Three Key Considerations for Healthcare Companies Raising Capital in Today’s Fundraising Environment
The healthcare industry is ever-evolving, and healthcare CEOs looking to raise money from investors in 2023 need to be well-prepared to navigate the current venture capital landscape. While overall investment in the healthcare industry was robust in 2020 and 2021, demand has cooled significantly in 2022 and so far through 2023. Investors are becoming more discerning and selective in their investments.
Here are three key considerations for healthcare companies raising capital in today’s environment to maximize chances for a successful fundraise:
Prioritize Capital Raised and Investor Alignment
In order to maximize success for a fundraise, CEOs should be focused on demonstrating a clear value proposition, path to profitability, and proof of leverage in the company’s P&L at the unit economic level. In this environment, raising adequate capital, especially from well-capitalized and strategically aligned investors, may be more important than seeking to optimize valuation. Investors are more likely to fund a company that has a runway through clear de-risking milestones, and better yet, a clear path to profitability, with well-funded investors around the table.
Communicate Regularly with Existing Investors to Understand Their Reserves
Existing investors, or insiders, often reserve capital for future rounds of financing. However, in a constrained environment, these investors may need to reallocate reserves to other portfolio companies, or even shift strategies entirely. In these cases, it becomes important to quickly identify which investors may be unable or unwilling to participate in future financings. Once those groups are identified, CEOs can work with a dedicated secondary investor who may be willing to step into the “pro rata” responsibility of these groups, refreshing the syndicate and providing a fresh source of capital.
Think Creatively About Employee Compensation
The terms for a new round of equity financing may include a refreshing of the company’s option pool. However, in cases where a company is raising a convertible note or debt, or in cases where augmenting the pool isn’t an option, companies can consider giving employees a liquidity option for their shares. A secondary partner can work with a company to purchase shares from employees for cash. This can help reward and retain employees, while also relieving pent-up demand for liquidity.
In conclusion, CEOs seeking to raise money from healthcare investors in 2023 should be well-prepared and knowledgeable about the current venture capital fundraising environment. They should prioritize capital raised over the valuation of the round, focus on investor alignment (both existing and new), and think creatively about employee compensation. By considering these factors, CEOs can increase their chances of securing funding and setting their companies for success in 2023’s dynamic fundraising environment.
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