Patti's People - Patti Peeples speaks with Natalie Douglas and Ragan Hart - Part 1

Hi Patty, nice to be here.

Thank you, Patty. Well, I'm a 30-year plus veteran in life sciences. I started my career within big pharma as an entrepreneur. I then went on to build a global market-leading pharmaceutical services business where I brought in millions of dollars through private equity funding and raising debt through a major bank. I've been CEO twice of two private equity-backed businesses of varying sizes. So I've been exposed to working closely with private equity. Today I'm founder of Lucidity LLC, which is itself an investor in life sciences companies, and I also operate within that business model as a strategic advisor to private equity and venture capital. Bringing things up to date, I'm also an experienced non-executive director and currently chair two medtech companies, both of which are venture-backed.

Yes, I think I've looked at several HOR market access models more broadly, pricing and reimbursement models over the last few years. I would certainly say that looking at those models over the last few years, those that have already adopted technology, those that are tech-powered, obviously generative AI has become the in thing and I think that is absolutely catching everybody's eye. But if I look at a few years ago, it was really as Reagan said, looking at those sort of human-intensive models, but how they were adopting technology to enhance their output, how they could develop greater deeper insights on the data side with their technology platforms as opposed to just using human capital, and the speed at which that data was visible to the client. So I think that we've been in this place over the last few years. It's been an exciting place and I would agree with Reagan that it's still a positive space to be. Although I would say there's caution amongst the investor community at this point in time because I think simply we were in a very frothy market a few years ago. I think investors were very excited about these new technologies, these new platforms, and perhaps a few years down the line now are starting to first of all become more savvy about what AI is or what technology, what tech actually means, and what we mean by data value. So I think investors have been learning along the way. I think we saw some very high valuations as well and we're clearly not in that marketplace at the moment. So we're getting back to sort of realistic business principles even with these tech-enabled models.

Well, I think looking at funding avenues really depends on what size of business you are and I think we can split it generally into those that are seeking venture capital and those of us that are seeking private equity. Very simply, if you're seeking private equity, you've got questions to ask yourself as to why you need private equity, particularly if you're generating EBITDA, which is actually what most private equity firms will be focused on. So it's really making the choice about going the PE route or whether you can fund it via debt, for example, debt alone, perhaps a combination of both, but you're really probably weighing up debt and equity positions and looking at why you want to raise capital, what the benefit of doing that is or what the need is for that, and then thinking about how you construct that. And that's going to depend on a number of factors. I think if you're looking in VC territory, certainly I can use examples from the businesses I work with at the moment. They've been funded largely through angels, high net worth syndicates which are actually quite popular in the UK as an example market because it's tax efficient, grants, lots of government grants, Innovate UK, that kind of grant situation can be hugely powerful to get these businesses moving and off the ground, and then of course you're going out to VCs. And we're in that place at the moment. So certainly that's a very interesting place to be and a difficult landscape to some extent.

Sorry, can I just add as well just off the back of what Reagan has said? One of the other things we've seen emerge, particularly on the medtech side, is corporate venture arms. So this is something that can be really helpful for venture-backed businesses. I mean, to some extent those seeking private equity as well, of course, but I'm just, if I look at the two medtech businesses that I work with at the moment, being able to tap into corporate venture arms or corporate venture funding is also a potential opportunity for certain types of technology where they can demonstrate significant value to a big pharma company, for example.

Well, a lot of big companies, big pharma, some of the bigger med device companies have developed their own venture funding arm. So it's like venture capital within the organization. And I think they've done that for very good and obvious reason that they see that they need to look at investing early in some of these technologies and these innovations in order to give them the support and the opportunity that they need. For all the reasons we've already stated, venture capital is great, but it comes along with a lot of strings and also sometimes what we see is a lot of, it's almost like bootstrapping with somebody else's money as well. These businesses sometimes need to grow more rapidly and trying to secure additional funding can be really hard. So the corporate venture arms have been very inquisitive in the last few years and are very focused on tapping into talent coming out of universities in particular and really looking at supporting some of these amazing technologies because there's a lot of capability at that end of the market these days and they obviously want a piece of the action, and at some point that gives them an opportunity to acquire potentially at a much more economical price, I would imagine.

