Thanks for hosting me, Benedikt! I enjoyed writing this piece because it’s essentially the transcript of our conversations about investing in what we’ve coined as “high information-barrier-to-entry” spaces. While this piece is specifically about investing in health tech, there are many lessons that can be applied across challenging investment categories.

For those who don’t know me already, my name is Owen Willis and I’m the founder and GP of Opal Ventures, an early-stage health tech fund investing in the next generation of healthcare infrastructure.

This piece is the synthesis of lessons I learned while building a health tech community of 300 founders and operators and as COO of Osmosis, where I had a front-row seat to the complexities and opportunities of building in health tech.

Healthcare in the United States is the definition of big business. It makes up 17.3% of total GDP and accounts for almost 30% of federal government spending. Ask anyone building a health tech business in Europe or another market and they’ll say that the US is the biggest opportunity for them in order to hit venture scale. 

The massive scale of the US healthcare system is only matched by its complexity. Payors, providers, pharmaceutical companies, and patients all have different incentives and priorities that must be understood in order to build in the space. 

In February of this year, Change Healthcare, the largest clearinghouse for medical payments in the US, fell victim to a cyberattack that exposed this intricate connectedness in the healthcare system. As a result of this single hack, up to 36% of patient billing claims could not be processed and United Healthcare (the owner of Change Healthcare) had to provide $4.4B in assistance to provider groups to prevent them from going out of business.

This complexity is why, despite the massive opportunities, investing in health tech is a black box for many investors.

The high information-barrier-to-entry, especially around go-to-market, is exactly why early-stage health tech investing in the US is such a promising and under-tapped opportunity. It also requires a slightly different approach than traditional early-stage venture capital investing. 

I saw firsthand the challenge of both pitching and evaluating opportunities as the program director for On Deck Health, a community of more than 300 health tech founders and operators. 

Within this program, I saw that founders struggled early on to understand the incentives that drove decision-making in the spaces they were selling into, and experienced difficulty in communicating opportunities to investors. On the other hand, investors had difficulty evaluating founders themselves and their right to win in a complex market.

To overcome this challenge, we surrounded our founders with healthcare experts who enabled these startups to build faster and make fewer mistakes. The proof speaks for itself: more than 64 companies have raised a combined $285M in early-stage funding coming out of On Deck Health from top firms like Sequoia, General Catalyst, and Lux Capital.

This experience taught me several lessons that have shaped my approach to evaluating and investing in startups in health tech.

Lesson #1: Relationships are everything

Relationships drive go-to-market in health tech. 

Selling in healthcare requires an understanding of incentives that drive decision-making; this knowledge can only be gained through years of experience. Because of this, the best founders work diligently to build out networks of advisors and experts with relevant playbooks and insights to unlock this understanding and accelerate their go-to-market approach.

These experts bring more than just experience to the table.

Healthcare sales, especially enterprise sales, is relationship-driven. Yes, you need a good product and efficacy data, but in order to navigate large organizations and close deals, you need warm introductions and internal champions to guide you through the process.

When used effectively, these relationships can shave months off of a sales process and can make the difference between getting a pilot and being put in the pile for “later.”

Lesson #2: Only the capital efficient survive

Large healthcare organizations operate at a glacial pace compared to the typical startup. 

Not only that, but success at selling into one organization is not always predictive of future success in selling into others. As the saying goes, “if you’ve sold into one hospital, you’ve sold into one hospital.”

This makes it difficult for companies to stay capitalized while trying to sell into these organizations. This is especially tricky in the early stages of building, when startups are gathering data on the efficacy of their solution. Without this data, they can’t sell pilots, but without the pilots, they can’t raise capital.

This chicken-and-egg problem, which often occurs between Seed and Series A funding rounds, is the valley of death for health tech startups. Only the very best founders, through a combination of efficient operations and their ability to raise capital, are able to navigate it.

Lesson #3: The math really matters

Liquidity events and exits also look different in health tech.

Here’s the good news: between the culture of M&A-driven growth among strategics and strong private equity activity in the space, there are many opportunities for exits. Unfortunately, given the dynamics of the space, the average exit price for these businesses is lower than it is in other industries.

Generally speaking, the majority of positive exits happen in the $250M - $500M range^₁ . Once a startup ventures past a $500M valuation, the list of potential acquirers dwindles, and the number of health tech startups that have gone public in the last 3 years can be counted on one hand.

Because of that exit range, it’s important that investors appropriately benchmark their investments to match. This means that entry price and ownership targets are especially important for health tech investments. Dilution also matters, so it’s important to understand what the capital-raising requirements of the business might be in order to achieve scale.

Given all of these challenges, how can investors establish a right to win in health tech?

First, focus on building your network of experts. Healthcare is both broad and deep when it comes to market insights, and it’s important for an investor to understand the limit of their knowledge and augment it with external expertise. Not only will these experts help ensure that you’re asking the right questions during diligence, but they’ll be able to provide your founders with real tactical support through guidance and customer introductions.

Next, find ways to meet founders as early as possible in the building process. Nothing replaces getting to see how they build, react when things go wrong, and build feedback loops for themselves with potential customers. It’s a fantastic way to understand a founder’s grit and their right to win in the space. From my experience at On Deck and at Opal, I’ve found that speed of iteration is one of the strongest indicators of success in early stage health tech startups.

Finally, take the time to understand the fundraising cycles and needs of different types of businesses in health tech. Capitalization requirements look different based on the type of business a founder is looking to build. As an investor, you need to make sure that you’re backing startups that will operate with some amount of capital efficiency, especially with businesses that have a tech-enabled services component to their model.

At Opal Ventures, we practice what we preach. 

Our fund model enables us to meet founders at the point of ideation and utilize our network of health tech go-to-market experts to enable founders to get to market quicker. Not only does this let us understand a founder’s approach to building, but it helps us earn allocation in their first round of funding, no matter how competitive it is.

Our approach at Opal Ventures is made possible by the incredible community of founders, operators, and health tech investors we’ve cultivated since launching the fund. 

This network of experts assists with diligence and helps our portfolio companies scale post-investment. Through them, we’ve been able to support our founders as they launch products, close enterprise deals, and raise subsequent rounds of funding. 

It takes a village to build a health tech startup and I hope to welcome you to ours. If you’re interested in diving deeper into health tech investing or just want to compare notes on the space, please reach out!

1  https://secondopinionmedia.substack.com/p/resetting-expectations-for-vc-investing