:55
  Uh, your, your leadership in the market is really meaningful, and it's pr- it's... I appreciate hearing your, just where your, your heart is in this right now. So thanks, Lee.
• 11:03
  Well, Logan, thank you and the StartUp Health ecosystem for all you do. All right. [upbeat music] That was Lee Shapiro, managing partner at 7wireVentures, speaking to me at the ViVE conference in Nashville.
• 11:17
  Next up is a conversation with Shawn Ellis, managing partner at Distributed Ventures.
• 11:22
  Shawn talks about where he sees opportunities in the market and what founders need to do to get the attention of a $100 million fund like his. Enjoy. [upbeat music] Shawn, thanks for joining me. Logan, my pleasure.
• 11:37
  Great to be here. All right. So let's just talk about Distributed Ventures. Sure. What makes it different? Absolutely. Um, so we're a $100 million seed and Series A focused fund.
• 11:47
  We look at health tech, digital health, but also fintech and insurtech, so a little bit of a broader aperture. Um, we work very closely with our companies and our limited partners to help accelerate- Okay...
• 11:58
  uh, the, the portfolio companies that we back. Um, go to market strategies, product refinement, pricing, all of the above.
• 12:06
  Uh, very hands down, very hands-on collaborative approach.I would say a lot of firms say they're hands-on, or say they offer coaching, they say they help you go to market.
• 12:17
  Uh, how would you say, uh, your approach to, yeah, to that coaching piece is different? Yeah. Cou- couple different dimensions to it.
• 12:25
  Um, so number one, uh, in terms of our investment team, we've been on the other side of the table as founders. Right.
• 12:31
  Um, we have very deep industry expertise in the areas where we play, so you've got a, a bit of a, a distinction at the investment team level.
• 12:39
  And then moving to that statement about the strategic limited partners we have and the way we work with them, um, interface in a really streamlined way, have an innovation forum that they can plug into, um, have leaders that are dedicated there, so it's a really streamlined point of interface, um, to help these, these founders, you know, navigate their way in the early innings of their businesses.
• 13:00
  Uh, what stage of business do you look at? Uh, so seed and A. Uh, we've skewed, uh, earlier out of this fund- Okay... uh, and, and done primarily with seed. Okay. So a lot, lot of seed stage.
• 13:11
  What are the challenges that most of your founders are facing? Yeah. Um, well, first of all, uh, startups are always challenging, right? Feels like you're, uh, you're climbing a mountain that, uh, just keeps going.
• 13:23
  Uh, but I think the, the market of late is definitely throwing some curve balls to founders, obviously with SVB and some- Yeah... banking crises. Uh, just, just money flows- Yeah... have been challenges.
• 13:34
  Uh, but I think the sort of the broader, more persistent, um, dynamic that we're starting to see is a higher bar in employer contacts, higher bar as it relates to, uh, pricing models, return, uh, on investment, uh, what are they really getting from these solutions?
• 13:51
  And so that's forcing a lot of founders to think about different risk-based models, utilization-based models, price points, so that they can remove some of the friction for the early adoption of their product.
• 14:02
  Are there some strategic refrains that you hear yourself coming back to again and again in conversations?
• 14:07
  Um, I, I, I think what's been great for the venture market, both on the investor side and for founders, is, is that kinda 2022 and '23, um, gravity's kicked back in. Okay. Right?
• 14:20
  Uh, founders, you know, are, are sort of building businesses in a scalable, disciplined way that kind of involves common sense. Yeah.
• 14:27
  Um, so th- that's great because I think there was a period that was sort of suspension of reality, uh, when capital was slow- So-... a little bit more freely.
• 14:35
  So you're seeing a bit of a silver lining in what is definitely a rocky situation. I think so.
• 14:39
  I mean, we're definitely seeing founders that are building more durable businesses that are gonna be, you know, great companies. Uh, not that they aren't today, but they're gonna be great companies at scale- Yeah...
• 14:50
  three to five years down the line. Is there a vertical that you're particularly interested in right now? What would you like to get pitched? Yeah.
• 14:57
  So I think particularly within the healthcare arena, we're big fans of virtual centers of excellence. Um, any model where you can create a more efficient market between demand and supply.
• 15:10
  So a couple examples of that, we've invested in a fertility company that's focused on male infertility. Okay.
• 15:17
  Um, what's really interesting about that subcategory is there's an extreme constraint on the supply of care- Okay... in the form of male infertility-focused urologists. Okay. They're clustered around major urban centers.
• 15:29
  There are only about 200 of them in the country as a whole. Wow. Um,
• 15:33
  on the demand side, it has not been, uh, the universal standard of care to consider male infertility while women are going down their infertility- Right... and treatment path.
• 15:43
  And so this is really about, uh, more efficiently meeting that supply and demand and creating a better care experience, leveraging telemedicine and, and some of the virtual tools that COVID really accelerated. Yeah.
• 15:57
  Um, another example, sort of similar play, uh, invested in a, a company that's a comprehensive hearing plan.
• 16:04
  Um, it involves a virtual diagnostic, access to a virtual network of audiologists, uh, 200 audiologists, so the largest network in the country- Interesting... it just happens to be virtual.
