Investors from TPG and Andreessen Horowitz share insights for navigating the downcycle in healthcare

SVB's Healthcare Investments Exits Webinar Highlights

SVB published its annual Healthcare Investments and Exits report covering information on VC fundraising, investments and M&A and IPO trends for the entire year of 2022. Shortly after, I had the privilege of sharing the report findings and connecting with two of my partners in the life science and healthcare ecosystem Carolyn Ng, partner and managing director at TPG Life Sciences Innovation, and; Julie Yoo, general partner at Andreessen Horowitz, in a webinar titled, Navigating the Current Downcycle in Healthcare. The panel was moderated by Erin Brodwin, noted Health Tech Reporter at Axios.

For a quick overview of the first half of 2022, please read Healthcare Trends 1H2022: Insights and advice for founders.

This blog highlights the panel discussion centered around fundraising, valuations and deal structures. Be sure to watch the on-demand webinar for the complete Q&A conversation.  


Carolyn Ng’s perspectives: For companies raising money in biopharma, focus on prioritization of your pipeline programs by understanding the key value drivers for your fundamental science and technology. This is particularly pertinent for companies with a platform approach — be prepared to explain which specific clinical programs and indications you are pursuing and why your modality makes a real difference in these applications. Be thoughtful about defining and articulating to investors specific milestones that you can achieve with the funding and how these milestones enable value creation, both for patients and investors.

Should funding be limited in this market environment, conserve resources and work on truly differentiated programs delivering benefit to patients instead of being the incremental twentieth “me too” in a leading indication.

Julie Yoo’s perspectives: For healthtech companies raising this year, run the math, work backward from your valuation based on current multiples and do a runway evaluation exercise to understand what revenue you need to earn that valuation in today’s market.

Recognize that raising will take longer in the current market and expect 6-8 months to raise your next round. Evaluate and prioritize projects. Understand your cash flow to break even. Shut down the speculative projects and focus on your core innovation.

Go into your fundraising process with at least 12 months of runway, if not more, to ensure you have enough leverage when at the negotiating table.

Leverage your existing VC relationships and meet with the downstream capital partners to understand who is deploying capital, in what circumstances they are doing so, what companies/VCs you are investing against, and which ones align with your business.

How should founders be thinking about valuations?
Jonathan Norris’ perspectives: Understand the current market for public market comps and realize that valuation is under assault. Don’t get stuck in valuation. Having new investing partners with dry powder supporting company growth is more important than trying to save valuation.

Julie Yoo’s perspectives: Regarding valuations, people may have to decide to take structured terms over doing a down round. Many of the founders who have already gone public and looking in the rear-view mirror at their founder journey say that there was always a painful round, and they regret the amount of energy spent on optimizing valuation in that round when it didn’t end up mattering over the long arc of the company-building journey. Again, don’t get caught up in valuation.

What unique deal structures are taking place in the down market?
Julie Yoo perspectives: Healthtech will likely see more syndication of deals. Traditionally in healthtech, a lead investor takes most of the round, and it’s less of a partnership with other funds. Given the capital needs and business models in healthtech, we will see more groups playing nice with each other on rounds where they're sharing equity. Investors will likely be more willing to share cap table space with 2, 3+ investors with complementary value propositions.

Strategics will get involved in rounds, often tying equity investments to commercial commitments and milestones. If you construct it correctly, it can de-risk the commercial risk typically associated with these growth-stage healthcare companies and become a win-win for both sides.

Carolyn Ng’s perspectives: Given how the tides have turned in the biopharma market in the past year, it is an opportune time for companies to consider alternative financing sources, including non-traditional VC funds. Strategics and corporate venture capital (CVC) are good potential partners because they are not limited by the type of cycles traditional close-ended funds must follow. CVCs remain committed to biopharma, unlike non-specialist funds that are currently risk averse.

 

 

During such times, it is about being more thoughtful and creative as an entrepreneur to articulate a differentiated and impactful story and to cast a wider net around various funding sources, both traditional and non-traditional.

Jon Norris’ perspectives: Back in 2009, there was a pullback on the corporate strategic side regarding support and dry powder – a real problem for venture-backed healthcare companies. However, during the current down cycle, CVCs are keeping the same pace from 2020 or doubling on activity and investment dollars. CVCs are an essential part of the life sciences and healthcare ecosystem because they support companies with equity and can also be the end buyer in some situations. For more about CVC investors and activity, read, Corporate investors remain key pillars of life sciences and healthcare.


Thank you to the panelists for the fantastic conversation. Be sure to watch the on-demand version, Navigating the Current Downcycle in Healthcare.

If you haven’t already, I invite you to download the report today and explore the research. If you’re interested in an overview of the findings or subsector highlights, watch the video playlist featuring seed/Series A, overall investment, deals and dollars by top indications and listing the largest deals in 2022 across biopharma, healthtech, dx/tools and device.