The Covid-19 pandemic spurred capital investment in healthcare and valuations have climbed, but companies need to be careful of over-capitalizing and burning through funds raised with no strategic plan in place.
That’s according to Sahil Choudhry, managing director at Cigna Ventures & Strategy, who spoke on a panel about trends in healthcare investing at the MedCity INVEST conference that kicked off Monday. The panel was moderated by Liz Rockett, director of Kaiser Permanente Ventures.
Though venture capital interest in healthcare has been growing steadily over the years, the pandemic and the ways in which it has changed the healthcare ecosystem have created a host of new opportunities for investors. For example, digital health companies, especially those offering virtual care capabilities, attracted a great deal of interest, with over $14 billion invested across 440 deals last year — nearly double the amount invested in 2019.
It is prudent for companies that are getting more capital at a high valuation to take advantage of the market right now, Choudhry said. But they must be careful of burning more capital than necessary just because they raised more than they needed.
“It sets the wrong incentives and expectations for the future, future rounds, exits, etc.,” Choudhry said. “So the balance there is key.”
Dr. Garheng Kong, a managing partner at HealthQuest Capital, echoed Choudhry during the panel.
“It’s been a very robust market for companies in healthcare,” Kong said. “Definitely more valuation…arguably buttressed by the public markets as well as SPACs [special purpose acquisition companies]. The presence of SPACs has really changed the dynamics of what a company can get, and that has affected the dynamics of the exit market.”
HealthQuest Capital has partnered with companies that seemed like they would be two or three years away from an initial public offering, but in this current environment, find themselves six months to one year away from one.
Suddenly, these companies have access to $100-$150 million in an IPO, Kong said. But it’s a bit of a double-edged sword because they still need to figure out what to do with the money. They don’t always have a way to deploy it effectively.
So HealthQuest Capital’s management team has been having discussions with the entrepreneurs they work with, encouraging them to think about other applications of their company’s technology or new markets they can pursue using their funds, Kong said.
It can also be helpful for companies to have different capital deployment plans for various financing scenarios, said Amy Len Kobe, principal at Baird Capital, during the panel.
“Being very thoughtful into where every dollar is going, but also having several different plans that you can pull with given, pre-defined triggers, has been very important [for our companies] to weather this [past] year,” she said.
But this investment landscape will not last forever. It will ultimately revert to the norm at some point, both Kong and Choudhry said.
When it comes to thinking about valuations, Cigna Ventures & Strategy is working backward from when they think the company might exit and at what value, Choudhry said. During this process, they are mindful of the fact that multiples that exist today will likely not last for the next five or six years.
“That sometimes means that we could lose a deal or not join a syndicate, and that’s okay,” he said.
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