1. Strategic Approach to Seed
Investing in Healthcare*
Christina LaMontagne
December 2, 2012
*The focus of this presentation is healthcare, but most
lessons could be widely applied to other sectors.
3. The case for seed investing
• Early access to deals
– Build pipeline for future venture-size and stage deals
– Establish competitive position for participation in Series A
– Gain proprietary insights into company, market, product and team while only putting small
amount of capital at risk
• Establish firm as go-to investor
– Willingness to back seed-stage founders sends message about firm’s level of partnership and
commitment to entrepreneurial teams and innovative products
– Current scarcity of early-stage healthcare investors provides an opportunity for firm to catalyze
next wave of healthcare investing
• Strategic learning about new health technology
– Digital health technologies, which require less capital than traditional life sciences companies,
are attractive seed investment targets
– See and track emerging trends; test new market opportunities without high capital commitment
• Mitigate portfolio risks
– Opportunity for deeper diligence and discretion to stem losses (fail fast)
– Diversify portfolio risk profile with early-stage high-risk deals (10x+ returns) to offset lower-risk
later stage returns (2-4x)
• Financial returns
– First money in yields better returns
– Super Angel Funds have pushed Series A valuations high, seed stage deals can be better value
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4. Fund management risks & considerations
• Relative to initial check size, requires disproportionate time of investment
professionals
– Time might be better spent on transactions with higher investment/higher stakes
• Control/governance rights
– Given time constraints, many investors choose to be less involved with seed-stage
companies, but this comes at the cost of looser governance and irregular flow of information
• Accountability for high failure rate
– Higher risk profile of early-stage companies means many will fail or be unattractive when
seeking a Series A
– Write-offs are common in year 1 and 2 and fund leadership must set seed fund expectations
differently from VC fund expectations
– Successful investors embrace high beta risks of early-stage companies, with many losers and a
few big winners
• Seed capital goes furthest with low capital intensity businesses
– Capital efficient businesses (e.g. digital health as opposed to science-based businesses) allow
investors to track rapid progress towards meaningful short-term milestones
• Potential for seed-stage bubble
– Flood of incubators and seed investors into early-stage companies has meant easier access to
capital; some worry relative scarcity of Series A investors means fewer companies will
successfully graduate to Series A
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5. Implementing seed investment program
1 Design an investment model
2 Develop an ecosystem of partners
3 Shape investment process
4 Build financial model
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6. 1 Leading seed stage investment models
Model Description Examples
“Spray and • Volume play to invest in hundreds of companies with expectation of SV Angel, 500 Start-Ups
Pray” 1-2 major hits; betting on abilities of promising Founders
Sector focused • High throughput investing (~2 deals/month) creates index fund Forerunner (e-commerce),
index fund betting on best deals for specific market opportunity (e.g. big data) CommerceVC (fin-tech)
Value-add • Investor does thorough diligence and deeply engages with K9, Google Ventures
entrepreneur to provide regular support and guidance
• May advocate for seed-stage board formation, prefer priced rounds
to convertible notes
Personal brand • Led by established entrepreneur who leverages personal money, Innovation Endeavors (Eric
funds connections, and legacy to attract entrepreneurs Schmidt), Felicis (Aydin
• Opportunistic across sectors (e.g. health, enterprise, consumer, etc.) Senkut)
Incubator or • Founders apply through rigorous process, winners get workspace, RockHealth, BluePrint
accelerator mentorship and investment (e.g. $25,000 investment for 8% equity) Health, Y Combinator
Series A farm • Investors attract Founders early and influence company trajectory Many established VC firms:
team • Can be high volume, little diligence, little PR Sequoia, DFJ, General
Catalyst, KPCB, Andreesen
• For bandwidth reasons, often managed by junior investors
Horowitz, etc.
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7. 2 Develop an ecosystem of partners
My go-to list of smart, collaborative partners*
Incubator Incubator Mayo Clinic, RockHealth, BluePrint
Health, HealthBox, StartUp Health,
TechStars, ExploraMed, Cambridge
Innovation Center, Founders Den
University Seed Investor
Stage Investor Felicis, Floodgate, KPCB, Aberdare,
Canaan, Norwest, Bessemer, Founders
Ecosystem Fund, HLM, Versant, DFJ InCube
University MIT, Harvard, Stanford, Berkeley, UCLA
Entrep-
reneur Entrepreneurs Current venture-backed entrepreneurs
who introduce their friends
Encourage deal sharing, co-
investment, and value creation
*There are lots of wonderful partnerships to be found! This list only highlights partners with whom I have direct personal experience.
