Since rates of interest began climbing in 2022, digital well being firms have confronted a tighter VC market. In truth, funding for digital well being organizations dropped from a 2021 excessive of $29.1 billion to simply $10.7 billion final 12 months. That’s the unhealthy information.
The excellent news: there are nonetheless VCs trying to spend money on industry-leading digital well being firms; actually, my firm closed a $31 million Collection B in September.
There are 4 issues that entrepreneurs have to show to buyers to have fundraising success: a big whole addressable market, robust unit economics and product-market match, a world-class group, and a compelling plan for the longer term.
On this article, I’ll clarify why every issues and the best way to show these important indicators the following time you’re elevating cash.
1. Whole addressable market: Are you fixing an enormous drawback that folks care about?
Since we raised our Collection A 3 years in the past, intestine well being has gone mainstream, because of constant training from these of us dedicated to creating GI care extra accessible.
In pitching for our Collection B, we targeted our efforts on educating potential buyers concerning the measurement of the addressable market. To do that, we pulled third-party information from CDC and NIH on what number of Individuals are affected by intestine well being points (40 %), then in contrast these numbers to extra acquainted markets, like diabetes, psychological well being, and musculoskeletal care.
Every of these comp markets is nicely established – and our addressable market is even larger, with direct impacts on worker productiveness and effectiveness. That form of framing will help buyers perceive the potential for a digital well being answer.
2. Sturdy unit economics and product-market match: Profitability and scalability
These are two separate indicators, however they go hand in hand.
First, unit economics: Traders need to see that you could create your product profitably on a per-unit foundation. (Be aware that that is the other of the infamous early-2010s mannequin of firms like Uber, which aimed for progress in any respect prices, insisting they’d work out the unit economics later.) Simply as vital: Are you able to keep your unit economics as you scale?
Second, product-market match: There’s an enormous market, sure, however does it truly need and wish the product you’re producing profitably? In that case, you might have product-market match.
Once you’re searching for enterprise capital, there’s additionally the query of how worthwhile you could be to be thought of a great threat. That varies by {industry}, but it surely’s data you possibly can monitor down by both speaking to buyers in your house or tapping benchmarking assets like these printed by Rock Well being, which define VC-specific profitability expectations for numerous industries.
You may count on buyers to care about issues like your gross margin profile, common LTV of consumers, buyer acquisition value, and month-to-month burn charge. Traders usually have benchmarks for every of these metrics for a enterprise in your {industry}. For instance, a SaaS startup would possibly want to indicate a 90 % gross margin profile, however one thing decrease is perhaps acceptable when you can present you’re on a trajectory of enchancment.
As for that trajectory, you’ll want stable numbers to show its chance – like previous progress and a clearly articulated imaginative and prescient for the longer term (which I’ll get into under). Key right here is to know which class you fall into, what investor expectations are for that class, and the best way to show that you simply’re assembly (or exceeding) these expectations.
3. A world-class group
Traders need to know that, as founder and CEO, you possibly can construct and scale a world-class group. Throughout your group, they’ll search for area experience and expertise in rising and scaling related organizations.
Constructing an incredible group isn’t simply good for elevating cash, although: surrounding your self with top-tier expertise makes you a greater CEO and offers potential buyers the boldness that your group will be capable to execute in opposition to your progress plan.The important thing to constructing such a group: you ought to be continuously recruiting and assessing expertise. My suggestion is to take a position early in creating processes round constructing groups: recruiting, interviewing, hiring, teaching, performing ongoing expertise assessments, and so forth.
The perfect groups emerge when team-building is an always-on self-discipline.
4. A compelling plan for the longer term
Traders don’t need your hopes and goals right here. They need an enormous imaginative and prescient coupled with a concrete plan that you could execute in opposition to.
In our investor conversations, we introduced our five-year projections and our detailed plan to get there. We additionally highlighted our previous efficiency, laying out earlier projections alongside proof of our having crushed them. That context can add credibility. As with unit economics numbers, it’s finest to enter this understanding what the expectation is to your {industry}. What is going to your buyers count on by way of year-over-year % progress? Gross margin profile enchancment? Lifetime worth?
In case you’re undecided which metrics to forecast, ask round. Traders and different startups can information you, as can {industry} publications. Along with providing projections for core progress, we outlined structured optionality – extra enterprise segments we are able to goal and product enhancements we are able to construct that develop the TAM and help future exponential progress. These projections assist talk not solely that we’ve got a imaginative and prescient for the longer term however that we’re constructing the corporate and the platform right now realizing that we are going to transfer into different markets.
Bonus tip: Don’t wait till you want cash to start out fundraising
A number of occasions on this piece, I’ve instructed asking for enter from buyers, which means buyers you might have relationships with, however not essentially the buyers already funding your organization.
Constructing these relationships – with buyers and others in your {industry} – will make your fundraising journey a lot smoother. Why? Three causes:
- You’ll have a greater understanding of what they’re in search of. They’ll present the aforementioned benchmarks that they’re in search of in firms.
- They may give you suggestions in your pitch. I strongly advise not pitching for the primary time in your first fundraising assembly. Share your pitch with mates, colleagues, and buyers you realize to get suggestions.
- You’ll lower the quantity of labor it’s a must to do while you pitch. It’s a lot simpler to pitch an investor who already is aware of you and understands what your startup does. How do you get to that time? Construct relationships with buyers.
In a decent capital market, hold your mission in thoughts
In all of this, it’s vital to not lose sight of why it’s price pouring a lot time and power into fundraising supplies. Like many digital well being firms, we’re a mission-driven group. On the finish of the day (and in the beginning and within the center), we care concerning the influence we’ve got on the sufferers who use our platform.
Elevating cash is a wonderful technique to speed up your progress plans, however greater than that, it’s one of the efficient methods you possibly can deliver extra influence into the lives of extra sufferers.
Photograph: drogatnev, Getty Photographs