Yeah, look, I think a lot of what Reagan has said about looking at VC funding applies when looking at private equity as well, but there's a couple of additional, several additional points I would like to make. One is particularly in healthcare, what's likely to be happening to you is that you're attracting private equity in the first instance. So I would say a lot of firms have been attracted by private equity because they've been sought by private equity, not necessarily because they're looking for private equity funding. And I think this is very relevant in the broader market access space particularly with these sort of small to medium-size enterprises. And so that turns heads as well and it can be particularly not daunting, but it can be seen as a bit of a badge of honor for these founders whose heads may well get turned by the fact that they've got all of this attention because to be perfectly honest, where there's one private equity firm in this space, there'll be multiple others. So really, if you've got a good business, they'll be bounding you. They'll be banging on your door. And it gives you the opportunity to step back and really think about whether private equity is right for you and what that actually means. I think a great, I don't know whether it's an analogy, but if we think about the good, the bad and the ugly, I think we can use each of those three categories when we think about working with or attracting or deciding to choose the private equity. But if we look at a brief description of the movie, The Good, the Bad and the Ugly, I think this is even more relevant where it states, 'The good, the bad, and the ugly.' The movie is a bounty hunting expedition bringing two men together in an uncomfortable alliance. And I really liked that. I thought that was really neat because of all the great things that private equity can help you with and can do for you, and we'll talk about those as well. I can work with private equity and I've worked closely with private equity. There's lots of good things, but I think going into it with no experience, you can be very naive to the implications and a lot of what Reagan has said, it's just amplified with private equity. When you're bringing capital into your business from whomever, there's obligation and implication to that. And I think that if you're thinking about bringing private equity in, regardless of how the deal is structured, the financial side, you really have to think about choosing carefully. There has to be a good cultural fit, your visions, and be clear about expectations because this needs to be nailed down quite formally as you're entering this kind of arrangement because your visions of the future may be entirely maybe polar opposites and they're not necessarily going to tell you that on the way in because the personality from private equity you see when they're signing the deal with you is a very different personality to the one that shows up at the table at the point of an exit. So, you're really, another movie, Jekyll and Hyde maybe. This is the stuff to bear in mind and do your homework. A lot of what Reagan said, I fully agree with. Do your homework. Make sure that you reference potential private equity firms. Make sure you understand what they're like to work with, the good times, the bad times. And really think through how long that journey is going to be. How long are you going to be on this bounty hunting expedition? And how can you make it as comfortable an alliance as possible?

Yeah, just to add, fundamentally with PE, what they tend to do depending on the size of the fund, the firm, they'll be very specific about the types of companies they will invest in, the size of the company. Typically, they'll be looking at certain EBITDA levels or ranges before they're interested. They may be generalist or specialist, but they're going to reverse engineer it ultimately. They need to invest a certain amount of capital. They need to write a certain size of check and they need to see the return for that. So they will have some, and they'll be looking at this from an algorithm perspective, and if you fit neatly into that or potentially your model is going to fit neatly into that, then it's going to work. Lots of private equity firms can be interested in business models, but if they don't hit, let's say, a five million EBITDA dollar, they're not going to be able to write a check. They can't invest. So it's kind of similar in the VC world. Obviously, everyone's got their limitations and their aspirations, but their specific requirements because they're ultimately going to look at the rate of return. So yeah, there's an algorithm associated with it for sure from the investor side. And doing your research, as Reagan has already said, you've got to do your research on the firms that are in your sweet spot or you've got to figure out how else you're going to get there with that investment structure.

Can I just add to that as well, Patty? When I talk about EBITDA at around about a $5 million range or slightly above, that's almost a starting point for private equity really. Private equity are doing far larger deals. Their entry level of interest might be at a $50 million EBITDA, okay? But so their returns as well are going to need to be really significant. So I just wanted to make sure that there's appreciation for the fact that private equity comes in all shapes and sizes, but predominantly that's probably the very starting point where I explained the 5 million earlier.

A self-funding option is a really great place to be if you can do it. And there are a number of people that have done it really well, have maybe gone from zero to sort of 10 million revenues without completely bootstrapping the business. And I think that there are multiple models out there. Certainly when I went out looking for venture capital, we were a debt-free organization. We had developed a profitable business before needing to go out to private equity. And actually I think that model, my example was I went to private equity. There were reasons to go to private equity. There were some existing shareholders that wanted to leave the business. The business was valuable at that point as well, and so there was a need to do it to realize value for existing shareholders who wanted to go, and actually there was a real opportunity to accelerate growth in the business. There's a tipping point as a founder, as a leader of a business, where you have to think about the future. And we'd rapidly grown and international expansion was really what I was after. The interesting thing is that the raise at the time, we did not overlever the business. We had put in a good strong debt package and we could have serviced that debt. We could have actually increased the debt and reduced the equity position. And this is the challenge for those, I mean this is maybe not the self-funding model that you're talking about, but it uses perhaps several examples of when to think about bringing in additional or external capital and whether that's equity or debt. The decision was made. We did a combination of both and that helped accelerate the business. We were able to pay off existing shareholders and actually it was a very good growth story for the next 10 years. So it was a good decision. I think self-funding, if you've got a highly profitable, cash-generative business and you can see your way clear to continuing in that vein without putting your business under any pressure or ensuring you can pay all your bills and manage your lifestyle, then there's no reason to bring in external capital. And actually these days I think there's a need to encourage some founders to continue on that journey before going for equity-based capital. So there's absolute nuance to it, but in general, you have more chance of self-funding if you're already highly profitable and cash generative. I don't know if Reagan would have additional comments to make, but that's general principles to me.

