I was reading Ashton Kutcher’s outstanding Tech Crunch article on how and why he invests in startups and felt that it aligns with my philosophies regarding how we plan to invest the capital at Hippocrates VC. Unfortunately, it is not a common way that VCs thinks. I am hopeful that more venture capitalists will share Ashton’s philosophy because it would be much more inspiring and helpful to entrepreneurs. You can read the article here: https://techcrunch.com/2018/05/23/how-and-why-i-invest-in-startups/. I have also pasted the text below:
A lot of people ask me how I choose to invest in startups. Stage? Revenue metrics? Sector?
I’m not proactively funding at different stages. I’m proactively funding brilliant people trying to solve hard problems.
Focusing on this simple goal of identifying and enabling amazing entrepreneurs to create a better tomorrow is the crux of my investment strategy.
My startup investment “formula”
A lot of venture funds try to optimize for returns. They run complex ratio economic models to determine what their diluted value will be at the end of the life cycle of the optimal and non-optimal case of every given company.
I don’t do that. I just try to fund the best and brightest.
I love working with the smartest and brightest people in the world on some of the hardest challenges. And oftentimes I make a return as a result of that.
I weigh investments based on two vectors:
The primary litmus I put on any investment is on behalf of my LPs. Will the capital have a potential of 6-10x returns in five, eight, 10 years? If not, it’s not going to be worth our time and money.
But it’s not the only factor.
If we’re happy doing the work that we’re doing on behalf of this company and relatively confident that we can return for our LPs, it’s an investment worth making.
It seems counterintuitive, but it actually works — our first fund is showing 8-9x returns.
I’ve had the experience where I’ve lost all my money. But more often than not, I’ve had the other experience.
A lot of companies might not have 100x return, but they have 5-6x return and they’ve solved an important problem. By measuring both the financial return of the investment and the happiness of being a part of that journey, I can holistically gauge the net outcome.
Know what you don’t know
It’s really easy to box yourself out of really great companies by having mathematical guard rails that don’t necessarily hold up over time.
At the time of investment, it can be difficult to anticipate the future products that end up being the largest revenue drivers.
If you had the insight to know that the value they were returning to customers was great enough that eventually they would find a way to monetize it, you would have invested in Facebook.
But if you’re operating on a purely mathematical model, you might not have been able to do that.
I remember sitting down with one of my mentors around eight years ago. He listed 10 companies on a white board and said “rank for me from top to bottom which company you think is the most valuable. Now rank for me from top to bottom which company has the most revenue.”
I had a mix of ones, fives and sevens; whether I thought they were going up or down the list on both sides.
It turns out that the company with the least amount of revenue was the most valuable. And the company with the most amount of revenue was the least valuable.
What I look for in founders
When I make an investment in a startup company, I plan on the likelihood that I’ll end up working with that person for five to 10 years.
I don’t have a magic formula, but there are four important factors that must all check out for me to invest in a founder.
1. Domain Expertise
The best founders have some unique insight in the domain where they’re building a company that gives them some edge. I often find that it’s one of three factors:
Deeper understanding of consumer behavior
There’s usually some initial edge that is really clear and that gives you confidence that they have absolute domain expertise for whatever problem they’re trying to solve.
Founders need some capacity of perseverance through really, really tough situations.
I’ve never heard a single story of someone building a company where everything went the way they thought it was going to go.
And when things don’t go the way you think they’re going to go, will you have the capacity and the willingness and the perseverance to sort of go through it?
This one is difficult to assess, and I generally go by gut instinct on meeting with the founder.
Is whatever they’re building someway connected to a greater purpose in which they’re personally invested?
Whatever they’re building has some resonance relative to who they are, how they are and what they believe — because belief systems don’t go away when you get into trouble or come across a difficult challenge.
There’s a level of charisma that many great founders have, especially if they want to be the CEO of their company.
When I meet with a founder with true charisma, I usually come away feeling like I want to quit my job and go work for them. Because if I don’t get that sense or that feeling that I want to quit everything that I’m doing to go work for them, the best person for the job that they are hiring for isn’t going to have that feeling either.
Recruiting is the hardest thing that any CEO has to do.
