Venture Funds

Covid19 + Beyond

Preparing for the impact of Covid19 and beyond

Years ago, Bill Gates tried to warn us all about the risk of a deadly virus. Unfortunately, we didn’t heed his warning.

The good news is that he has left the boards of Microsoft and other companies to focus his efforts on the Gates Foundation.

His efforts will likely change the way healthcare organizations prepare, governments track outbreaks and how vaccines are developed.

Healthcare

The thought of making a meaningful change might be inspiring you to get more involved in the transformation underway.

If you’re thinking about healthcare venture capital or startup, here are a few takeaways from my studies last week:

1/ Venture is big business: Returns have normalized as more money runs into the sector. That may change if stock markets continue to contract.

2/ Small funds preform better than big funds: Funds less than $500 Million are more likely to return 2x the capital invested after fees. Big funds are reportedly more dependent on the management fees and might be impacted more than smaller funds.

3/ Entrepreneurs are important: If there is no entrepreneur, there is no need for venture capitalists, investors, lawyers, accountants or other professionals. Entrepreneurs deserve your respect.

4/ Terms: Many of the deal terms seem to be driven by scarcity which makes for a really toxic working relationship. If you have to control the company, it’s probably not a deal worth doing.

5/ Fees: The healthcare industry is not the only industry resistant to change. Personal interests often get in the way of much needed progress in venture too.

Hillary

The Hulu documentary about Hillary Clinton is worth watching if you have some down time. It’s available on Netflix and likely other streaming services.

What many Americans didn’t realize, Hillary had the respect of several staunch Republicans including: John McCain, Lindsay Graham and Bill First MD from her work on various bills including the Children’s Health Insurance Plan [CHIP]. Many didn’t get past the name “crocked Hillary” and “lock her up” chant to learn the truth.

Regardless of what you think about the Clintons now or more broadly Democrats, there are some important takeaways for us all.

1/ Media: Headlines are meant to get our attention not provide the substance for a meaningful debate on the issues. Unfortunately, many Americans now seem to have an attention span limited to about 140 characters. That makes it really hard to share the information needed for everyone to make good decisions – even in times of Covid19.

Just remember, the devil is in the details. Before you loose your head, use the three [3] D’s from Radical Candor for good decision making: Discuss, Debate and Decide.

2/ Timing – Some risks can be mitigated. Others come out of the blue and totally change the game. Game changers take out everything that’s weak.

Scale appropriately and sure up your resources to weather the storm ahead. We’re likely not going to see a return to business as usual in the near future. Let’s hope for a U [2001 recession] and not a L [2008 crisis] but consider both in your strategic plans.

3/ Progress: There is often a gap in what we want to do and what we can do within a given political landscape. 

Ultimate success requires a lot of small steps and zigzags to achieve a goal. Progress is good. Celebrate each small win.

Whatever happens, it’s going to be one heck of a ride!

Investment Structure

Demystifying venture capital for healthcare professionals.

I am using my social distancing time to help a colleague assess the feasibility of a new Social Impact fund for early stage startups.

The timing aligned with the start of an online program about venture capital sponsored by TechStars/Kauffman Fellows that I had enrolled in. Having a specific project to apply the learnings to always makes the content more meaningful.

It didn’t take long for me to discover some parallels to a legal structure commonly used in healthcare. Understanding the parallels will make venture capital more relatable.

Structure

Healthcare companies already have experience with the basic legal structure Venture Funds use. It’s the same structure commonly used in joint ventures with physician partnerships.

Venture firms use the General Partner [GP] – Limited Partner [LP] structure to manage their funds. The firm acts as the GP which is the active partner in the fund and the investors [Pension Funds, Endowments, Foundations and Family Offices] are the LPs that have a passive role. The main role of the LPs is to provide the money to fund the investments made by the GP.

Knowing that it’s a legal structure that many of us already have experience with demystifies the complexity of it.

Expectations

Many entrepreneurs have 10X seared in their minds as the required or targeted return. However, the goal of venture funds is to return at least 3-5% more than the public markets in order to compensate investors for the increased risk. For the 10 years ending June 2019, the S&P 500 returned 14.7% and the Dow Jones returned 15.03%.

That’s on par with the expectation of healthcare joint ventures as well. However, projections are usually done to estimate the return of a healthcare joint venture and to benchmark actual performance rather than using the stock market performance.

Problems

The main problem with the GP/LP structure in both cases is that the expectation is not met but the fees paid to the GP are the same regardless of outcome.  In other words, LPs pay proportionately more when a smaller pot of money is returned.

That generally doesn’t make anyone happy. Disappointed LPs eventually sever the financial relationship.

Timing

Timing is one of the big differences. LPs in a healthcare joint venture have more engagement in day-to-day operations. Even if the GPs aren’t sharing all the financial data in real time, the LPs often have a sense of the business and know when something is off. Changes can be made at the end of the contract term or sooner if termination for cause is warranted.

Conversely, the LPs in a Venture Fund often get limited insight into the financial performance of the fund because they have no involvement in the management or operations of the portfolio companies. The actual results are revealed at the end of the fund which is 10-13 years after the initial commitment. Consequently, LPs may have invested in multiple funds with the Venture Firm before they get any insight into actual performance.

Interestingly, the solution for VCs is one that I’ve used in healthcare joint ventures to establish trust with the LPs. Experts are recommending more transparency and standardization in financial reporting.

With that said, I think there are some additional challenges for establishing appropriate benchmarks with public funds. It’s not an apples to apples comparison.