Be More Conservative on Your Burn & More Aggressive on Your Funding Target – Adjustments Founders Must Make due to COVID-19

For the most recent German Accelerator “Pass The Mic” series, we hosted a virtual fireside chat with a diverse group of investors to hear how the current health and economic crisis is impacting corporate venture capital’s (CVC) investment strategies. With a global perspective and different types of organizations represented, Meredith Fisher (Partner, Mass General Brigham), Rohan Ganesh (Principal, Venture Capital, Verily, an Alphabet company), and Joey Mason (Head of Life Sciences Fund, M Ventures) provided insight on the current corporate venture capital environment from multiple perspectives. 

It is evident that COVID-19 has had a major impact on Pharma and biotech companies. How is this crisis specifically affecting M Ventures, the corporate venture arm of Merck Darmstadt? 

Joey Mason: Merck KGaA, which is headquartered in Darmstadt, Germany, is a large organization with 56,000+ employees across the globe and the various business units are responding differently to the crisis. We have our healthcare business (pharmaceutical, biotech, & drugs), the life sciences group which is accelerating efforts of vaccine production, and we have performance materials who support the communications networks. At the group level, we have actively solicited both internal and external requests from interested parties who would like to work with us. Over the last month, we triaged and looked at these ideas and efforts across the organization. 

However, COVID-19 has not fundamentally changed how we look at the world since our horizons are much longer terms. We have an immediate issue that everyone is dealing with, but we look at what the investment trends will be in the next 5-7 years. What is occurring currently is the unheard of shortening of timelines, especially with synthetic biology which can produce designs literally in days. Moving forward, anything that supports digital health by way of tracking or monitoring will be important. This is where technology will play a huge role in the future.

What is hard to understand is the velocity of knowledge that’s been created. It was only a couple of months ago that the virus was sequenced. Everyday there are studies coming out for subgroups, and all this knowledge that has been created in such a short period of time is overwhelming. The assumption is that there is going to be a solution very fast, but clinical trials just don’t work like that. A vaccine that you are planning to give proactively to billions of people has to be incredibly safe so that you won’t create another problem. 

How has COVID-19 affected investment strategies at Verily? 

Rohan Ganesh: Already before COVID-19 we were very much a believer that digital health was here to stay. Just this week, I read that Sutter Health (a local health system in the U.S.) saw their video health visits going up from a baseline 20 visits a day to 6,000-7,000 visits a day! Managing chronic conditions throughout this time is very important, and anything that can help virtualize or digitalize this will be a big trend.

Verily jumped into action a few months ago helping out with the testing phase. We are powering the community-based drive-thru testing sites in over 100 sites across the U.S. But ongoing screening and testing needs to move to the next phase when people go back to work and school. 

From a broader industry perspective, 80% of Americans have a smartphone, therefore the vast majority of us have a very powerful tool in our hand that enables us to receive real-time notifications and symptom tracking. We need companies to build applications at very large scales. 

How has COVID-19 affected both the Mass General Brigham hospital system and your investments?

Meredith Fisher: Mass General Brigham and our Harvard teaching hospitals have been at the forefront of seeing thousands of COVID-19 related cases. Like other healthcare systems, we anticipated this months ago and had task forces set up and have been able to mobilize incredibly quickly. This includes clinical trials, which we have multiple running right now throughout our system. It has been amazing to see the mobilization, the planning, and the reactivity in the hospital system. We brought a mask decontaminator that arrived on a plane, and allows us to recycle masks throughout the whole system. The flip side of this is we have sacrificed essentially the majority of our revenue and anticipate losing somewhere between $3,000-$5,000 per COVID-19 patient. We have had to cut off all elective surgeries where we actually make money, instead of losing money. I expect we will lose a lot of revenue this year. This will have an incredibly large impact, and create a cash challenge for us even though we are in a very privileged position since we were well-prepared, and could deal with the patient load. We were able to mobilize thousands of people. Unfortunately, I am not sure other healthcare facilities across the country will be as fortunate as we are.

This bleeds into how we view the fund. We are still actively making deals and investing, and are still putting capital to work. This is incredibly important since we are a profit center. In fact, one of our portfolio companies, Keros Therapeutics, was the first and only company to go public during a week in April. After the lock-up period, we hope to return a significant amount of profit to our hospitals. There is certainly investment activity from us, but we are balancing that with making sure our current portfolio is healthy.

Aside from COVID-19 focused work, can you speak to how your portfolio is changing in the future? 

