VCs Cautious of “COVID-19 Contortionists” and Telemedicine “Gold Rush”
COVID-19 is fundamentally changing how we live, how we do business, and how we approach and deliver our healthcare. In the past 14 weeks, there has been unprecedented growth for a segment of companies who were positioned to meet these rapidly sweeping changes to our lives, while so many others have had to close their doors or are fighting to stay in business. COVID-19 has sparked millions of job losses.
Amid this crisis, which has caused disruptions to almost every aspect of society, the innovation economy is remarkably strong. It has been said that within chaos there exists great opportunity, and many entrepreneurs and startups are pressing forward to get their ideas and technologies to market. With the code-red urgency of the crisis, there has been a tremendous amount of this innovation energy within the biohealth markets to address the challenges that a pandemic has forced upon it.
What can these innovators expect from the capital markets as they seek funding during COVID-19? VC’s have shifted in how they are evaluating deals and the markets they are now more interested in.
During a recent live-virtual panel discussion on “Venture Versus the Virus”, Adam Dakin, Managing Director at Dreamit HealthTech, a leading venture-backed accelerator, piqued the audience’s interests when he brought up the term “COVID Contortionist.” The term, which has recently emerged in VC circles, is applied to companies that make a hard pivot away from their core business focus and positioning to attempt to meet the demand created by the coronavirus.
The term could be applied to some organizations that flooded the market with antigen and antibody tests after the FDA opened the testing floodgates. Hundreds of tests came on the market without FDA review; the FDA, after receiving much criticism for this policy, walked back its policy in early May to require companies with tests to move through the Emergency Use Authorization (EUA) process.
Clearly, the vast majority of life science companies pivoting to help battle COVID-19 have the right skills, technologies, and intentions; however, as with any crisis, there are people with good intentions but without the ability to execute properly and, quite simply, bad actors trying to make a dollar on this health crisis.
Dakin kicked off the discussion about COVID Contortionists, but the other VC panelists, Andrea Alms, Co-Fund Manager at BioHealth Capital; Mathew Miessau, Associate at Epidarex Capital; Adair Newhall, Principal at Greenspring Associates, noted that they, too, had seen these Contortionists and expressed skepticism about investing in these companies.
“I think if you have the tool kit and case and wherewithal to solve the pain in the market, go after it. But be mindful of whether you can sustain your pain in the market solution. Can you bring that product to market, generate revenues, and exits for your investors when you go after that COVID solution, or are you just a flash in the pan?” stated Alms, Co-Fund Manager at BioHealth Capital.
“The money is still out there. Deals are still getting done. But the one piece of advice I have for startups is don’t be a COVID Contortionist,” stated Durkin.
“We look at tons of deals and now it seems like everybody has come forward with ‘Wait, there’s more: We have an incredible COVID use case.’ It’s very transparent that they are twisting themselves into pretzels to come up with a compelling COVID use case and it’s clear to sophisticated investors. If you have a value proposition that’s compelling and a defined go-to-market that you believe in…stay with it. Don’t try to reposition yourself. Generally speaking, I don’t think investors are receptive. It feels like the .com boom. Companies need to be mindful of that.”
As the Managing Director of a healthtech accelerator focused on growing digital health, medical device, and diagnostic startups, Durkin has a unique vantage point from which to see the turbulence caused by COVID-19, particularly in the medical device and diagnostic testing space. It seems Durkin and his fellow VC colleagues can easily spot a startup that’s abandoning its core business model to wade into unfamiliar waters that might be too deep for them.
Durkin’s Dreamit Healthtech is part of Dreamit Ventures, which is a fund and growth program focused on startups with revenue or pilots that are ready to scale. In addition to Healthtech, the fund looks to invest in Securetech, which, broadly speaking, looks at the cybersecurity sector, and Urbantech, which seeks to develop real estate and construction tech startups. Dreamit is now on its third fund and directs its investments in seed and Series A rounds.
Dreamit Ventures runs two company cohorts a year, one in the spring and another in the fall. The spring cohort was announced in early April 2020 and included 13 Securetech, Urbantech, and Healthtech companies, including the BioHealth Capital Region’s (BHCR) Healytics, a genetic data management company located in Cockeyville, Maryland. Healytics is led by Johns Hopkins University Carey School of Business alum Olga Maltseva.
Like the flood of companies pivoting to COVID-19 use cases, the coronavirus pandemic has also broken down barriers for the more widespread use of telemedicine or digital health tools and processes. With patients unable or unwilling to go to their primary care physician’s brick and mortar office or the hospital, telemedicine became the standard of care nearly overnight. Hospitals like Children’s National Hospital in Washington, D.C., who had been developing telehealth programming for nearly two decades, were ready when the floodgates opened in early March 2020 because of COVID-19.
According to Epidarex Capital’s Miessau, “the genie is out of the bottle” when it comes to telemedicine. How healthcare will be delivered is going to be very different post-pandemic, much like telework is likely to remain the norm even after social distancing restrictions ease.
However, there’s always a mix of positive and negative that comes along with the sudden removal of barriers and a surge in urgent need.
“There are opportunities if you bring in a telemedicine solution like AI and robotics features that are solutions to limiting the human element and COVID exposure. So I see spots of innovation in the telemedicine ecosystem, but I do get a little suspicious about opportunities that are short term in nature and only address something that looks only a year out until we get a vaccine,” stated Newhall, Principal at Greenspring Associates.
“There’s no question that the pandemic is the wind at the back for telehealth and remote care platforms. It’s busted down the door and traditional objectives have been swept to the side because we have to do this and we have to do it now. Clearly that’s created a lot of opportunities but it seems like companies feel like this is a Gold Rush,” said Dakin.
“Everybody is coming forward with a telehealth platform. It reminds me of before the pandemic with Remote Patient Monitoring (RPM). We look at five or six remote patient monitoring platforms a week. When an RPM company comes forward there’s almost a collective eye roll…That might be happening in the telehealth space; we’ll see a few months from now. What’s really important is if you have core Intellectual Property (IP) that can be leveraged to create a differentiated, high-value proposition, then it makes all the sense in the world to shift your platform focus to telemedicine because the wind is at your back. But if you’re making a hard left turn away from your core IP that’s probably not sustainable or the best idea,” he added.
The bottom line seems to be this: Startups need to adhere to the Latin aphorism “temet nosce”, or ”know thyself.” Chasing opportunities that have emerged during the pandemic that is on the fringes of your company’s expertise or IP is a poor strategy in general, and it is even more so when it comes to securing funding from sophisticated investors like those on the Venture Versus Virus panel.
The pandemic has changed many things, perhaps irrevocably in some ways, but what VCs like these panelists look for in a startup hasn’t changed.
VC firms and individual investors want to see great IP, a big market, strong value upside, a product that has commercial promise and a leader and leadership team that is coachable (or has the self-awareness and humility to step aside for a more experienced leader), has experience building companies, can uplift and empower a team, and that has a deep network of KOL advocates.
In essence, if your startup has a great IP that is differentiated and can solve a significant COVID-19 or telemedicine pain point, go after it and these VCs will back you. If your startup has to make a “hard left turn” from its core positioning, as Dakin put it, it’s best to not make that turn at all.
The program, “Venture Versus the Virus” was organized by The Society of Physician Entrepreneurs (SoPE), and produced in collaboration with BioBuzz. Read a full recap of the key takeaways from the panel to learn more about how venture capital has been impacted by COVID-19.
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