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8. 3 Shape internal investment process
Investment Criteria Due Diligence Process – Investment Committee
no more than one week Approval Process
• High caliber team Team references • 2 page investment
• Within scope of fund • Assess maturity, risk recommendation
• Billion dollar potential to tolerance and likelihood • Majority approval by
change industry to stick together for long IC/Managing Partners
• Disruptive technology haul • Not necessary to go to
• Huge addressable market Validate opportunity size corporate execs for sign-
• Opportunity for unique • To offset risk, companies off
firm value-add should have potential for • Can manage process with
• At least one other huge returns (looking for Director-level investment
reputable investor in a 10x+) staff
syndicate Technology assessment
• Investment required • Likely no time to bring in
<$200k experts; need to assess
based on published
literature, credibility of
early partnerships, and
market need
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9. 4
Initial Financial Projection
Expected cash flow related to first year of seed investing
Assumptions Discussion
• Pace of 1 deal/quarter @ $100k • $100k seed investment size will typically only buy ~2% of equity
• Within 1 year of 1 st 4 investments: • Some early stage investments require a “bridge” to the Series A – this
• 1 matures to Series A is often seen as a 2nd seed round with little if any valuation increase
• 2 require Bridge • Seed investment should pave way for firm to participate at pro rata
• 2 are written-off or super pro rata in Series A – it is essential to include this in Series
Seed term sheet. Corporate investors are uncommonly asked to lead
Series A
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10. My fantasy seed portfolio*
Company Description Financings
Molecular diagnostics company • $500k Series Seed Q2 2009
setting the new standard for routine • $18M Series A led by OrbiMed,
genetic carrier screening during Safeguard, SV Life Science Q3 2010
pregnancy. • $14M Series B Q2 2012
Passive monitoring via mobile • $1.7M Series Seed led by True
phone technology for better Ventures, Kapor Captial Q3 2011
management of chronic conditions. • $6.5M Series A led by Khosla Q4 2012
Software and mobile eye • $1M Series Seed in Q3 2012
diagnostics for low resource
settings.
iPad viewer app and cloud server • RockHealth seed financing
that enables collaborative viewing
of medical images.
Helps hospitals discover, evaluate • $1.1M Series Seed led by Bessemer,
and adopt high-value medical Fidelity, HLM Q3 2012
devices.
Software platform for • In process
storing, processing, and sharing
biomedical molecular data to
deliver precision medicine.
* Just a few of the excellent companies in this space. 10
11. Lessons learned
• Importance of team quality and cohesiveness
– Early stage founders must be held to the highest of standards and demonstrate ability to work
together for long haul, build a team, and be credible CEO material for Series A raise. When
company is still young, it is easiest for founders to walk away—thus destroying investment
• Seed extensions/Series a “Bridges” are common
– Often companies need additional runway before hitting milestones for Series A raise. This
means more capital is required, but often at the same or near initial valuation resulting in
greater investor ownership
• Mixed outcomes of board involvement
– When investors insist on a board seat at the Series A, they may overcommit their time to
company and then be biased to push for a Series A in company that does not merit more capital
– However, not taking a board seat means less governance/information and fewer controls
• Entrepreneurs seem to favor convertible notes over priced rounds
– Can complicate negotiations as entrepreneurs misinterpret the note’s cap as a valuation
• Seed rounds often look like a Series A
– Companies might raise as much as $2.5M and still call the round a Series Seed. Important for
investors to measure investment amount and set milestones appropriate to capital invested and
stage, regardless of semantics
• Series A crunch
– Incubators and Super Angels have brought unprecedented supply of capital to seed stage during
the same period that traditional venture capital supply has decreased. Result is a “Series A
crunch” where Series A capital is scarce and increasingly difficult to secure
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12. Recommendations
• Launch seed stage program with:
– Appreciation of financial risks/rewards
– Strategy of leveraging seed activity to build fund profile and sector intelligence
– Focus on capital efficient software/mobile/digital sectors
• Maximize value of seed activity by creating formal channels to reach and get to
know entrepreneurs
• Selectively take board seats, if at all
• Keep check size small—consider seed investment as access to and insights for
future rounds
• Establish internal processes to ensure that criteria for Series A investments is
consistent and seed investments don’t receive undue bias/support from IC
• Pace yourself so you catch the best trends and technologies without getting
distracted by hype and noise
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