Managing risk in healthcare start-ups

Venture capital investors focus on risk and how they can decrease it. They want to make sure the entrepreneur knows about the risks ahead, and how is he planning to cope with them should he need to. Some entrepreneurs are not willing to talk about those risks, as they think maybe the investor will factor them and therefore the start-up will receive a lower valuation… Right?

Wrong. Well, if the investor does not hear about the risks, he will quantify them himself pretty ruthlessly, usually with a bigger impact on the valuation. The message you want to send to the investor is that risks are under control, and you are ready to face them. It is therefore useful to include in the presentation:

• What are the risks?
• When are the deciding events going to occur?
• What are the chances of those events occurring?
• What is the upside versus the downside of the event?
• How can you prevent them?
• How much does it cost to prevent them?

Risk in healthcare has five dimensions:

Operational risk
Can the people in the company deliver? Do they have the skills and the energy to execute the business plan? Is there a clear path to market?

Technological risk
What if the technology does not show itself as feasible? What if our product does not work as expected, or a competitor introduces a better product on the market, with superior technology?

Intellectual property risk
Healthcare relies heavily on intellectual property. The nature and size of the investments required for many start-ups, specially those related to life sciences or medical devices, needs some sort of market protection. The risk of not receiving a patent is therefore an important issue.

Regulatory risk
What if the different administrations don’t approve the market launch of our products?

Financing risk
What if at some point in the progression of the start-up the entrepreneurs cannot find more capital needed to grow, and the present investors don’t want to throw more money at it? Will the company need several rounds of financing? Is it possible to stretch the lifetime of the current capital by taking the burn-rate down?
(*burn-rate is the speed at which the start-up consumes its money, If the shareholder capital is exhausted, the company will either have to find additional funding or close down)