Austin Poole recently joined Dr. Maxwell Cooper on the DaVinci Hour Podcast to talk about venture capital investing in the Healthcare sector. In this brief, informative conversation, Austin and Maxwell discuss how founders should think about whether private capital (VC in specific) is the right path to funding, what makes a promising startup, and the areas of innovation that are transforming Healthcare. We’ve summarized the high points in this post.
🎙️ Listen to the DiVinci Hour podcast here.
VC is a deeply relational funding structure. Once a startup is part of a VC portfolio, its founder(s) and lead investor(s) spend a lot of time together and work through real, material challenges. Before taking equity funding, founders should consider who their investor partner is and where they come from.
It can be immensely beneficial to partner with a former operator who has become an investor. Austin speaks from experience when he describes the useful balance of empathy and practical experience these investor partners can offer. They have navigated the challenges of early-stage businesses and have gained a deep understanding of the entrepreneurial journey, from managing cash flow to handling complex team dynamics.
Operational experience gives an investor an empirical perspective on the early stages of a company. They are more likely to ask the right questions to spark insights and drive informed decisions. This combination of empathy, experience, and strategic questioning makes them ideal partners for founders looking to navigate the complexities of growing their businesses.
Even if an investor has sat in the operating seat for 30 years, they won’t be able to solve the problem the founder is solving, simply because we're not in the trenches. Investors operate from a mile high. That gives us visibility to everything that's going on – good market perspective – but we’re not sitting in the founder’s seat.
Before pitching their company to a VC, a founder should know whether their company is a good fit for private capital. Then, they should determine whether their startup fits the VC’s investment thesis. Venture capitalists prioritize investments that align with their expertise and market understanding. It's crucial for entrepreneurs to research and approach investors who comprehend their business model and sector. A good fit between the investor's knowledge and the business's domain is essential.
The investment teams at BIP Ventures conduct over 400 meetings each year. They take a methodical approach to assessing opportunities. It's especially critical in Healthcare because innovators are building solutions that have the potential to transform lives. By taking a structured approach, the team is more likely to invest in companies and sectors with high growth potential and the greatest potential for significant impact. For example, the BIP Ventures Healthcare portfolio focuses on B2B software and tech-enabled services, so a startup working on something like a device would not be a fit with the firm's core areas of investment. But that startup might fit well with another VC.
The second thing to know is that VC thrives on high and persistent growth rates. Founders should consider the timing and necessity of the capital raise, making sure the business can demonstrate sustainable unit economics. This maturity reduces investment risk and can increase business valuation. If it doesn’t, taking VC money is going to be too risky for everyone. BIP Ventures reviews gross margins to determine if a business could benefit from VC. Put simply, the team assesses whether the funding can enable growth beyond what the company's balance sheet currently allows.
For a business model to attract venture capital, it often needs to demonstrate the potential for a flywheel effect, where high gross margins (typically 80-90% in software) allow substantial reinvestment in sales, marketing, and product development.
Companies with gross margins below 50% often struggle to meet the growth rates required by VC firms. This is especially true for service-based businesses with lower margins, where only a fraction of every dollar can be reinvested in essential areas like sales, marketing, and back-office functions.
A VC partner is best suited for businesses with the right combination of high growth potential and substantial gross margins. BIP Ventures strives to partner early in a company's lifecycle, typically when they have less than $10 million in software revenue or less than $25 million in services revenue. We look for signs of product-market fit and potential for scalable growth. That approach is not just about the funding. It is one way the VC team becomes a long-term partner that supports a founder through their whole startup journey from initial investment to exit.
A solid solution isn’t enough. Market understanding is more critical than market size. Investors are interested in how entrepreneurs segment their market and their depth of understanding of their target audience. A founder pitching an investor must prove they understand the problem the business solves and describe its solution simply. A nuanced understanding of the market can lead to more effective strategies and a clearer path to success.
A well-articulated understanding of the problem, its impact, and a straightforward explanation of the solution are key. Overly complex explanations or a lack of focus on the core problem can be red flags.
In Healthcare, especially, innovation is intriguing, but its practical application and integration into existing systems are crucial. The technology must fit into the Healthcare ecosystem and be readily adoptable by its intended users. For example, we are cautious about ‘buzzword’ innovation trends that capture imaginations and, often, major funding without having already proven their ability to solve real, vexing issues. Artificial Intelligence (AI) falls into that category. AI holds significant potential for transforming Healthcare, no doubt. But there seems to be more focus on the technology than on its practical application right now. We are more focused on how AI is used to enhance healthcare services and the quality of care for people.
Through that lens, we see AI's greatest value in Healthcare is most likely going to be as a solution to improve efficiency and effectiveness for providers. For example, AI tools that increase operational efficiency by 50% compared to traditional methods are appealing – but only if they also reduce costs and increase sustainability and practicality.
For BIP Ventures, the companies we’re most excited about are those that are revolutionizing access to care and care coordination, such as HealthyMed, which targets the Medicaid special needs and waiver population, and Trella Health, which has leveraged extensive Medicare data to optimize care paths, ensuring patients receive the most effective post-acute care.
Another critical issue that Healthcare innovators are actively trying to address is how to address burnout among healthcare providers. Innovations in this space are increasingly focused on reducing the administrative and logistical burdens that contribute to burnout. For instance, advancements in electronic medical records (EMR) systems, while beneficial, have also increased the documentation workload for healthcare professionals. Innovations that streamline documentation processes or enhance clinical workflows can alleviate this burden.
We believe in supporting business models that enable healthcare providers, rather than trying to replace or disrupt them. Our focus is on solutions that address logistical and business challenges in healthcare delivery, rather than just medical practices. We're most interested in startups that are working to improve life for healthcare providers and enhance the efficiency and effectiveness of healthcare delivery.
🎙️ Listen to the conversation between Austin Poole and Dr. Maxwell Cooper.
