Funding your healthtech startup – alternatives to VC funding
With valuations in public technology stocks going down significantly, high inflation, and a looming energy crisis, it can become very tough for a young tech company. Despite all of the macroeconomic challenges, tech startups are still being created and the need for funding new technologies, products, and services hasn’t changed. Furthermore, the latest Pitchbook report shows that VCs are successfully raising even more capital than this time last year – so there is a lot of “dry powder” out there.
That being said, most early-stage startups still won’t find it easy to fundraise from VCs these days, particularly if you’re a first-time founder or working on technologies that may take more time to the market than others, like with the focus of our fund – healthtech.
Despite considering ourselves very lucky, as all of our first fund 15 startups are alive and growing (knock on wood!), we thought that it would be prudent to show that there are alternative sources of funding if at any point VC funding becomes too challenging to obtain.
With this in mind, last week we held an internal webinar for our Verge HealthTech Fund portfolio teams, where our startups shared their personal experiences about raising funding from other sources than venture capital, especially given some of them face these same challenges above. Considering that there are many more healthtech startups out there that may find themselves also looking for alternative sources of funding, we thought to share some of the highlights and thoughts behind it. While some of these insights may seem obvious, we are continuously surprised by how few startups we meet have explored these options fully, having fully succumbed to the tunnel vision of VC or nothing.
Types of alternative sources
Some of the most common types of alternative sources of funding include (and we’ll deep dive into the specifics of each):
· Grants
· Startup competition prize money
· Bank loans
· Revenue from pharma
Grants
The most common source for science-based startups. Usually, they are milestone-based and are administered by government bodies - regional, like EIT Health in Europe or global ones like USAID that require going through a submission process.
Key lessons
· It takes time to write each grant application – if your startup has the capabilities, look for extra help in preparing those applications. As a founder your time is limited, therefore ideally, you can have a dedicated team member (ideally an ex-scientist or STEM graduate student) that just writes these applications as a full-time job; otherwise tapping freelancers is another option.
· It’s a numbers game – as with any other fundraising activity, startups compete for grants, and, the greater the competition, the lower chances of success – so most likely you’ll have to write many applications to get that grant funding. To give some numbers for perspective – the examples that were discussed in our portfolio meeting – 1 grant application/per week.
· It’s not really “free” money – what we mean by this is that, yes, it’s not equity-based and yes, if you have achieved the set-out milestones in the grant application, you don’t have to return the money. However, the cost is in “time”. With NGOs or government, bodies come to a certain administrative burden (as understandably they want to make sure the grant has been reasonably spent and has had the intended impact), about which quite a few founders forget. So, remember to have the necessary resources available also to administer the grant.
Startup competition prize money
Another source of funding is prize money from the many startup competitions out there. Some of them are hosted at major tech conferences like Web Summit, Slush, etc., and require the founders to pitch their startups. Other competitions, similar to grants, go through a more formal application process requiring the startup to submit its application.
Key lessons
· Healthtech is a trending topic – the benefit, if you can say that, of living through COVID-19 times is that these days it’s much easier for audiences to understand the many problems healthcare systems have. With this, healthtech startups have an extra edge in public startup competitions as usually these competitions are aimed to promote social or any other positive impact.
· Prize money + publicity - another frequently missed benefit of applying to competitions is that top placing startups (even at 50/10) are – almost always mentioned in the events’ marketing channels and materials. So, in addition to the prize, you increase your social footprint (and credibility when facing later due diligence).
Bank loans
An often-forgotten source of funding, some banks provide loans to startups, especially, if the capital needs for your startup are short-term (e.g., purchase order financing), or if there are corporate social responsibility allocations that your startup may qualify for. Even with interest rates rising, the cost of capital is far lower than equity with high growth expectations.
Key lesson
· Don’t ask – don’t get – there is this perception that for bank loans only large established businesses can qualify, and too many startups do not bother even trying... Companies in our portfolio have come to realize otherwise. Certain cashflow-positive startups are eligible for bank loans, and at decent rates (before all the rate hikes). – they just might not be as openly advertised. It takes 5 minutes; rejection is fast and the only way to find out is to ask.
Revenue from pharma
Finally, a source that despite healthtech’s having a huge interest in collaborating with pharma companies, (and pharma’s existential interest in healthtech), there is very limited available information online on how to work with them. Pharma companies can be great partners having the most abundant financial resources out of all health sector stakeholders, global footprints, large stakeholder networks (government, clinical, academic, etc.), and deep knowledge of local markets.
Key lessons
· Global > Local – particularly if you’re looking to work with a global pharma brand. As with any large organization, the local teams are often not significant budget holders, so to increase your chances of success, make sure to reach out to the right people. Extra time should be spent on researching the partner’s centralization vs decentralization strategy to get a better sense of what to expect.
· Speak their language – understand their corporate strategy, company terminology, decision-making process, hierarchy, and any internal politics.
· Develop long-term relationships – this may be self-explanatory, but what can be seen from real-life examples is that the most important deals are usually done by building a relationship over time and gaining trust. In the case of selling to pharma companies, account development beats new sales, where a first $38K deal can over time become a $500K deal, and the concept of an ARR deal is new and difficult to implement (frustrating founders that look to cater to VC pattern matching).
· The first deal is the hardest – It’s generally true that nobody wants to be first, yet everyone is ok to follow. This may take longer than expected as sales cycles can go beyond 12 months with pharma companies. That being said, if done correctly once you’ll have that first logo on your deck, the rest will be much easier, as you will have that “stamp of approval” from one of the industry’s players.
Summary
Despite going through yet another uncertain period let’s look at it from a “first principles” perspective. People still get sick, chronic diseases are skyrocketing, and most of the world’s 7.9 billion people still don’t have the level of care they need and deserve. Global organizations and governments launch new programs and opportunities to call for new healthech innovation and pharma companies are looking for new markets. If your healthtech solution meets the needs of these parties, then even if VCs these days may say no, there are alternative sources of funding and almost all of them are way less expensive than venture capital.
That being said, at Verge HealthTech Fund, we still look for the most promising founders and technologies that can impact the world for the better, and if you happen to be one of those founders or know someone who is, be sure to reach out to us. Healthcare has a lot of areas for improvement and we cannot wait to meet the visionary founders who will create that future!
S.