Last week, we were thrilled to have Hannah Sheath from ClearlySo here at Health Foundry for a Lunch&Learn session to discuss "How to get your Digital Health Startup Investment Ready".
ClearlySo work exclusively with high-impact businesses to help them raise capital and their angel network, Clearly Social Angels, are the UK's leading network of high-net-worth individual investors dedicated to impact investment for businesses that create positive, social and environmental change. ClearlySo have helped over 1,000 high impact enterprises and helped clients raise over £116 million so they know what they are talking about!
Hannah was also joined by our very own General Manager Sinead Mac Manus who successfully raised a funding round with Clearly Social Angels for her previous startup Fluency.
Here’s a run-down of Hannah’s advice...
Firstly, Hannah took us through the different types of capital available to startups: grants, debt and equity.
- Grants / donations can be restricted or unrestricted and are the cheapest form of capital available as you don't have to give away equity or pay interest. There are a number of grants that digital health startups can access (watch out for a future Lunch& Learn on this topic) or can come from venture philanthropy or non-equity crowdfunding sites such as Kickstarter.
- Equity is the purchase of shares for ownership of the business and comes from impact funds, angels and also crowdfunding sites such as Crowdcube or Capital Cell (the first European equity crowdfunding platform for biotech projects). It is the most common source of capital for early stage businesses.
- Debt is less common for early stage businesses as it needs to be repaid over set periods. It comes from social lenders/impact funds and banks.
Hannah explained that it’s key that the entrepreneur seeking investment has a clear idea of what the cash will be used for. Often the money is used to develop and improve the product or to help enhance the marketing and business development and in turn generate sales. In practice, this could mean making key hires, investing in clinical trials and building infrastructure so you are ready to scale.
So how do you know when to start fundraising and how much to raise? When is comes to fundraising, giving yourself enough time to close the round before running out of cash is crucial. Sinead shared her challenges with her startup saying that she ran out of cash three times before deciding to close the business last year.
Fundraising always takes more time that you think it will and your goal as an entrepreneur is to keep as lean as possible and try not to take your eye off the business while you are fundraising. You also need to work out how much you need to raise to get you to your next funding round, again without running out of cash, while demonstrating clear milestones of success to your next potential investors.
Sinead recommended that the startups not raise capital too early unless they can demonstrate good traction with users and some revenues or contracts in place. Her advice was to rely on grants and "sweat equity" as long as possible before you approach investors as it will put you in a much stronger position when you start to raise your first equity round. Hannah also recommended that you get your business ship shape in terms of structure and operations and achieving some significant milestones before approaching investors.
What are investors looking for?
Hannah explained that investors are looking for entrepreneurs to "demonstrate a qualified demand for investment capital". What that actually means is a company with:
- Early traction or validation
- Proven product / service
- Early revenues / contracts
- Strong team
- Demonstrable impact / evidence if you are in the social impact space (which includes health)
They are also looking for entrepreneurs that really understand the market they are in and can show a clear market opportunity for their product / service. Digital health startups should demonstrate a clear grasp of the health economics of their product (again watch out for a future Lunch&Learn!) and show the ROI if you are selling direct to the NHS or the size of the potential market if you are selling direct to consumers.
Investors also want to see evidence of happy customers as well as testimonials from users. Lastly, the entrepreneur should have a clear idea of how to scale the business. Always remember that investors are looking for a return on their investment so an idea of your eventual exit strategy is key as well.
Key stages in the investment process
Hannah then took us through the different stages of fundraising and which key documents you will need at each stage.
Having a coherent and well thought out business plan is an essential first step. When creating the business plan this is your chance to showcase your product and show investors you are ready and can meet necessary demands. Investors want to see credibility and that your proposal is clear, accurate, achievable AND that you will be able to pay the money back! There are hundreds of templates online o n how to create a startup business plan. Don’t be shy also at asking other founders especially in the health space to share their plans.
The business plan is quantified by the financial model which is the strategic framework for thinking through the key drivers of your business. The financial model provides operational metrics that help drive better strategic decision making and tell you how much money you need to raise and when. This is also your chance to prove your business is likely to continue trading for the foreseeable future. Investors will want to see historically two years of data (if you have it) and three years of future projections.
The pitch deck gives a concise view of the business that you can send to potential investors and present to investor groups or investment funds. It's your chance to demonstrate your business is viable and your team is the one to get the job done! This is also the opportunity to show strong forecasts and outline the impact generated and how you will measure it and report on it as you scale.
Another essential document is a two pager or executive summary which is your chance to summarise the investment opportunity and is one of the most used documents to get early traction with potential investors.
So what happens once you get an investor or group or investors interested? Well, that’s when the really hard work starts! You have now entered into the Due Diligence phase. This is a long and often painful process of meetings and negotiations with investors and potential investors and was described by Hannah as a "prolonged interview". Remember that, especially if you are dealing with angels, you are creating a personal relationship with your investors. They are investing in you as much as in the business. Your responsiveness (written, pitching, due diligence meetings, phone calls, meetings etc.) all feeds into their decision making.
During this process the thorny subject of valuations will rear its head. Valuations are an art as much as a science and are simply the value of the company that you can both agree on. Some standard ways of coming up with a valuation are earnings/revenue multiples, discounted cash flow, or price-per-user and other industry specific variables. However, most valuations are based on recent rounds and what other similar companies have been valued at. Sinead advised not to seek too high a valuation in your first fundraise as this can make subsequent rounds too expensive for investors.
Lastly Hannah ran through the documents needed to complete the investment. Your lawyer will help you complete the relevant documentation. This will include a facility letter with key terms of debt if you are raising debt finance and a Shareholder Agreement if you are doing an equity raise.
So in summary here’s a quick overview of the investment process:
- Get your business plan and financial model together
- Qualify your demand for investment capital - why would an investor invest in the business?
- Develop your capital raising strategy - clarify timing, amounts and use of proceeds
- Confirm your clear financial plan
- Decide who will manage the fundraise in your team
- Prepare for due diligence and countless conversations with investors
- Reach out to investors, pitch, and repeat
- Complete and close the round
- Celebrate, then get on with building the business!
Thanks again to Hannah for sharing her wisdom with us here at Health Foundry and feel free to reach out to us if you are looking for support and advice and / or submit a submission of interest to Clearly Social Angels.