StartUp Health Masterclass with Lee Shapiro: How Founders Should Navigate Fundraising in 2024
In addition to being a managing partner at 7wireVentures, alongside his business partner Glen Tullman, Shapiro has been a health tech operator for decades. He was the CFO at Livongo, guiding it through its IPO, and the president of Allscripts. In this StartUp Health Masterclass, held in front of a studio audience of founders from the StartUp Health community, Shapiro gives his take on 2024, shares where he thinks the market is heading, and offers his best advice for early-stage startups raising funds.
Hire Slowly
StartUp Health: Lee, you were CFO at Livango and president at Allscripts. You pride yourself in being an operator, not just an investor. What's one experience you had as an operator that shaped how you invest today?
Lee Shapiro: One of the worst things that I ever had to do as an operator was to downsize some of our teams and let people go. You can sit in a boardroom and talk about shrinking the team to watch your burn rate. But those are people you hired, families you've met. These are people that when you talk to them and let them go, they're gonna cry and you might cry with them. I had some of those tears. So my recommendation is to hire slowly because it’s better to work a little harder and to have a few gaps that need to be filled than to hire too many people. You're dealing with people's lives.
The Tourists Have Left the Island
StartUp Health: You've been in this industry a long time. We’ve had boom years and we’ve had tough years, and it is important for someone who's in the trenches to have a bit of perspective. How do you think founders should be thinking about 2024?
Shapiro: I've been through a number of different market cycles. Many founders haven't seen some of these cycles before. We had an unprecedented run of close to 10 years where capital was very inexpensive. People think that things are expensive now, with interest rates hovering in the 6 and 7% range. When I bought my first condominium in 1980 I was lucky to get a loan at 21%. Interest rates hovering at these levels are actually closer to normal than one might think.
So that means that there's competition for capital and there are alternative investment vehicles that that capital will chase. When investors start thinking about returns and risk, seed and series A is a risky investment. That risk requires a level of compensation that is benchmarked against how much they could make leaving that money in the bank or putting that money into bonds or the stock market.
We're also facing a time where there is less capital available. I call it “the tourists have left the island.” in 2020, 2021 and a little bit of 2022, you had funds that were chasing early-stage deals that were novice investors in this space. They were late-stage investors, private equity, even some hedge funds that were writing checks and they'd say, “look we'll close in a week, we're valuation insensitive, we just want exposure to the sector.” And exposure they got! Many of them are now in the situation of trying to unwind some of those investments.
Then, with valuations being where they were, a number of the companies that had raised money in later stages with really high valuations are finding it hard to justify where those valuations are, and therefore now are finding themselves dealing with circumstances where they have to raise on much lower valuations.
The good news for early-stage companies raising in 2024 is that the valuation issues that others face you don't face and there are a number of vehicles that will invest in early-stage opportunities because they wanna be there on the ground floor. There's a benefit in terms of being earlier stage than later stage right now, but there is competition for capital.
Building Relationships Takes Time
StartUp Health: Let’s get really practical about fundraising. There are smart founders who have got great products and they may need to raise regardless of the macroeconomic conditions. What practical steps should they be taking to raise in 2024?
Shapiro: For one thing, you need to build relationships with the venture community. You’ve got to get to know them and get them to know your story. Building relationships takes time; it’s a little like dating. At 7wireVentures we won't invest in the company unless we've gone out to dinner with a founder at least once if not multiple times. In order to do that you need to be attending conferences. You need to be socializing with investors and getting introductions from mutual connections.
Before you come to market for a raise you need to be sending out updates about things that you're doing, even if your product hasn't been released yet. Where are you in the development cycle? This is one of the areas where I think you can be doing work right now,
planting the seeds to find out who's interested, who's responding to those messages, and what are the types of things that they're interested in.
You have to be smart about who you go after. If you're not a biotech company, you shouldn't be talking to biotech funds. If you're a company that's focused on helping health systems, go to a health system VC fund.
