Has venture capital worked in healthtech? Yes and no...
Once upon a time, it was the only way to build a ‘serious’ business. Now, founders are looking at other models. This week's Pigeon Insider deep dives financial models.
Babylon raised hundreds of millions, listed at a $4.2bn valuation and two years later was sold for parts. It was the most famous company UK healthtech had ever produced and it did everything the venture playbook asked for. Raised enormous sums and sold the dream. I interviewed Ali Parsa about it on my podcast a while ago and I actually saw him at HLTH Europe yesterday and had a brief chat. Essentially, the venture model can work to build a big UK healthtech business. It just hasn’t. Yet. If you define ‘big’ as ‘a successful IPO,’ anyway.
On the other hand, Open Medical, run by an orthopaedic surgeon called Harry Lykostratis, has quietly (and profitably) put its software into more than 90 NHS sites without taking venture capital. Yep. A bootstrapped healthtech company with scale.
Healthtech has, arguably, spent most of its short life treating the VC model as ‘serious’ and bootstrapping as ‘charmingly irrelevant.’ But the reality is that I’m noticing a shift that Harry was part of way before it was cool. It feels like we’ve only ever properly learned to use one kind of capital because it’s been essential in order to bring products to market, and it’s been readily available. But recent times have been challenging to raise money, tech costs far less to build, there’s an AI>humans narrative and doubling revenues year on year isn’t appealing in healthcare at all. All this is forcing a different attitude, i.e. to running extremely lean and avoiding VC altogether. Or at least for as long as you can.
The conveyor belt
For about fifteen years, there’s been a common playbook - raise a small seed round for some equity, build an MVP, make a few sales, raise a Series A, then a B, then a C, each one bigger and each one from broadly the same pool of investors reading broadly the same emails. On my podcast a while back, Ash Patel, who, coincidentally, was one of the first employees at Babylon, now runs capital markets advisory at the investment bank Houlihan Lokey. He called it the conveyor belt, and talked with me about how automatic it’s become and how founders can assume that because they once took angel or seed money, the conveyor belt is the only way forward.
I assume the script for this came from a mixture of biotech and SaaS, where, in both, it does genuinely work. Biotech needs hundreds of millions and the best part of a decade before it earns a penny, and it has a well-understood buyer waiting at the end (big pharma). SaaS, interestingly, runs on the opposite logic of cheap to build, almost no marginal cost per new customer, recurring revenue, and a land-grab. Pour money in early to take the market before anyone else does. Healthtech borrowed the ambition of the first and the speed/scale instincts of the second, but I guess I’ve always seen it as a bit of a square peg in a round hole.
Healthtech carries biotech's regulatory weight without the clean pharma exit, and it sells software like SaaS without the frictionless path to the customer, because a healthtech buyer almost never behaves like a SaaS one. Whether it is a public system like the NHS, an insurer weighing actuarial proof, a self-insured employer chasing a return on its benefits spend, or a hospital counting the cost of switching, the sale is slow, evidence-hungry and institutional, and the one paying is hardly ever the one using the thing. So none of that favours a land-grab.
And here’s the kicker…
