Jesse Liebenthal, Principal at Liebenthal Ventures
Investing in Startups is risky yet exciting. I find it fascinating to speak with other investors to understand what aspect of investing motivates them the most. Is it money, mentorship, technological advancements, or making the world better? When it comes to investing in healthcare startups, I find investors motivated by helping the world be a better place are the best match. The reason for this is investing in healthcare companies is a very long-term play and requires a great deal of patience.
Usually, founders have the best intentions but can often be overly optimistic. We have a saying at Liebenthal Ventures. If we could bet the under on every founder’s projection, we would be very rich. It is no different when it comes to healthcare companies. On second thought, it is significantly different. Some healthcare companies have to get FDA approval before they can operate. So, now we are combining two uncertainties: the path to approval and the financial projections. Imagine if we could take the under on both!
According to Doctor Gail A. Van Norman, “From preclinical testing to approval, research shows that the average approval process of new drugs and devices takes 12 and 7 years, respectively. While other studies place the average drug development cost at $2.8 billion, another study conducted in 2020 determined the average cost to be $1.3 billion.”
“It is crucial for investors to understand both the time and money facets of the approval process when they are weighing an investment in a healthcare startup”
It is crucial for investors to understand both the time and money facets of the approval process when they are weighing an investment in a healthcare startup. When speaking with a founder for the first time, the first two questions you should be asking are “where in the FDA approval process are you?” and “how much time and money do you actually need to get all the way through to approval? Now, we must understand the founder mentality to qualify their answers. Once again, founders usually have the best intentions but can be overly optimistic. This can be from a lack of experience, or maybe they haven’t read Mice and Men to understand that “The best-laid plans of … often go awry.” Founders may also be looking for the cheapest and quickest path to approval to ensure that by the time they are approved, they have maintained the highest ownership possible. From personal experience, this doesn’t always have the best outcome. Shortcuts are usually not an option. With this in mind, it is important to take their answers with a grain of salt and do your research to ensure that the path they set forth is reasonable. Additionally, try and find someone with experience going through the approval phase and get their thoughts.
In conclusion, if you are looking to invest in Healthcare startups, be ready to buckle up for a long ride. Depending on where in the startup’s approval process you invest, there may be at least additional ten years just to reach commercialization. Additionally, pay close attention to the amount of money they claim to need to get to commercialization and ensure it passes the smell test. If they say $5M will get them approval, they better have good reasons as to why. If you are looking to break into the healthcare startup world, I would suggest starting by investing in healthcare-adjacent technology that doesn’t require FDA approval to operate.