StartUp Health: Let’s talk about those investor updates. At what point should founders start sending them out? What do you like to see in those updates and how often should they be sent out?
Shapiro: When you're starting your company you need to focus on your reveal. Whether it's through a blog post or social media, you need to figure out how to find your audience and get your founding story out there. Share what's motivating you and why are you doing this, how are you approaching the problem, and what is it that you're gonna be building to solve it. Then, you're gonna provide a regular update to the community. I think that quarterly is a good pace. Monthly might be too aggressive because there may not be enough to report.
Share with your community if you're doing a study, how many people you’ve enrolled, and what some of your early feedback has been. Tell us what people have liked, what you’ve learned, and even what you’re going to fix as a result. I think all those things create interest and are going to generate some enthusiasm as you continue to come to market.
Focus on the Fundamentals
StartUp Health: Sending out a quarterly email does not get you into a strategic dinner invitation. Neither does going to a conference, though those things are obviously part of a macro strategy. Any other tricks and suggestions for getting your foot in the door?
Shapiro: The best connections may come through your customers. If you’re working with a health system, they may have more credibility in terms of making an introduction for you. Those folks may be able to introduce you to someone or create a forum for you to meet and socialize with venture firms. Many of us do that a number of times during the course of the year to make sure that we're available to some of those key partners. Because they provide us with deal flow and in some cases they’re even investors with us.
You also need to focus on the fundamentals. You have to be clear in terms of where you’re gonna fit in the healthcare ecosystem and who your buyer is going to be. You need to be approaching some proofpoint of interest such that there are people who want your product and are willing to pay for it. It's not enough that you've just shown us the need. I've heard many companies say that they think doctors will use their product because it's just practicing better medicine. That may be the case, but if you don't have an understanding of reimbursement, or how doctors are paid, or what it takes to get integrated into a practice, you’re going to have trouble. Any investor who's worked in this space is gonna know to ask you those questions and if the answers aren’t crisp, then you're probably gonna be left waiting until they are.
No one is gonna expect you as a pre-seed or seed company to be demonstrating profitability. But you need to understand and convey what it's gonna take to get there if you prove out your premise. If you say that it’s going to take 15 years to get profitable you’re going to scare some funds away.
I have never seen a deck come in for a seed or pre-seed company that didn’t show a financial slope that was up and to the right. We recognize that it's gonna be slower, and it’s going to be up and down. And it's gonna take some time. So at this stage, especially pre-revenue, there's a recognition by most investors that there's still a lot to be figured out and there's some pivots to be made. It's about having a good compass and being able to say here's the sense of direction that we're gonna be taking. Here's the things that we're gonna go out and prove in the market. This is what we've done to try and validate our price point.
I don't think that you need to have a detailed financial analysis available in terms of how you're going to be approaching the market. Rather, you need to be able to speak to what your financial model and business models could look like.
Questions from Founders
StartUp Health: Let’s take some questions from founders. Ole Nielsen from Go-Pen asks: How do you deal with VCs that like what you’re doing, but aren’t writing the right check size for your particular round?
Shapiro: There's work that you can be doing to qualify the type of fund that you speak to. You wouldn't go to a big private equity firm for a seed-stage deal. One suggestion is to go to the fund that you met with, who loved what you are doing, and try to get a reference from them for a smaller fund to work with. At 7wire we have a number of relationships with funds that follow-on and write checks into investments that we make at the seed and Series A stage. They send us deal flow all the time.
StartUp Health: Here’s a question from Jeremy Wygel, CEO and founder at Pelex: How fruitful are cold emails and cold calls when it comes to building a VC relationship?
Shapiro: A cold call followed by a basic email is pretty challenging. It really helps if they already know about you and have been tracking you, or have had some other introduction. Having a little bit of warmth there makes it feel less like a blind date. It's far better to do research to see who's invested in your area. Before you even talk to them about the raise, tell them you’d love to talk about our idea, to share a little bit about what we're doing and get some feedback. Don’t make it just about raising, more about mission.
