IG: My name is Ian Goldstein. I’m a partner at Fenwick & West. I co-lead our venture-backed company practice. Fenwick is sort of one of the leading firms primarily based in Silicon Valley, but I’m here in New York City, and we represent sort of leading venture-backed companies in the tech and life sciences ecosystem, including like a broad variety of digital health companies and the venture and strategic investors that sort of support and help that industry grow. So the topic of this discussion is the art of an investment deal. So obviously we have a lot of experience here on the stage with Bill and Joe and myself in helping digital health companies and other companies secure investments, capitalize on great investment syndicates, and figure out how to sort of build a company with those investment syndicates. So that’s sort of what we’re going to try to do in the very short amount of time that we have here. So I wanted to just start off and Bill, you had already alluded to this in the, in your opening discussion, just to talk about what is the environment right now for early stage digital health investing?

BT: So what we’re seeing is there’s, there’s actually a lot of capital out there, but the problem is getting access to that capital. And from the growth investing side, which where we focus, what we’re seeing is that most of the companies that raised those big rounds and high valuations in ’21 and ’22, in order to get funding, you’re going to have to take a flatter down round. That’s just for those growth. What we’re seeing is, and those companies are struggling to actually raise money no matter good, how good they are and how good their P&L is. From the A, B rounds, and even the startup capital, we’re actually seeing more funding going into them without as many conditions as you might see in the growth equity rounds, probably because they didn’t raise it, those ridiculous valuations that aren’t supported by the P&L. And there’s a relatively raising much smaller round. So their access to capital tends to be a little easier. The other thing I think is, it’s obviously investor friendly now versus being company friendly before, and maybe a little less structure perhaps in some of the rounds we’re seeing for the earlier stages. And then certainly in the down round stages or flat round, a lot less structure, simply because it’s just really impossible to get a deal done if you’re putting that much structure in place. So just trying to make it as simple as possible for those companies that are going to have to raise the down round again, but that’s more on the growth side versus the early stage rounds. At least that’s what I’m seeing.

IG: Yeah. I mean, so I’d say that the data that we’re seeing at Fenwick and that you all are probably looking at, whether it’s CB Insights or PitchBook or some of the other data sources would suggest, there’s a fair amount of strength and activity at the earlier stages, right? Pre-seed, seed, and A. And then you begin to have some tension points as you go up the food chain to later stage and growth investments. And Joe, is that consistent with what you’re seeing?

JV: Yeah, and I’ll just add a little more to the question in terms of the companies and how we’re working with our assets in terms of follow-on investments. What we’re seeing too is a bit of a slow roll by some of the investors where they want to wait a bit. So it takes longer to raise money. You generally get it, but usually where you may go six months to eight months and start out earlier looking for funding, we’re starting out like a year ahead. And whether you have a banker or not, there’s a lot of folks that are still, want to be very cautious of what they’re investing in. And they’re taking a hard look and it seems like they’re going deeper in terms of due diligence than usual. And what that sometimes leads to is us having to fund or bridge the company longer. So you’re seeing us put in note rounds and the insiders of the syndicate put in note rounds to carry them through to that final raise. So that’s been different for us and we’re seeing a lot more of that. And it’s frustrating for all parties.

BT: The one thing I’m seeing too is part of the problem we’re seeing in those growth rounds is that there’s a reluctance by the investors and even the C-suite to take that down or flat round. And the reality is, you think it’s common sense, but what they don’t see is that dilution doesn’t cause bankruptcy. Lack of cash causes bankruptcy. And at least with a down round or a flat round, you live another day. And that’s what we’re trying to coach a lot of these firms is that you don’t need to raise a lot of money. You just need to raise to get you to that inflection point that allows you to raise the next round to grow again. But it’s just been an interesting dynamic amongst investors of just their reluctance to want to do those down or flat rounds. But the reality is, as Joe said, if you thought it took six months, it’s now taking a year and the cash runway is a lot less than they believe that they have. And that’s causing, I think, compounded issues. But again, that’s more on the growth side than the early stage.

IG: So what tips do you both have for companies? Let’s start at the early stage because it’s going to be different depending upon stage. Tips you have for earlier stage, let’s say seed and A-stage companies to try to accelerate that timeline a bit, right? When you’re going in, let’s say you’re a new investor, we’re not talking about a follow-on for one of your portfolio companies. You’re looking at a company, it’s an earlier stage company, what are the things that you see that help accelerate your decision making? And what are the things that you see that sort of slow things down? Because I think that would be sort of a helpful tip for the audience here.

