Jeff Yasuda is the CEO and cofounder of Feed Media Group, which powers music for apps and websites.
For founders of digital health and wellness apps, the current economic environment presents both an enormous challenge and an even greater opportunity. Despite the uncertainty in the markets, this may be an ideal moment for seed investment in all kinds of startups, including those in digital health and wellness, as Kjartan Rist recently spelled out in “Five Reasons Why Now Is A Great Time to Invest In Startups.”
Since most investment horizons are five to 10 years, there is plenty of time for the economic climate to change for the better as you get your business off the ground. The pandemic shone a bright light on innovative digital startups looking to make a positive impact in the health and wellness field, and now could be an advantageous time for funding if you move quickly and strategically. In this article, I will look at eight steps to do so.
Get your house in order.
Similar to preparing to sell a home, it’s very important that you address as many potential issues as possible before you begin the fundraising. Raising institutional capital with just a presentation is no longer the norm—you must be able to demonstrate a good early-stage MVP (minimum viable product) before going out to seek funding.
Solutions like Amazon Web Services have made it easy to build an MVP and quickly scale. Moreover, if you’re a non-technical founder, look for a technical counterpart. Many founders opt for outsourced development teams. While this strategy can work, eventually, core tech needs to be brought in-house, and it is critical to a company’s long-term development. I am not saying it is impossible to raise without a technical partner, but your chances for a successful raise go up dramatically with one.
Build your data set.
After building an MVP, you’ll need to obtain measurable data indicating that your product or service works. Digital health investors are no longer simply betting on a dream—investors now need initial proof points that your idea works.
While qualitative data is good, be prepared to provide quantitative data when possible—a good rule is that every statement should have a number in it. The more granulated the data, the better. That which is not tracked is not achieved.
Research potential investors.
Be sure you right-size your capital raise to the type of investor that best matches your company’s stage and profile. Now more than ever, you need to be able to account for 18 to 24 months of runway.
Most institutional investors require you to manage your burn to get to the next fundraising cycle—which, hopefully, will be in a better market. Given the current market conditions, you should probably assume that you may not be able to raise more funds this cycle.
The best entrepreneurs are individuals who have access to resources that they don’t own. Build a network of trusted advisors who will give you valuable advice and access to potential partners, customers and employees. Get these advisors on the payroll and reward them with equity. Building your company’s credibility is key to your success in securing the right VC funding.
Know thy investor.
There are very few venture capital firms that invest only in health and wellness startups. Start researching venture funds that may have invested in health and wellness in the past and have recently exited. Examine their track record.
In general, most VC firms want a diverse portfolio of investments, so if they are currently working with another health and wellness startup, you might not want to approach that firm. The last thing you want is to be sharing proprietary information with someone who is working with a direct competitor.
Watch for red flags.
That leads to red flags to be aware of in the negotiation process. Look out for situations where you might simply be providing free consulting for the VC. Are they really interested in working with your company, or are they using the meeting to become educated on the digital healthcare segment and assist a competitor? Be careful about protecting your intellectual property. VCs rarely sign non-disclosure agreements (NDAs), so don’t give away technical details or the thought processes behind them.
Another red flag is violating confidentiality. If the VC divulges information about other companies, you would be correct to wonder how much of your company’s information they’ll be willing to share with your competitors. I get worried when investors say, “between you and me” or “you didn’t hear this from me.”
The most important thing is to “know thy investor.” Watch them closely during the negotiation process to get a feel for how they deal with challenges and difficulties. It’s easy to be easy-going during good times, but the party bus always has to stop for gas.
Create a competitive process to close the deal.
Investors have an unfair advantage in this game in that the longer they wait to make an investment decision, the less risk they assume. The challenge for any founder is to demonstrate to investors that the time is now, and the same opportunity won’t be around if they wait.
One of the most compelling ways to make an investor move is to let them know that there are other investors interested in and evaluating the opportunity. Fear of missing out is a palpable concern for many investors.
Enjoy the journey.
Perhaps surprisingly, brutal markets can be the best time to start a company. Potential employees who have been laid off are available. Because budgets have been cut, vendors may be willing to agree to lower prices. That’s good for founders. Smart investors know that a potential exit or subsequent round is years away—ideally when market conditions improve.
And remember, fundraising should be fun. You’ll be engaging with incredibly smart people who have exceptional pattern recognition. Think of it as a way to get some actionable advice on how to improve your company from an industry expert. A positive attitude is contagious and exciting to a potential investor.