Questions on the Hardina Smythe and the Healthcare Investment Conundrum Case:
1. How should Vine Brook evaluate each of the potential investments?
2. How can Hardina best position Vine Brook and herself for success?
Given:
Summary:
This case is complex because each of the investments has different strengths and weaknesses. Different investors value greater the management team, the technology itself (product) or the market. In this case AlwaysCovered has the all-star team, but a small market (unlikely to tap into other industries) and an easily copied product. BioChallenges has a potential for an amazing product, but does not have an outstanding CEO, who moreover makes strange choices to outsource trials to Eastern Europe - not reliable place. SweetDreams is attempting to address a massive market, but the product itself might not be attractive for the customer. Moreover SweetDreams has serious management problems.
Always Covered Software
Product → a scheduling tool delivered over the internet via a web interface
Problem addressing → costly staffing for hospitals and other healthcare providers
+
Team → "all-stars", experienced (serial) entrepreneurs + have strong network
Technology → once installed, will require high switching costs
Customers → already happily used by 4 and 2 are interested to expand usage
Clear exit strategy → acquisition once grown big enough
→ Monthly recurring fees - good for cash flows
→ Small installation fees - economies of scale
→ Growth potential in other markets
→ Relatively small investment
-
Technology → nothing very new, easily replicable
Team → too few sales people to sustain competitive advantage (other staffing companies can replicate the service very quick)
→ Hard to convince unions (but one of the unions is on their side)
→ No quick return (very important for the VC)
→ Takes at least a year to get a contract (according to her) - 4-6 months according to the company
--> Competition can take over the market very quickly and draw down the prices (so their sales plan is not realistic and ROI could be really slow)
Financials:
Average hospital spends $3 million on staffing
Market: $400 million (nurses) → $800 million - $1 billion (other healthcare)
Valuation: $4 million
Raising $6 million - but will it be enough???
Biochallengers
Product → biotech company developing and commercializing therapies for Multiple Sclerosis
Problem → current offering in the market has side effects, "treatment that potentially worked better, lasted
longer and was far more easily tolerated"
+
Technology → successful trials
Funding → already raised $9 million and than another $40 - investors trust in it
Clear exit → IPO within two years or an acquisition by one of the big pharmas
Alternatives → if this fails company still has a lot more going on
→ Little involvement from the company
-
Technology → investing in trials means no profit in any short run
Technology → limited transparency about the product
Comment from senior in the company (they are in for a rough ride)
→ why don't big pharma invest? Is there something wrong?
→ no place on the board - could seem like a weakness, but also strength as it saves time for VBC
→ Have to rely on the external info
→ really high investment!! (compared to the size of the funds)
Financials:
Others generate $3.5 million a year
Pre-money valuation $125 million
Raising → $40
Sweet Dreams Technology
Product→ implantable device to help reduce obstructive sleep apnea
+
Market → very large and growing market
Technology → clear and transparent
→ investment suggested by Plymouth, so could be trusted... or could it?
-
Team - not stable CEO, bad management
→ not clear how much we need to invest
→ not clear exit strategy
→ a lot of involvement from the VC
→ VC has already invested in many medical devices and wants to differentiate
Financials:
Valuation → $19 million (rising some number a bit above this)
Market → $3 billion
Extra:
VC: wants quick ROI, clear exit and no babysitting of the firm; has a portfolio full of medical devices so is not very keen in investing any more there; CEO doesn't believe in biotech investment
Hardina: wants to prove herself and needs to do so within a year. expert in medical devices, but doesn't want to be only known as medical device investor;