BT: I think one of the interesting things is, even though you may not be raising, it’s the whole idea of talk first, then raise cash. And so the idea is start to line up lots of people, lots of investors that you could just have conversations with about your company. Which then sets you up when you’re ready to raise, that accelerates the process because you already have a cohort of groups of investors that have already heard about your company, know about your company in depth, and you’re not starting from scratch, so to speak. So we always try to give this advice almost, it’s really kind of simple, it’s just talk first, build a cohort, then raise your capital. And that tends to accelerate it quite a bit. I think what also helps accelerate is how well you manage your cashflow prior to your raise, right? Investors can tell when you only have two or three months of cash, they can smell that your shark’s in the water at that point. So the whole idea is, again, making sure that you’re raising where the company looks healthy, right? No matter what, that’s no matter what stage, whether you’re doing it at a time where you’re building your company. Now it’s one thing if you’re pre-revenue, don’t have any customers yet, but that’s a part of your story though, that you’re selling. And then your reflection point is, oh, but at this point we will have customers and so on and so forth. So it’s also part of your storytelling. And the last tip I’ll give and turn over to Joe is one of the things we try to tell everybody is fix your narrative. And the narrative is the most important thing that you’re going to do when you’re pitching. And really the whole idea is tell the truth about where you’re at today and where you’re going to be. One of the things that us investors don’t like is when you maybe have two years of flat revenue and then you show me a hockey stick that you’re going to make this incredible amount of revenue. We know that that’s not true, but what we want you to do is tell me what’s the inflection point that’s going to make me believe to invest in you that will get you to that hockey stick point. It’s okay if you might go, well, this next year we’re only going to increase by a few million, but then we’re going to go up. That’s a better story than telling me the story that I don’t believe around where your revenue is. So it’s really getting that inflection point and making me believe as an investor that you have everything in place to get you there. And then that actually accelerates the funding process because we believe in what you’re saying.

JV: So I think that the syndicate is critical and even at an early stage, and you touched on it a little bit, having your story and the narrative is huge. Even if it’s a few years out. You like to hear where this is going, you might have a good idea and it’s a core phenomenal patented thing, but if it doesn’t lead to something larger or have that vision or strategy frameworking behind it, it’s tough to kind of visualize why I should invest now. So that’s important. And I think to Bill’s point, talking to as many people as you can, hooking up with maybe a startup health or an entity that’s like an accelerator at an early stage is huge. We’re not early investors. And frankly, I’ll be honest, it’s a long haul to get in early and stay with the company and coach and bring them up. We have 38 active investments. Can you imagine if there were 38 earlier stage companies? And there’s 10 of us now, three of us actually doing the deal. So that’s a lot of work. I want six boards and those are growth companies and that’s a lot of work. So you have to pick your syndicate really intensely and understand their ability to really give you a ramp of their time and get into kind of the things you need to do like hiring and all the things to run a company. So I think that’s important. I also say that one of our companies that is using a banker, and this is a later stage company, the banker put a kibosh on them moving forward until their story was really tight and they made cuts and the cash flow was strong and the story there of where it was going was strong. So you’re seeing a lot of that now. And I think that should be carried into early or late. And you really got to have your story buttoned up and get the help to get you that story. His idea of just putting in front of everybody, people do that with us too. And even if they’re not an investor is a phenomenal way to kind of learn where it’s wrong first. What you’re saying, hope is not a business model. I don’t know about saying it’s not.

BT: Hope is not a strategy, no. Let’s get real.

IG: Let’s talk a little bit about deal terms, right? Bill, you mentioned the word structure, right? I would say, I’m curious both your takes, but I have a feeling I know what it is, that generally speaking, that companies should be aiming for simplicity, right? Ideally, your cap table would have not layers of seniority in your preferred stack, right? Ideally, there’d be a streamlined governance structure. Ideally, you wouldn’t have terms like multiple liquidation preferences and cumulative dividends and lots of things that are both sort of dilutive to the common and the management team, but also sort of anchoring in a potential problem for a subsequent round of financing, right? So, ideally for a company to eliminate those things and have a very simple fundraise, regardless of stage. So the question is, right? How do companies get there, right? In a tougher funding environment like what we have, like what are some tips that founders and executive teams can use to sort of try to drive as best they can their current and new investor syndicates towards that sort of simpler structure?