Meredith Fisher: From the digital side, just last fall we announced we allocated a fund for AI (digital health). Arising out of the crisis is an interest in looking for technologies that are highly enabling to the hospital. We can make a business and patient case for those. If we think we can provide a strategic or competitive advantage for the company, while receiving a competitive advantage for us as a hospital system, then we are interested in bringing those companies into the fund. 

Has it become relevant now that you work with entrepreneurs in your current portfolio? What is your risk appetite to work with entrepreneurs you do not know? 

Joey Mason: We are very lucky that we are in a sector that is defensive and safe. In the past month, we made two investments, but to be fair, these were companies that were in our pipeline already. We continue to speak with companies, but fundamentally in order to invest, you have to actually see the company. Essentially we are kicking the can down the road and trying to figure everything out, but we are uncomfortable closing a virtual deal. 

One thing to remember is venture money is very expensive and if you’re an entrepreneur who doesn’t have experience in the sector, it will be very difficult to raise money. You really have to be able to use the funds effectively and demonstrate the growth the money requires. This is where experience matters. European companies don’t quite get it sometimes how fast things happen in the U.S. Things happen really, really quickly and the whole system of recruitment, retention, and hitting milestones is moving really fast.

Looking specifically at early-stage MedTech companies not related to COVID-19, is this an area still being invested in? 

Rohan Ganesh: What is most important is that if you had a business plan before COVID-19, that you now go back and make adjustments. If you were about to begin a clinical trial or commercialize, the reality is timelines have changed. For early-stage companies, I would encourage founders to be more conservative on their burn and more aggressive on their funding target. I believe early-stage MedTech deals will be done, but I feel investors will want to see more runway. Perhaps there will be fewer early-stage deals, but the investment amounts may be larger. No clinical unmet need will go away due to COVID-19, but it is now just about the timing, pacing of your spend, when you hit certain milestones, and making sure you capitalize the company adequately. 

Large hospital systems are known to be hard to sell to under normal circumstances, what changes do you see now due to COVID-19? 

Meredith Fisher: Looking at virtual patient visits, our numbers have gone up 300%. Particularly for patients needing chronic care, the model has made a lot of sense and our clinicians have loved it. With that being said, we will be a terrible customer moving forward due to the devastating impact COVID-19 has had on our economic standing. Our appetite for solutions will be higher, but our willingness or even ability to pay for them will be quite low. However, we have also been in a time period where reimbursement rates for virtual visits are the same as of in-person visits; this is a fundamental paradigm shift. If this continues, this could accelerate the adoption of certain solutions. This would provide an opportunity to essentially lower hospital costs for those visits and increase margin because the reimbursement piece would be comparable to an in-person visit. 

Joey to Meredith: Is this a simple financial question, where we should advise our investments to lock in deals with hospitals for receiving payment in the future? 

Meredith Fisher: Certainly inventive ways to sell may be helpful, but at the end of the day it really depends what the product is actually delivering. Is this product going to immediately increase revenue? What Mass General Brigham needs to do is build back up our capital in the bank. So I would advise companies to not just think of selling, but what is the value proposition of the product. In summary, the answer is yes, no, and it depends.

What advice would you give startups regarding changes in their business model? 

Joey Mason: In a funny way, for new startups it really doesn’t matter since the horizon is 5-8 years out there and you can reduce your spend. It is much trickier for companies who need to weather the storm now and navigate on-going clinical trials and figure out how to sell. Now, like always, startups need to understand the market need, have technology solutions that no one else has, and assemble a fantastic management team. 

Do you see infectious disease startups getting more funding from now on? 

Meredith Fisher: I really hope so. If nothing else, I hope this time is a good reminder to us. This is an area that has been challenging for biological, commercial, and financial reasons. But I am seeing Pharma moving back into infectious diseases, sadly because it is a global market opportunity. I also hope something else that will come out of this is a surge in funding for  diagnostics. 

What does the post-COVID-19 world look like to you?

Meredith Fisher: In many ways, I think it will be business as usual for us. We will still need some face-to-face interaction. If anything, there may be increased activity because people with investment dollars who are suffering in other industries will shift over to the healthcare industry. 

Joey Mason: We will probably get used to working in different ways. I am concerned about the economic devastation that this is causing. I don’t buy into an instant snap back to normal activity. Last week I read “there are a lot of people who are unemployed that don’t know it yet”. In the short-term I am worried, but in the long-term I love being in healthcare since what we do makes a difference! 

Rohan Ganesh: To all the founders out there, what we do is meaningful and important. The need for healthcare and life sciences is only going to increase, and not decrease. Fundamentally we are in an industry that makes an impact.