Covid-19 is changing the game for health care companies and investors

Even as the health care industry has stepped up with an unprecedented response to the Covid-19 pandemic, health care companies are being undermined by a loss of revenue, splintering of their clinical workforces, and the disintegration of normal as we know it. For health-related entrepreneurs and startups, this means the rules of engagement with their stakeholders, including venture investors, are also changing. The emergence of a new abnormal will depend on several factors.

Is money available?

The message from the venture capital community is that it’s open for business. Firms say they are being more cautious but are still willing to invest. A few venture outfits have even closed new funds within the last weeks.

The truth for entrepreneurs and venture-backed health care companies, however, is more nuanced. Investors are always open to hearing about new deals and looking for ways to shore up current portfolio companies. The pipeline development analysts cannot afford to sit twiddling their thumbs. But new deals are exceedingly rare right now, and industry pundits say that the deals that do get done are on far less frothy, or certainly more realistic, terms — approximately 30% lower valuations and falling — than before Covid-19.

The word on the street is that venture capital firms are looking for a two-year runway, a difficult measure to assess in times of extreme uncertainty. And with most health care companies facing potentially dramatic negative impacts to sales, staff, and supply chains, that projection becomes even cloudier.

Investor as therapist

Sharing resources and best practices among portfolio companies has been a long-stated objective for many venture firms. Funders have even tried to provide centralized platforms and programs across their investments, ranging from annual summits or small CEO peer-mentoring groups to recommended consultants that can help save on fees. But a sense of competition between founders, limited bandwidth to meaningfully engage, and a desire for entrepreneurs to not show weakness in front of investors have probably all contributed to the historically spotty uptake of these services.

In the midst of the Covid-19 pandemic, venture capital firms have renewed their commitment to provide these types of shared resources for portfolio health care companies. These programs have popped up seemingly overnight and are diverse in nature. They can include office hours with fund partners or group conference calls between CEOs who share an industry, sometimes facilitated by a fund partner and other times left unchaperoned for “real talk.”

Websites and tools aggregating best practices in response to Covid-19 are continuously being updated by venture fund staff or portfolio company leaders. Topics and perspectives can include how to humanely conduct a layoff, manage cash runway in times of uncertainty, or deal with the sudden, acute stress and mental health implications of leading companies and families through this crisis.

I’ve been seeing more founders take up such offers than in the past. Some no doubt are in desperate need of support, while others might just be feeling physically isolated and cut off while maneuvering their companies from a home office, a guest room, or even the kitchen table. The big question is whether this trend of resource sharing will extend into the future and if these deeper interconnections, including more frequent, honest, and vulnerable dialogues between investors and portfolio companies, will have meaningful implications for future financial returns for venture capital companies or for the quality and richness of entrepreneurial ecosystems.

A Covid sure thing?

The reality of venture investing is that some startups will fail while others succeed. The difference now is that some are failing more rapidly than in “precedented” times. Most firms have an investment thesis and abide by it, but personal networks and gut instinct no doubt play a role — especially now when no single investor or entrepreneur has a clearer crystal ball than others.

When looking at the next round of investment in health care companies, it’s fair to say that Covid-19 is creating a market for telehealth and other virtual health-related platforms. But beyond that, a lack of clarity on the future will no doubt contribute to at least a short-term wait-and-see attitude.

Still, many companies have wasted little time pivoting from their original business models to embracing clear emerging needs like production of personal protective equipment, infection prevention methods, or remote or virtual engagement for distanced selling and staff training, all while investing cycles into the next big ideas birthed by the pandemic — moves that will eventually entice investors to once again eagerly place their bets.

Those bets will surely come with more risk. For example, when evaluating companies that serve hospitals, how can one reasonably predict what the hospital of the future will look like, or when hospitals will have the time or financial resources to embrace the new or innovative?

The duration of the Covid-19 outbreak will dictate how and when we treat routine and elective procedures like knee replacements and cataract extraction — first with trepidation and eventually at the levels seen in January. But patients’ fear of hospitals could affect the volume of procedures long after the pandemic subsides. And uncertainty as to whether elective procedures will return in full force ahead of the release of a vaccine (which even the most aggressive predictions pin at 12 to 18 months out) raises even further question about already shaky ground.

Practitioner skepticism over whether employers hold their best interests at heart or have been adequately protecting their efforts on the frontlines will figure into inevitable changes to hospital infrastructure and care standards. It is reasonable to expect that what we previously called “patient and practitioner experience” will transition to become “patient and practitioner demands” in the post-Covid-19 era. The definitions of “nice to have” and “need to have” as defined by patients and their caregivers will become increasingly polarized, with both patients and practitioners defining what they will require before returning to the hospital. These demands could ultimately become the lens through which health systems and leaders make future decisions about innovations and investments.

Market demand

Ultimately, investors will continue to play a critical role in how the health care industry rebuilds itself. The demand for venture funding will almost certainly increase as new business models and concepts emerge from the melee and the faltering foundation of health care delivery caused by Covid-19. Entrepreneurs will rush to fill gaps such as higher thresholds for infection prevention, social distancing within hospitals, relaxation of HIPAA standards, or even remote clinical consultations that have already been highlighted as fresh opportunities for change.

With debt markets completely locked up, health care companies in the commercialization phase will also be forced to approach venture funds for both their dollars and their therapeutic counsel. Yet it is uncertain at this point in the crisis if venture investors will be responsive.

Fortunately, venture capital firms in the health care space do not necessarily mean vulture capital. Many funds are committed to advancing meaningful solutions in the industry and supporting the needs of underserved populations and the greater good.

What’s next?

Venture capital has been and will remain an integral part of the health care innovation ecosystem. But some of these companies might be better equipped to help the sector reach its new normal than others. Just as this global crisis is separating the survivors from the victims in the hospital market and across our populations, so too will it accelerate the success or the demise of venture funds.

Investors who rose through the ranks as former entrepreneurs and business operators and those who prioritize their existing portfolio companies over new investments might be better positioned to see long-term returns — both financial and in terms of loyalty. Conversely, investors who exclusively chase the shiny new object may have near-term returns but will lose the trust and confidence of the entrepreneurial community.

Just as investors should focus on long-term outcomes, health care innovators must also take the long view. This (hopefully) once-in-a-lifetime upheaval is an opportunity for transformation and reimagining standards, perceptions, and practices. The sacred cows of health care are no longer looking so sacred, and the right health care companies and venture investors will recognize this opportunity and maximize their ability to do well by doing good.

Eric M. Stone is a health care entrepreneur, patient advocate, chronic disease sufferer, adviser to several health care startups, and co-founder and chief executive officer of Velano Vascular.