Dipen Vijaykumar Trivedi, Healthcare Management Consultant, gives his insights on what the PE investor/ Venture Capitalist are looking for while souring for healthcare projects to invest
If you happen to be the first-generation doctor turned entrepreneur, who having negotiated the tough initial years, wishes to expand one’s practice at a larger scale then, arranging for capital is extremely critical. Any debt financing envisages serving a collateral security which may always not be feasible, at early stages of one’s practice career. But capital is certainly available for the deserving ones who muster the courage of making it large and chase their dreams till they turn real.
Healthcare has been riding a wave of private-equity (PE) investments and specialised services such as dentistry, fertility, pathology labs, eye care, family clinics (consultation, diagnostics, pharmacy, all under one roof model) etc. have already benefitted from this surge. (Check table)
|
Year
|
Deals
|
Value $ Million
|
|
2011
|
29
|
463
|
|
2013
|
45
|
1262
|
|
2013
|
71
|
1359
|
|
2014
|
*80
|
*1450
|
|
(Source: Extracts from several Reliable Public Domain websites)
|
||
Let us try and explore certain fundamental questions which a venture capitalist or a private equity investor seeks to explore while setting out to shop for promising and profitable medical ventures:
What is the focus of the business model?
A business model focusing on a ‘specialised medical service’ has been preferred over and above a multi-speciality hospital chain in which the management is possibly aiming to do too many things and spreading too thin.
Is the business idea initiator an ‘early mover’ or a ‘laggard’ in the current market context?
An early mover advantage in an unorganised space, is the ideal opportunity that venture capitalists or the private equity investors look out for.
What is the CAGR potential?
What is the growth potential (compounded annual growth rate) of the ‘specialised medical service’ in context of the Indian healthcare market. Is there a clearly identifiable market? The basic concern is not whether it will grow, but at what ‘rate’ and ‘pace’ will it grow?
Depth and conviction in the business plan
The business plan should explain the nature of the company’s business, what it wants to achieve and how it is going to do it. The entrepreneur/ doctor should prepare the plan and should set challenging but achievable goals.
Venture capitalists expect the business plan to include detailed market size analysis. Market sizing should be presented from the ‘top down’ and from the ‘bottom up’. That means providing third-party estimates found in market research reports should be equally complimented with a feedback from potential customers, showing their willingness to buy and pay for the offered services.
Capability to execute business plans
Demonstration of the capability (in terms of experienced management team, screening systems, policies, processes and a sound administrative structure) in creating as well operating franchisee clinics, which maintain uniformity in service delivery standards, quality and customer experience across its chain of clinics, irrespective of their geographical location.
Cost effective and practical acquisition of customers
Venture capitalists and PE investors often come across entrepreneur/ doctors who are often by nature very passionate about their practice. In itself this is a good thing, but unfortunately that passion often blinds them to some important issues:
- They don’t focus on how they are going to acquire customers in a cost effective way especially in unknown territories, as they believe that people will either beat a path to their door owing to their goodwill in an erstwhile tried and tested locality, or that their service will go viral as everyone will love it so much they will tell all their friends.
- They fail to look at whether their erstwhile (local) goodwill or their service is enough to get the customer to overcome inertia and experience it, with other competitors around especially in an unknown/new territory.
A competitive advantage through ‘niche’ services, for a better market penetration and an assured market share
Products and services that customers can’t do without because they are so much better in terms of ‘experience’ or because they are so much ‘cheaper’ than anything else in the market. VCs look for a competitive advantage in the market. They want their portfolio company to be able to generate sales and profits before competitors enter the market and reduce profitability. The fewer direct competitors, the better. This is one of the core principles of the venture capitalists and its application is no different in terms of the healthcare industry.
A capital-light model
VCs often judge the wisdom and the manner of spending in the initial stages of the setup. They appreciate a ‘capital light’ model, to start with (i.e. a low intensity ‘capex’ per unit of the proposed chain).
Choice of healthcare
IT and technology Entrepreneurs who devote significant efforts in the choice of apt technology (keeping in mind the technology redundancy factor) often get distinguished and picked up by the venture capitalists at the time of decision making.
Is the business model scalable? How soon is an ‘exit’ possible?
The business model should have a potential for a rapid scaling up in terms of units for the chain. The ‘exit’ by means of an Initial Public Offering (IPO), will require a substantial amount of scaling up. ‘speed of scaling up’ is directly proportionate to the ‘nearness of exit’ through an IPO route. The faster is the potential to scale up, the more convincing is the investment.