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Article: Key Considerations for Investing in New Ventures in Healthcare

June, 2017

Dr. Amit Varma, Co-Founder & Managing Partner, Quadria Capital, describes the fundamental evaluation criteria for new age business models in the healthcare industry


The Indian healthcare sector has grown manifold in the recent years to become one of India’s largest sectors and contributes 5% to the country’s GDP. Growth has primarily been driven by robust fundamentals such as large, rapidly growing aging population, increasing affluence, rising middle-class and increasing burden of chronic and communicable diseases. Yet, with one-fifth of world’s disease burden, the doctor-patient ratio being as bad as 1:1700 and out of pocket share being as high as 70% of total healthcare spending, the sector is grappling with structural and fundamental challenges. India’s healthcare sector caters to a complex set of needs. On one hand there is a large section of low-income population which doesn’t have access to quality and affordable healthcare services, and have to rely on a broken system of PHCs for addressing their daily healthcare requirements. On the other hand, there is another section of the society - the new urban rich who give prime importance to healthcare spending in light of rise in awareness and lifestyle diseases, and are now demanding world-class facilities. The number of healthcare personnel along with the infrastructure required to satisfy these mounting needs of the Indian population is significant. Thus, the mission of making quality affordable healthcare services available to all is not only an arduous task and but also offers enormous potential for private sector players.

Though private sector in India will continue to be the driving force for the next phase of growth of the Indian healthcare segment, it would require innovative business models to help reduce the current demand supply gap and make quality healthcare accessible to a larger population. With the advent of technology and data, healthcare landscape is witnessing the rapid emergence of new businesses which are focused on delivering affordable patient-centric healthcare solutions with the potential to be easily scaled up to multiple locations across the region. In the last two years alone, over 500 start-ups have emerged in the healthcare sector, with their presence spanning across the entire patient lifecycle - from engaging and enrolling the patient, to treating and managing them. Initially, majority of the ventures focussed on offering services for appointment booking, home healthcare, pharma delivery, telemedicine, doctor discovery and practice management. Entrepreneurs in healthcare have now upped the game and venturing into businesses in less-explored areas like mHealth applications, low cost medical devices, wearables, community-owned health kiosks, personalised medicines and data analytics.

The ability of these new age business models to deliver an attractive return on the capital employed on account of lower capex requirement, faster scalability, shorter gestation periods and better unit economics, is making them an attractive bet for private equity and venture capital firms. The healthcare sector in India has attracted over USD 6 billion of investment over the last five years. While traditional models of healthcare such as multi-specialty hospitals have pulled in large capital over the past few years and continue to do so, deals in emerging models of healthcare are becoming more prominent in terms of volumes.

Though the macroeconomic trends and overall trends for business model are favourable, there are certain aspects of each business which can potentially make them the leaders of the next big breakthrough in healthcare. While making the important decision to invest in a company is a lot more complex, there are some fundamental evaluation criteria investors use to weed out the vast majority of start-ups that don’t meet a basic standard for consideration. Generally, decision making for investing in early stage healthcare opportunities comes down to understanding the four key factors about the business - Market potential, Model, Management, and Momentum.

1. Market Potential

One of the key things that investors determine when considering an investment is the demand potential (large addressable market) and the identification of the right target customer base. Furthermore, the investors also evaluate the consumer behaviour for the product and the speed of adaptability. Investors usually like working with companies that target capturing a decent market share in a large market rather than on the possibility of being the sole player in a small market. This is the reason why venture capitalist lay special emphasis on detailed analysis of market potential and go-to-market strategy.

2. Model

When it comes to making the right investment, investors prefer businesses with differentiated product or service offering, especially if they can establish a proprietary position (patent protection or a significant competitive advantage over current market offerings) on account of the superiority of their technology platform or business model. While evaluating the business model, investors generally seek to understand the unique value proposition (the business concept), how it uses its sustainable competitive advantage to perform better than its peers over time (strategy), and how can the firm monetize its offerings (revenue model). Lately, the investors are also evaluating the possibility and path to profitability for the new-age healthcare ventures. This further strengthens the business case for the investors as it gives them a visibility of their exit pathway. At the same time, investors usually avoid companies that may have excellent technologies or products but will ultimately drive higher costs to the healthcare system as such products might face challenges in adoption, given the economics of our healthcare industry. Furthermore, the investors don’t prefer business models that exist in segments that don’t have clear regulatory guidance.

3. Management

Most investors believe that “the jockey matters more than the horse” when it comes to backing the right business – suggesting that an important criterion in selecting an investment is having a talented, resourceful and savvy team. Investors believe that the right team in a portfolio company is critically important to the highest returns as a strong management has the ability to steer the company in turbulent times and grow the company in an ever-changing and complex environment. Depending upon the investment philosophy of the investors, some prefer teams with previous entrepreneurial experience while others enjoy working with first-time entrepreneurs who have tremendous enthusiasm and energy and are surrounded by a strong management team and industry experts. Additionally, investors prefer if the top management team has a equity stake in the business since it creates an additional alignment for the team to work towards achieving commonly agreed goals.

4. Momentum

In the ever evolving and an increasingly competitive environment, investors are focusing on the momentum of the businesses. There are a lot of instances where new age ventures have launched good products but have failed to get traction from users. Sometimes the cause behind this is that the products themselves are not solving a real problem or are in search of a problem or that the market is not yet ready for that product. This is the reason why investors look for minimum level of momentum as evidence of early product-market fit prior to investing. Different investors have their own definition of momentum (user numbers, channel partners, business development deals) which would vary based on the category of the business being evaluated.

While some investors would lay more importance on one factor than on others the success of early stage investing hinges heavily on all of these factors.

Summing up, it won't be wrong to say that healthcare ecosystem in India is undergoing a transformation by broadening and deepening the focus of its services and products by using technology. Disruptive innovation is the most common and sought after trend in the industry. It is expected that disruption will not happen through the incumbents but through the innovative models that are focusing on bridging the existing gaps in the healthcare value chain by application of novel state-of-the-art technology and devices.

The opinions expressed in the article are the author’s own.