Despite an overall slowdown in venture capital funding in 2022, healthcare companies raised $61.1 billion in investments last year, according to Pitchbook.
With so much money getting thrown around, you may wonder how a venture capitalist decides which healthcare startups they’ll fund. To answer that, Healthcare Brew talked to Sharla Grass, a principal at VC firm Greycroft.
Since 2017, Grass has worked as a venture capitalist in the health tech division of Greycroft, where she’s invested in startups like Boulder Care, Knox, and ScriptDrop. Greycroft is an early-stage firm and typically makes Series A investments between $1 million and $10 million.
Grass walked us through how she decides whether or not to invest in a health startup.
This interview has been edited and condensed for clarity.
When you’re looking at a new company and deciding whether or not you would want to invest in it, what’s the first step you take?
The first step is meeting a founder, whether it’s in person or virtual. We try to get back to everyone we hear from, whether it’s a cold email or a referral from someone in our network.
What kind of things do you look for during that initial meeting?
Is this the right team to build this company? Is it the right time? Why invest now? We’re trying to understand how big the opportunity size is. For us, even if we’re investing at the seed stage, we still want to be able to dream of how this company could become a huge standalone business.
How do you evaluate if it’s the right people?
We like to ask ourselves, “Would you want to work for this person?” Because a big part of a founding CEO’s role is recruiting the best folks they can to join them in the business.
What’s next after that first meeting?
We tend to do analysis through a data room that our founder has put together. So depending on the stage of the business, that will include things like historical financials, understanding different contracts they have with customers [and] how those are going, and understanding their pipeline for new sales. We like to spend time with the rest of the leadership team if there are several founders or other key hires they’ve made on the leadership team.
And then we really like to understand the fundraise. If they’re raising a certain amount of money, we like to understand the use of proceeds. Where’s that going? How can we help them think through the forecast and make sure that’s the right amount at the right time?
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Are there any red flags you look for early on in the process?
The biggest one for us is really just that we want to partner with teams that are trying to build big category-defining companies, and in some cases, that’s not really the desire of the founding team. And that’s just something we need to get on the same page about.
What’s the last step before you make a decision?
The last step, and this is pretty typical, is a company coming in to present to the full investment team. From there, we tend to move to a decision pretty quickly. We discuss the opportunity internally, and sometimes there’s a little bit more work to do based on questions that will be stirred up in that discussion. But in general, that’s the last step for us.
Do you take a vote to make the final decision?
Yeah, it’s basically a group discussion, and we do hold a vote, although it’s by no means binding. But it’s a great way to get everyone on the investment team to put their thoughts and their vote down.
How long on average would you say the process takes from the first cold email to a final decision?
I would say a couple to a handful of weeks. It really depends on the stage of the business, and how much there is to work through. In general, we like to move as fast as we can.
Does the process of deciding to invest in a healthcare company look very different than if deciding to invest in a different industry?
It’s different for every company, but the steps we take and the way we think about it is really consistent from industry to industry.
How many startups do you consider at one time?
It’s so hard to say. Some weeks are busier—there’s a lot of seasonality in the business—but in general, every member of our investment team is meeting new startups pretty much every day, or three or four days a week. Our team is always out there meeting new founders, whether they’re currently raising or not.