Presented by Providence Ventures
Entrepreneurs can easily scour the news wire for articles related to the age-old question: “What Should I Ask a Prospective VC?” As opposed to retreading familiar ground, I’d like to tackle the topic from a perspective near and dear to my heart: Namely, the nuances of inviting a “Strategic” investor into your company’s fundraising strategy, and how to evaluate this class of investor.
Entrepreneurial fundraising options come in many shapes and sizes. Despite my role as a Partner at Providence Ventures (“PV”), which is the strategic investment arm of Providence St. Joseph Health (“PSJH”), one of the largest not-for-profit healthcare systems in the US, I actually push entrepreneurs hard on whether raising venture capital is right for their business at all.
It’s expensive capital that comes along with strong expectations for rapid growth and a positive “exit” (i.e. company sale) within a reasonable timeframe. If venture capital is raised without appropriate forethought, it can place unwelcome pressure on companies at their most formative stages, and/or strain a company’s culture in counter-productive ways.
Of course, there are times when taking on venture capital makes all the sense in the world; but even then, there are important questions about the type of VC fund that should be contemplated. In PV’s case, we seek out innovative companies that offer technologies, or technology-enabled services, that help our parent organization, similar healthcare systems, health-plans (PSJH owns a health plan), and/or large employers (PSJH has 116K employees), adapt to the evolving challenges of delivering cost-effective and high-quality healthcare.
With the context above in mind, here are several key questions I would ask a prospective strategic investor, if I were contemplating their capital as a funding source:
1. How is your success as a strategic venture fund measured?
Ideally, your investor seeks a healthy combination of both financial and strategic returns from their investment. In our opinion, helping a company, and our co-investors in that company, achieve venture capital-like ROI (and being held accountable for our ability to do so on a repeatable basis) creates healthy alignment for all shareholders.
Strategic “returns,” though very important to a fund like ours, are harder to measure, and often tackled on a case-by-case basis. Generally, they address the ability of the portfolio company to reduce cost, generate new revenue, or, in the case of healthcare investments, save lives (and ideally, all three!). We measure these successes by providing resources to our portfolio companies to measure KPIs against their deployments and by documenting formal case studies.
That said, make sure your strategic investors are incentivized on investment performance so they are aligned with creating value for your company, and your other investors.
2. What’s your track-record for creating value on behalf of the companies you’ve invested in to date, and/or can I speak with some of your existing portfolio company CEOs?
It’s one thing to say you can create value; it’s another to demonstrat it. This wasn’t the easiest question to answer when we launched our fund in 2014. We had a small number of investments in our portfolio by the end of that year, and couldn’t demonstrate exhaustive results. Instead, we were steadfast in communicating our mission, which was to make every single one of our portfolio companies a raving fan of the effort we expend on their behalf.
At the end of our fund, the aim is to make each company CEO (and our co-investors) delighted, reference-able “customers” of the unique form of financial service that we provide. Whether it’s helping a company scale its solution across PSJH, piloting an emerging technology against measurable outcomes, partnering closely to enhance a company’s product offering, or driving new customer growth by facilitating introductions to other healthcare systems, depends on the company in question. In all cases, though, our team is held accountable for achieving defined objectives for each company in our portfolio.
Flash forward a few years, and we are now confident we can introduce you to any one of our CEOs who will acknowledge our ceaseless efforts to help them untangle the operational labyrinth of one very large U.S. healthcare system. Through our strategic advice and C-suite level visibility, we provide an opportunity for substantial commercial growth in our organization, as well as across a network of 75+ healthcare systems (many of which have visited us in Seattle) that PV has cultivated relationships with through PSJH’s aggressive digital innovation efforts.
3. I see that one of your organization’s well-publicized strategies is to [INSERT STRATEGY HERE]. Can I explain how our solution is more effectively executing on similar strategies? (Oh yeah, and did I mention we’re raising capital)?
This may sound like straight up sales talk, but it’s more nuanced than that, and an effective way for entrepreneurs to satisfy several objectives on an introductory call. First, you’ve made it clear that you’ve done your homework. It’s surprising how often entrepreneurs join an introductory call with the question: “Tell me more about your fund.” PV’s website, as well as numerous publicly-available articles, highlight what we do, at least at a high level.
Second, the question above demonstrates a general understanding of how, and when, strategic venture capital makes sense. It shows that you understand that PV is looking for companies that help PSJH solve the major challenges of modern healthcare delivery, and that my capital, as their venture investor, may be a compelling mechanism for aligning our interests around that goal.
As for the parenthetical (“we’re fundraising!”), it demonstrates that you know I don’t field sales calls. I’m happy to put you in touch with my colleagues who do when it makes sense, but I’d rather talk about the potentially powerful intersection of helping to increase your likelihood of success in PSJH, while achieving a risk-adjusted return on our equity investment.
4. Is your parent company a likely acquirer of my business?
Note that in our case, the answer is “probably not,” but, depending on the strategic investor, your company may be in their acquisition wheelhouse, and that can have implications for you and your shareholders. If the answer to the question is “yes,” then you’ll want to pay close attention to the terms of the investment and the rights you may extend to your strategic investor, to help mitigate concerns that alternative acquirers may have; namely, that they’ll just be a stalking horse in the case of a likely sale of your business to your investor’s parent company.
As a post script to the suggestions above, the fact that I’m writing from the perspective of a healthcare investor is inconsequential. Anyone seeking investment from a strategic VC should understand how that unique investor drives value to their portfolio companies, and what their ultimate goal is by investing in your business. Whether it’s my friends that invest on behalf of a pure-play tech company (e.g. Intel Capital, Microsoft Ventures), or a more biotech-focused fund (e.g. Sanofi Ventures), we each have a unique mission, and it’s our mutual job to clarify those objectives for one another.
Jeff Stolte is Partner at Providence Ventures.
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