If the customer is always right, then why not make them an investor? This might seem like an obvious statement, but I think it has powerful implications for start-ups in the innovation space looking for capital. I have written before about a finance value chain, which is business lexicon for funding a company from start (i.e. seed capital) to finish (i.e. exit and/or positive operating cash flow). The finance value chain exists in parallel to the overall company value chain of how an idea becomes a product and eventually reaches a customer. The idea of engaging customers as early as possible has firmly planted roots in the ICT start-up space (see Minimum Viable Product), so, can it be similarly adapted to the life sciences space?
As most know, there are three buyers of devices, drugs and diagnostics, namely patients, payers and providers. Of those three, I would argue that providers, namely physicians, are the “de facto customers” as they hold the bulk of the decision-making power. The rise in specialized and sophisticated health care has also given rise to health illiteracy, so, patients tend to carry the least weight. Payers are certainly influential in that they determine reimbursement rates (i.e. price) but just because something is reimbursed, does not necessarily mean it will be adopted (i.e. quantity). Ultimately, it is physicians, alone and in concert, that perform procedures, prescribe medications and request diagnostic tests, so, they are the linchpin in the customer equation.
I came across the idea of raising a seed round from physicians a couple of years ago when I saw a video about a Toronto-based start-up commercializing a prognostic assay for age-related macular degeneration. At about the 13 minute mark, the CEO discusses how the company was able to raise money from a group of ophthalmologists presented with the technology. At the time I first watched the video, I was “very new” to life sciences (as opposed to now, when I am just “new”), so, at the time I did not quite grasp the value of this approach. Over time, I have come to believe that this is a promising but uncommonly explored avenue for start-ups looking to raise a seed round.
As part of my research, I have put together a list of the pros and cons of MDs as Angel Investors. I welcome any comments and additions readers have.
- Established MDs tend to be high net worth individuals and would qualify as accredited investors. They have stable and predictable incomes, and can allocate a portion of their portfolio to start-ups
- Medicine is becoming increasingly specialized and segmented. Specialists are able to understand the science underlying the business, as well as factors such as adoption, standard of care and work flow that drives their decision as eventual customers
- Doctors provide important and unparalleled non-financial capital, namely credibility, insights and connections. Not only is this valuable to the start-up, but it also means better expected risk-adjusted returns for them as investors
- Although a group of MDs is unlikely to fund large rounds (i.e. seven figures and above), they serve as an important signal to investors looking to syndicate or provide follow-on funding
- There are horror stories of angel investors squashed by venture capitals in follow-on rounds via down rounds, liquidation preferences, etc. By virtue of their position as customers, MDs as investors mitigate this risk
- There is an acknowledged lack of later-stage life science funding, so, many angel investors are hesitant to participant in a seed round if there is little prospect of a Series A
- Recruiting and managing one large investor is considerably less challenging than managing a large group of small investors
- MDs are generally not seasoned start-up professionals and may feel overwhelmed by some of the business aspects of the science, such as valuation, intellectual property, regulatory, reimbursement, etc. Also, some might expect “halo deals” (i.e. 100X+) that occur in ICT but not life sciences
- For a platform technology with multiple indications, it may be difficult to identify the group of specialists best suited to investing. Also, investment from a group of specialists related to one indication may make it difficult to pivot to another if need be
- MDs using a new technology in which they have also invested may be perceived as a conflict of interest. Generally, this can be avoided by raising money from practitioners other than those on your Clinical Advisory Board and likely early adopters . (Being in Canada, an advantage is that the United States and Europe are often targeted as initial markets, and therefore, domestic MD investors are not the first users)
- MDs are busy people and are constantly being pitched by big pharma, biotech and medtech. It can be difficult to breach that barrier of being seen as just another “sales rep”