I think approaching the investor community is a strategy in itself for a business and I think that there's multiple ways of doing it particularly today. The starting point though for me and using my own experience was actually creating a strong brand in my market, whether it was for my customers or whether it was the investor community. So actually I built a brand and it was a very strong brand that stood for something, and so we attracted attention outside of the investor community as a result of that. And I think that's super helpful because the narrative is out there already and that's a narrative that then you can talk to. To Reagan's point, if you're then going into sort of one-on-one or you're trying to attract one-on-one sessions, hopefully there's some good news stories or there's some intrigue or there's something about you that the investors have already heard of. And it's one of the mantras that I try to explain to the VC-backed companies that I work with. It's all very well having a product that you've been spending years building. It's great getting approval for that. Of course, that's a huge journey, but along the way, you've kind of got to ready the market, whether it's your customer or whether it's your investor. So this is part of what I would call a strategy. It's part of the business strategy for want of a better term. One of the other things we've seen emerge certainly post-COVID as well is events. Lots of events where technology platforms and innovative businesses are meeting and combining directly with investors. And I think some big events like HLTH for example and others, but we're seeing that on a smaller scale in country as well. There was a meeting, Health Tech just taking place in London this week, there was another one in Basel, Switzerland last week. So these seem to be on the increase and this is a great place. I think visibility in general for emerging companies is vital. Sometimes there's a reluctance to spend money, going back to managing your cash very tightly, but there's things that I would put in the investment category and attending conferences. A lot of these sort of events and conferences you can get a free pass, a free ticket, and they will come from advisors or investment banks or other people in your network because of course the most important thing for the organizer is to get an audience there. So you don't always have to pay. Presenting at those events is a great opportunity to showcase your business model and get some feedback and ideally get investors coming to you at the end of that presentation. So visibility thinking and being more externally present is something I would encourage and that isn't something that always comes naturally to non-commercial founders, scientists, engineers in general. Not trying to offend anyone, but the marketing selling doesn't really come perhaps so naturally whereas to those of us that's absolutely core. So I think being externally visible, just touching on some of the points that Reagan made as well, my view would be try to avoid a cold approach because the chances are you're going to get a cold shoulder. There's so many businesses looking for funding and in a market like this as well, you've got to have credibility and I think that credibility will come from a warm introduction. It could be if you've already got a VC fund in, they will have a network. Tap into that. Tap into board members, tap into angel networks, tap into advisory firms. A lot of people will help you and want to connect you with VCs. Those seeking VC funding, maybe it's not possible to bring in an advisor or a broker to help bring those relationships to the table. But there are times when that approach actually really helps because they're doing a really long job. It's a tough job and it's a very specific job and a lot of founders don't have those skills. So that can also be an approach. But really looking at networking and being visible externally is what I would say.

Oh, why am I laughing? I mean, Reagan will have so much more value to add here, but in general, and she did touch on some of these points, but please avoid jargon. It's very easy to explain your business from your own perspective. And typically, your audience will not know anything about your model or your market, but they don't understand the inner workings of your model. So you've got to come at it from a different perspective. You have to think about the audience that you're talking to and what their level of understanding might be. So going back to Reagan's other points, do your research. What do they know about this space? What other models are similar? What do you think their understanding of generative AI might be as an example or remote patient monitoring in the oncology space? These are the things that you need to try and understand and you're going to need to pitch your deck to the audience that you're speaking to, bearing in mind you've done your research and hopefully you've got a short list of the best possible options. But I think avoiding jargon is the most obvious thing. And also not being the only person speaking. What the investors also want to look at, what all investors are looking at, is not just the product and the market potential, but how is there a team here? Is this a quality team? Is this a team that can actually deliver what they're talking about? Vision is one thing, a mirage is completely the opposite. They've got to have some faith in the people pitching the business. It's not just what you say, but it's who's saying it. So I think clarity, avoiding jargon, telling a story and not making it too complicated, and sharing the pitch with your colleagues so that they can get a really good feel of what the business is about, what you're trying to do, and who's going to be capable of delivering it.