BT: Typically where a simple structure comes in, it actually comes from groups like ours who are the growth investor, when we come in, not that we’re looking to recap the company but we’re not putting up with any of the nonsense that was done in the previous rounds for the most part. And you have that ability when you’re putting the large amounts of capital work that we typically put to cap. So if there’s all sorts of liquidation preferences and there’s no debt on the books and that stuff has to go, making sure that all the voting rights and the class rights are correct, that everybody’s represented, to your point, fairly. Where we tend to see structure for the most part, I would tell you, is when we do debt, right? That’s typically when we’ll add a little structure but it’s typically around some kind of either warrant or liquidation preference. Other than that, even as a growth investor, we try to keep it as simple as possible. And so where that stems from, that was really from the earlier rounds where part of it is where Joe said about your syndicate, what’s the sophistication of your syndicate? And a lot of funds don’t really perhaps know how to put these structures together they haven’t led before. So it’s finding the right lead for your investment that knows how to actually put a term sheet together that’s fair to everybody. I think that’s an important piece and that gets to Joe’s thing about the syndicate but it’s the lead investor really is one of your most important investors because they’ll put the deal together for you and with you. And that’s the other piece is partner with the investor. You all have a stake in what’s going on. You build a company, you don’t have to, you also you push back, you don’t have to take everything the investor says as gospel either. But that’s kind of things where we sort of think about is we just don’t like structure really much at all but it does happen when we do things like debt because that’s a different type of instrument that does require structure.

IG: Joe, thoughts on?

JV: Yeah, so I agree with everything Bill said. The additive there would be when you have a syndicate that’s a mess and there’s a lot of folks kind of on the cap table, it might be a good idea to start to look at somebody to come in that is part of the syndicate to take out some of those early investors. A lot of folks that are early investors get tired. They’re not contributing like they did upfront. An early stage investor is different than a later stage investor and it’s different than a PE fund or a growth equity fund. So when to bring those in is important and the timing of how you do that. I’m going to pile on to that syndicate of who you bring in, bring some adults at the table. So financial funds usually have their act together because they’re in it to make money and a lot, right? So they’re the folks that will crack the whip. We will too, but we have strategic initiatives in mind as well. So that would be kind of the one or two tips.

IG: Yeah, I think it’s a good point. I think sometimes you need to go through a complicated deal to get back to a simpler structure. We’re seeing sort of a lot of that now in like the mid-growth stages and later stage companies where you’re seeing sort of down rounds and companies that have to have their cap table sort of restructured. Those transactions are often pretty complicated and can be messy and difficult to deal with. But I think the goal at the end of the day, right, is to use that complicated and challenging process to get back to a price evaluation and an overall cap table and governance structure that actually makes sense and can support the company going forward for its next sort of milestones of success. So I mean, that’s a key piece of that puzzle. No, John’s waving, so I’m going to ask one more question. Is that okay, John? All right, so one more question. Particular areas of sort of strength, right? Like where are you seeing sectors within digital health that might be particularly strong and attractive places to focus energies to gather those investment opportunities?

BT: So from a pharma perspective, which is obviously what we represent, probably the biggest area that pharma’s adopting right now is the use of artificial intelligence, machine learning, and drug discovery and clinical ops.

JV: And supply chain.

BT: Right, and Joe, because Joe represents the supply chain, but that’s a big area as well. Where it’s less, from, again, a pharma perspective, I’m just throwing at you, is the commercial side, because we’re under many anti-kickback statutes that prevent us from investing in certain things. For example, we like telemedicine, but I can’t invest in it because we can’t be in a corporate practice of medicine as a pharma-owned venture capital firm. Doesn’t mean those places aren’t good. I think monitoring is a really big place that’s being adopted by the industry because the devices are more, they’re smaller, faster, they collect more data. That’s a really big area. We’re seeing a big uptick in social determinants of health, where health equity is gaining strength. But I would say that in the sort of health value chain, it’s still a lot more on the earlier side of where the clinical piece sits. This is across anything, not just pharma. It tends to be where the investment dollars are being, I think, deployed at the biggest rate right now.

JV: Yeah, nothing really to add, except the supply chain is definitely an area that’s hot, and all the technology around that, which the only thing I’ll say is the tech being used there can be the same tech being used in a clinical environment. So there is leverageability there. And what I like about those types of investments is supply chain analytics AI is supply chain analytics AI for a lot of different entities and industries. So if you start to dig in there, go look at other Amazon’s greatest supply chain, right? So go look there. So that would be my two cents add to Bill’s. I think we’re done.

IG: Super, yeah, I think we’re out of time, but thank you both for sharing the insights.