Venture capital explained
Venture capital funding is also known as investment funding. VC funds are required so that the money of the investor is managed, who pursue private equity stakes in SME and startup. Tremendous growth potential is estimated before making any investment in any of the startup or small or medium-sized enterprise. Private equity funds are not listed in public exchange, and they comprise of investors and funds who invest directly in private companies.
Through this equity financing, aspiring entrepreneurs and small business owners have the opportunity to raise money for their business. These funds are like private equity investment vehicles that seek high return growth potential firms based on the assets, company size and product development stage. These funds are not like hedge funds and mutual funds where a focus is only given on particular kind of early stage venture. Venture capitalists further guide these startups and further hold a seat in company’s board of directors.
The impact of venture capital funding on digital health companies
2016 was the great year for all digital health startups. As per Investopedia research article on VC funding on digital health, Q1’16 was the period where a maximum number of investment which is equal to $2 B across 316 deals were made related to the digital health care sector. These figures have broken the previous year records dealing with dollars. During first three months, then half three mega rounds crossing $100M were seen which included funding’s into Flatiron Health, Oscar, and Jawbone. Oscar received $400 M in the month of February that made a fifth of the total investment of the dollars in the Q1’16 space. The First quarter of 2016 receive than half of the total deals by Seed/Angel funding. Due to this, the number of accelerators has increased, and they are supporting a huge number of digital health firms that includes Healthbox and TMCx.
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The pros and cons of receiving investment from corporate venture capitals
An excellent article has been recently published by The NY Times, on the recent trends in expanding the commercial VC groups. USA Today article states that the percentage of VCs participating in all sorts of venture deals in Q1’16 space was 23.5%. Local companies such as Alcoa, UPMC Enterprises, and Highmark have recently launched their venture funds whereas local startups are receiving investment funds from firms like Google, Salesforce, GE, and Nordstrom. It is very much significant to understand the big picture while taking investment from such Venture capital firms.
The table below briefly highlights the pros and cons of receiving venture capital funding:
| A | B |
|---|---|
| Pros | Cons |
| Unlimited access to financial aid: The parent company’s balance sheet gives funds to Corporate VC and they are not bound to limited partners like traditional VCs. This results in more patience and value building to the start-ups. |
Clash of management: Not all the corporate VCs are pure financial investors and they have some strategic directives that are handed down by the same parent company. The Consequence is misalignment with other purely financial investors. |
| Credibility and integrity: Getting investment fund from such VC will boost the potential and credibility of your business hence attracting customers and talents. |
Micromanagement: Corporate VCs may take an important decision regarding your business which you may not like. They may induce certain policies into your business that you will need to follow. |
| Connections & networking in the business community: Your company will get good support from VC in terms of making new connections, providing channel access, product integration and much more |
The uncertainty of the funding duration: Corporate VCs may not live up to their words and deny from giving further financial capital in case parent company is not performing well. |
| Corporate expertise: By receiving funding from corporate venture capitals, your startup company will enjoy high-quality corporate services such as bookkeeping and asset auditing which would have otherwise dug deep into your coffers for funding. |
Profit share: Upon the success of your digital health startup business, you will witness a huge cut of your startup profits to have a share with your financier venture capital. |
| Added resources: Your digital health startup being a young business, the corporate Venture Capital firm will be of great significance by providing active support in the critical areas pertaining to legal matters, tax, and other personal matters. |
Lack of right growth structures and strategies: Venture capital funding may catalyze a faster startup growth with short-term induced structures. This may be dangerous and risky to your business if the funding may be withdrawn thereafter. You risk collapse. |
| Debt reduction: Venture capital funding provides a huge sum of money which would have been stressing to raise through seeking loans from banks and or other financial institutions with huge interest rates. |
Time-consuming: Before making a decision concerning your digital health startup business, you will have to involve the consent of your funding Venture Capital. This will surely take a valuable period of time before a decision is reached. This will not be effective in dealing with emergencies. |
| Accelerated growth: Having a venture capital funder will speed up your growth in terms of getting your products well known to potential customers and consumers. You will also get a chance to have their clients redirected to your digital health products. |
No reliability: Not all venture capitalist rely on their commitment. In a case of financial loss, VCs may fail to keep their promise and deny from supporting the startup. |
Various MedTech and technology companies supporting startups
It is kind of interesting that companies that provide their service to hospitals have acquired such hospitals which included 11 medical admin tools, companies physician practice management high-tech company and businesses that build clinical/HER workflow tools. As per Rock health 2016 year-end funding report, most of the hospitals are acquired by digital healthcare enterprises that are later followed by high-tech companies. In the year 2016, in newsWel look appeared to be sixth digital health acquisition whereas Paladin the news for its fifth acquisition. They have acquired HealthiestYou. Allscripts acquired Netsmart Technologies by investing $4.5 Million, and Myriad Genetics acquired Assurex by giving investment fund of $86.7 Million.
Conclusion
It is significant that you should do your research before approaching corporate VCs considering above points in mind. It’s a good advice to consult your advisors and attorneys before taking a leap into Venture capital. It is important to understand the strategy of VCs in order to save your business from loss. Failing at this will deal in big disappointment and distress later.
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