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VentureHealth Connects Investors with Biotech Startups

Posted Aug 19, 2013

By Eric Blattberg, Crowdsourcing.org
http://www.crowdsourcing.org/editorial/venturehealth-connects-investors-with-biotech-startups/27660

Eric Blattberg, Crowdsourcing.org Editor: Tell me a bit about VentureHealth. How did you get started, what's your role at the company and so on — a brief overview.

Talat Imran, VentureHealth Co-founder: My dad [Mir Imran] has been in the medical device business for 30 years. He invented the first implantable defibrillator, and he has started 21 companies since then. 18 years ago, he started his own applied research facility called InCube Labs, based here in San Jose, California. The model is that we take our ideas, the projects that we have, to a level of proof of concept on our own dime, and then once we feel comfortable with it, we will go and raise outside money. It’s worked out well; I think there’s been 16 positive exits, two write-offs, and one write-down in that period of time, with a couple of active companies still left. So it has a very good track record; I think we’re all pleased with the returns. In 2010, we raised our second venture fund, InCube Ventures. We raised quite a bit of the money for that out of the San Antonio area, and we opened up a second branch of InCube Labs over there. The fund primarily invests in companies that come out of the incubator, but we’ve also done a number of outside investments.

My own personal background is in venture capital. I started at an angel group and venture fund right out of college. I noticed there’s almost an adverse selection going on, where access to the best deals was left to venture capitalists, and angel investors were left with whatever else was remaining in terms of deals — they’d get in earlier, and it’d be harder to hold their position throughout, which is why if you’ve ever seen the numbers for an angel group they typically aren’t great in terms of returns on a group basis. So, a couple years ago I approached my dad and Andrew Farquharson, one of my partners at VentureHealth, about creating a portal where we could reach out to accredited investors and give them access to the deals that we were doing. Sort of in parallel with that, some of the folks we got to know in San Antonio expressed some interest in investing in some of the deals that we do. Since then, we’ve closed six deals, and we’ve had three exits already this year — all positive for the investors.

So that’s the InCube Labs, InCube Ventures, and VentureHealth story. We’re early on, but we’ve done a number of deals and we’ve had exits. I think we raised about $11.5 million across those six deals. We haven’t done any seed financing, but we’ve done Series B all the way up to a Series D or later, which is why we’ve had a few exits. The last thing I’ll say before I shut up is that one of the things that makes us different is that we’re structured like a venture fund. We’re not doing this from the perspective of broker-dealer.

Right, you’re not taking a cut of each investment upfront.

Well, if I could add a bit of nuance to that, usually a broker-dealer will charge a commission. In crowdfunding, it’s settling somewhere between eight and twelve percent, depending on the broker-dealer. What we’re doing is a very traditional venture fund, so it’s a two and twenty model, with the period for the fees being shorter. And the difference between fees and commission, just to clarify, is that the fees are paid back on success.

So it seems like there’s a really symbiotic relationship between InCube and VentureHealth — one very much seems to feed into the other. Is it almost exclusively companies that go through your accelerator that end up on VentureHealth?

The answers to your two comments are yes and no. It is very symbiotic, because our track record, our relationships, and the things that we’ve gotten out of the fund in the lab give us an ability to get into some really great deals. The answer to your second question is no; this isn’t really geared toward the deals that are coming out of our lab in particular. Out of the six deals, four of them came out of the lab, but my expectation is, going forward, if we’re doing eight to ten deals per year, the overwhelming majority of them will not be InCube deals.

So I see that you have a background in computer science. Are you doing some of the more technical development VentureHealth, or are you really leveraging your venture experience?

My background is in computer science, and I actually still run a web development firm. I write software applications for healthcare, primarily. I’ve built software for an ERP system, for a genomics company, and even at InCube Labs I’m doing some of the remote patient monitoring systems and what not. So to answer your question, yes, I’m doing all of the backend development and managing the website and web applications that run it, so that is part of what I’m doing for VentureHealth.

What are some of the biggest challenges for running a crowdfunding portal — and more than that, an equity crowdfunding portal — for the healthcare sector? It seems like you’d have to deal with a lot of regulation (both financial and medical) to operate. Could you speak to some of the issues you’ve run into and how you’ve dealt with them thus far?

I think because we’re going after only accredited investors, and because we’re structuring this as a venture fund — well, we’ve done that for a number of reasons. One, it aligns with what we were already doing, but also, from a regulatory perspective, it’s the cleanest path forward, and it’s pretty well-defined already. I think we’ve simplified the process for ourselves and for our investors. I think uncertainty is the thing that makes folks nervous about getting into a space, and the SEC has been slow to move on the JOBS Act. At least the public solicitation is going to happen in a month. We’re excited about that, but also nervous about what the regulatory requirements are going to be for doing public solicitation and the penalties — I’ve heard that if there’s a bad actor, there can be some stiff penalties. Uncertainty is challenging, and I think that’s the thing that gives us pause. On the healthcare side, we’re not giving discounted equity to physicians, but there have been and will be physicians who invest through our portal. We’ll just have to work with the startups to make sure that they’re aware of their obligations.

So I imagine as the SEC trudges onward and eventually implements Title III crowdfunding that you’re going to want to open VentureHealth up to a broader crowd. Is that an accurate assumption, or is the plan to stick with the angel and venture community?

I don’t think we’re going to go to Title III because of some of the rules and regulations in the JOBS Act. If you take money from Title III investors, you’re limited to $1 million per year maximum raised. It’s unclear you’d be able to take more money if you did a hybrid between Title II and Title III. If you look at the deals we’ve done so far, only one of them was for less than a million dollars invested, and that was because we got crammed down a little bit. The latest deal we did was $2.5 million, and they’ve all been around just a hair under $2 million on average. We haven’t done a lot of healthcare IT, but if you look at medical devices, pharma, drug delivery, these companies can take anywhere from $50-100 million for a medical device, much more for a drug discovery play — we don’t really feel like it’s a sector where Title III investors can make an investment and then be able to protect that investment through three, four, five rounds of funding and still come out and make some money.

How big is your crowd, then? How many accredited investors have signed up and are participating in these deals?

I don’t know how much of that we’re going to be disclosing publicly at this point, but I will say under 100 have invested over the last six deals. Our model is just a little bit different; I mean, I would love to get to the point where we have 10,000 active investors on the portal, but at this point, these are folks that we know, or folks that know people we know. They’re all accredited investors, and they tend to have some expertise in healthcare and a desire to invest in good deals.

I understand that you want to scale up and have more investors on the platform, but with the sub-100 number you have presently, are there any advantages to running the online portal? Does it help streamline things, improve communication, offer increased visibility?

That’s a great question. We have gotten a number of investors through the portal — folks that we’ve never spoken to before that we’ve gotten to know specifically because we have a website up — so there’s that benefit. The other part of it that you alluded to that’s really important is that even for the investors that we have, which we expect to grow quite a bit in the next couple of months, it’s not like at InCube Ventures where you’d have a dozen or two dozen LPs, and communication is already a little bit challenging but it’s doable. When you get to the point where you have 100 LPs spread over a few different funds — one for every company — you need to have automation and processes in place to handle communication, diligence, collection of funds, even just scheduling meetings with the entrepreneurs. We are building out systems — that’s primarily what I’ve been working on and will continue to do — to make it so we don’t have to hire a bunch of people to provide a good experience to the investors, because these are people that are writing much larger checks than what most people [envision] when they think of crowdfunding.

Check out the second part of our discussion with VentureHealth co-founder Talat Imran here.
 

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