• 16:15
  And then connection to care or strategies, software, et cetera, that can help individuals, uh, maintain and understand any hearing deg- degradation that they may have. Got it. Got it.
• 16:26
  So what I hear you saying is you're finding these, these verticals, uh, where you can connect an extreme gap of supply and demand. Yep. Absolutely. Using sort of the best virtual health tools that are available.
• 16:37
  Virtual modalities- Yeah... but again, this notion of kinda centers of excellence where we can address, you know, new needs that, that really have not been addressed historically. Do you get pitched a lot? We do.
• 16:48
  Yeah, we do. I think particularly because of what we can, can do to accelerate- Yeah...
• 16:54
  uh, the early innings of these companies, you know, a lot of folks appreciate that value and, and, uh, are trying to get in front of us. Yeah, yeah. Yeah.
• 17:01
  I did mean that question to sort of assess, uh, you know, your activity a- as much as to ask, what do you look for in a pitch? Yeah. Uh, so for us, there are a couple of, of hard kinda gating criteria.
• 17:13
  We wanna see product build. We wanna see some demonstration of, of, you know, the product having success in the market. So some revenue. Y- obviously, it's not the be-all, end-all.
• 17:24
  Um, everyone's sort of tinkering, refining their strategies when you're at that seed stage in particular.
• 17:30
  Um, but we're looking for, you know, post-product, some demonstration of revenue, how this is gonna be priced, distributed.
• 17:37
  And then on the founder side as well, you know, looking for founders, especially in today's market, that have grit, uh, that are demonstrating that grit. Um, you know, ideally, they're, they're repeat builders.
• 17:49
  Um, yeah, so those are some of the things. Is there anything... Yeah. Is there anything that you are looking for that you think is atypical? That's a great question.
• 17:58
  Um, I, I would say, you know, if you're looking for a, a capital partner that's sort of a, a set-it-and-forget-it approach, um, that ain't us.
• 18:07
  [laughs] Now, if you're looking for somebody that's gonna be a partner on the ride, and obviously it's, it's your business, it's your baby- Yeah...
• 18:13
  but we're there to help support and enable that vision-If you're looking for that closer relationship, we're, we're a great partner. Sounds like coachability would be important. That's right. Yep. Yeah.
• 18:24
  The ability to listen, to adapt. Yeah. Well said. How do you assess that? I think this is another advantage of the current market environment.
• 18:32
  Um, things have decelerated a bit, which I think is better for, for founders- Yeah... and for funders, 'cause you've got more of a chance to get to know one another. It feels less like a shotgun marriage- Sure, yeah...
• 18:43
  and a little bit more like we've got some time to date and, and appreciate how is a founder thinking about building and addressing an opportunity in market, and how are we as funders, you know, uh, sort of supporting that journey and success.
• 18:57
  What a wild three years it's been. I'm thinking about the recalibration of all those meetings happening over Zoom. Uh, all of a sudden you were having, you could have meetings with anyone at any time. Yes. All the time.
• 19:08
  Yes. Plus, the funding upswing. Right. And now [laughs] you know, now the changing financial, uh, situation, plus now we're meeting back in person again. Yeah.
• 19:18
  Um, I mean, where do you feel like this is heading over the next 6 to 12 months, just in terms of the climate? Oof, uh, that is a great question, right? If you would've asked me a month ago- Right...
• 19:28
  if, if any of us would've foreseen, you know, the SVB- Yes. Yes... episode and, and all the banks that have subsequently had implications. Um, but, you know, I, I, I think the market's gonna stabilize, honestly.
• 19:38
  I, I think in terms of kinda the shock to the venture market, uh, folks sitting on the sidelines and pulling back, I think we have found that bottom. Uh, we're starting to see people engage and be more active.
• 19:50
  Um, you know, and, and again, I think there's, there's no shortage of great founders that are out there still committed to building, even though this is, uh, you know, sort of a less euphoric environment than it had been 2018 to 2021.
• 20:04
  You sound pretty optimistic. You feel like we've hit that bottom and we're, and we're, we're m- moving forward. You know what?
• 20:10
  I, I think the private markets, they're obviously lumpier, but it's no different than in public markets. It's really hard to time the peak and the bottom. Yep.
• 20:20
  And so sort of staying in the game in a measured way is, is the smartest way to play. That's sort of how we've been, been operating. Yeah, yeah.
• 20:27
  Last words, um, what's your message to a startup that is, might see this and is interested in working with Distributed Ventures? Um, reach out. We'd love to hear from you.
• 20:37
  Um, we love to hear the way folks are thinking about addressing new problems. Even if we can't help you directly, we're happy to route you in the direction that, that might be most fruitful.
• 20:47
  So, um, we love to meet with folks and hear about what they're doing. Awesome.
• 20:51
  Sean, thanks for taking time with me today, and it's exciting to see that you're, you're in the market moving forward and helping folks scale. Thanks, Logan. All right. This was a pleasure. Thanks, Sean.
• 21:00
  [upbeat music] Thanks for listening to Starter Health Now. We'll be back again with another episode next week. [upbeat music]