Of course, sometimes there’s more urgency to raise. But try to start having these conversations before you need to raise. This is something that you should be doing from the minute you get pencil to paper on the business plan.
StartUp Health: Here’s a question from Wendy Johansson from MiSalud: We raised funds in 2021 during the period of high valuations. Any advice for a company like ours as we go into a Series A in this economy?
Shapiro: One of the things to manage is board expectations. Who's on the board and how many folks are on the board. I think at this stage you probably wanna keep it relatively small but if you have investors on your board and they invested at a higher valuation, they might be focused on trying to sustain a higher valuation longer. Ideally investors should recognize that markets are time-limited. This happens to be a lower valuation environment. It will come back to normalcy. So it's about making sure that you right-size the amount you're trying to raise based on the current circumstances in the market. That means that your investors suffer less dilution.
And if your investors are smart, they're going to make sure that you and your colleagues still have enough incentive to build the business. Investors need to make sure they do that in order to have a motivated management team.
I would always try to advise you to make sure you have at least 18 months of runway when you're raising especially, at this stage. Two years is better. This way you have enough capital to get to the next milestone.
StartUp Health: A question from Ronak Vyas from MedCoShare: When we were raising in 2021 investors were interested in our Health Moonshot vision. But now they seem very short term in their thinking. Is that what you're seeing as well?
Shapiro: It's an appropriate comment around moonshots because we're here at StartUp Health, the home of the Health Moonshot. I think it's an investor alignment question. For later-stage companies there is a lot of focus on profitability and runway, especially for companies that have raised meaningful amounts of money. For early-stage companies, you wouldn't want to find an investor who's focused on what happens for the next year. Any investor is certainly going to want to know how long the money you’re raising will last. You're going to want to be able to demonstrate to the investor that they're not going to be deluded by another round that's coming in in relatively short order. But it takes at least seven years to build a successful company, if not 10. You have to find folks who are willing to believe in your dream and are willing to back you for the long haul.
StartUp Health: Next question is from Warren Marcus from WiNK Therapeutics: I’ve talked to smaller investors and they like what we’re doing but won’t invest unless we have a lead investor. But the larger investors say we are too early. What can we do?
Shapiro: There's two categories of folks who tell you that you need a lead investor before they can get involved. The first are just politely saying no. The second group truly doesn’t have the capability to do the diligence and may not understand the sector and they want someone with more experience and reputation to come in and act as your lead. To find this lead, you’re going to want to do your research and see what investors have invested at an early stage in companies like yours. Could you get backing from a relevant foundation or a charitable organization to help your other investors get over the hump? Investors want to feel like they are following some smart money.
Open the Aperture
StartUp Health: Lee, having listened to the last few questions, I wonder if you have any observations about what founders are facing in the trenches?
Shapiro: We’re talking a lot about venture funding but I want founders to know that there's a number of alternative sources of financing. There's corporate venture capital and strategic partners who might want to make an early-stage bet to see your company grow. There are government grants like ARPA-H. We've seen a number of companies that have done work with the Department of Defense. The idea is to open the aperture on where you find funding.
StartUp Health: Next question is from Lee Paxman-Clarke from HEAL.med: We’re new to investing. How do you set your first valuation?
Shapiro: It’s all about benchmarking. You should be looking at other companies that are at a similar stage and similar revenue size. There's a lot of data that's available that you can utilize, and investors will use that as well. You don’t want to be an outlier. There used to be this focus on revenue multiples, but I never valued that. Not every dollar of revenue is the same. What’s the margin on that dollar? So I think that you have to be careful using revenue benchmarks.
Final Words of Wisdom
StartUp Health: Any final words of wisdom for our Health Transformers?
Shaprio: What you're doing is hard. It's hard work and it's a labor of love and yet the world's a better place for each and every one of you. Thank you for what you’re doing because in your own way you're all looking to improve health for all of us. I wish you all much success.
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