They have to be able to sell themselves, sell their vision, and sell their company. If they don’t have the charisma to sell it to me, I find it hard to believe that they’re going to be able to sell it to somebody else.
What makes me wary of founders
A founder can do many things to represent themselves poorly, but here are three:
1. Display questionable principles
I’m a very principle-driven person.
I have certain litmuses around gender equality, racial equality and working with good humans. I only want to work with founders and invest in companies that share my principles.
I want to be connected and associated with people who represent their brand in a way that I would represent mine.
It’s so easy to get distracted by the numbers and models and projections — and don’t get me wrong, these are important.
But also, I’m looking at human beings build businesses. I want to work with good people and people who respect other people and people who have good moral fiber.
2. Lack of domain expertise
If the person doesn’t know their numbers it’s an immediate killer.
I often drill down into the domain the founder is working in. There are often brand new, disruptive ideas that I’ve never seen before. It’s easy to get caught up in the excitement of that, but the economics still need to make sense.
If someone doesn’t understand the economics and the motivational drivers within a given sector, it becomes rapidly clear whether or not somebody has domain expertise.
And if they don’t understand the domain and have a unique insight, they’re probably not going to be able to build something special.
3. Lack of respect for time
The biggest key people often forget when they’re busy trying to sell what they’re doing is a basic, human understanding of other people.
Smart people know the right time and the right way to connect with someone.
I’ve answered cold emails from people who are really well-formulated, thought out, respectful of my time and respectful of me.
I’ve taken elevator pitches from people.
I’ve had meetings set up with strangers.
If you know somebody hasn’t even sort of taken the time to consider your time, they’re probably not going to consider the time of other people. And I think that’s going to negatively affect them and their company.
When a founder or company approaches me in a way that’s not considerate and respectful of my time and what I’m interested in, I have a hard time looking past that.
My role as an investor in the growth of a startup
I believe the job of the investor goes way beyond fueling the company with cash. It’s about fueling the company with expertise, intelligence and connectivity.
On paper, growing a startup can roughly be summarized as follows:
Have an idea
Crank out an MVP
Get that MVP to customers
Establish feedback loop
Make sure customers appreciate the product
Establish a customer/product development feedback loop so the customer can improve the product
Build a company
Hire to fill initial capacities
Find product market fit
Market product to reach all target consumers
Raise more money
Over the last 12 years of being an investor I’ve seen companies at every one of those life cycles. Each one of those transitions is a different discipline; a different challenge in and of itself.
As a founder, I think it’s really important to surround yourself with people who have seen it before, understand it, know what it’s like and know how to persevere through it.
That’s what an investor group does.
For example, going from a bootstrap company into a company that can scale is a tricky discipline.
A lot of founders make the really early mistake of hiring people just like them, instead of hiring people who bring unique diversity and expertise to their team.
And after the initial batch of hires is made, you transition from micromanaging into macromanaging; building startups within your startups, the variable divisions required to properly scale the company.
Investors who have helped companies through similar transitions can help you avoid pitfalls associated with these milestones. These are the very pitfalls that often derail early-stage companies.
Fast-forward to the growth stage and fundraising is a monster in and of itself. You have these checkpoints where you’ve got to go and raise additional funding — and the future of the company relies on executing.
And then eventually you get to the point where either you’re going public or there’s an acquisition. That’s incredibly tricky and not something that a lot of founders are ready for.
Every company’s situation is different.
If you’re a small team — two or three people — you might look to add 10 investors. I recommend building an investment team that has variable experience across different firms and individuals.
A lot of founders only target big firms. But you really want to get the person who understands your needs, your challenge and can help guide you through it — regardless of where they come from.
It all comes back to the purpose and principles
Make no mistake: I have a rigorous process around numbers.
Estimated TAM, IRR, NPV — we run them all.
But when weighed against potential impact for humanity and capability of individuals at the helm, I put slightly more value than most investors.
Maybe in the long run, I’ll fall into an even more disciplined manner of allocating capital.
But for now, I’m just going to keep working with great people on the problems that I want to work on.
Find good people solving tough problems and the financials often sort themselves out.
This post was originally published on Atrium – https://www.atrium.co/blog/ashton-kutcher-investments/
As seen in the Huffington Post: https://www.huffingtonpost.com/entry/6-reasons-a-healthcare-software-startup-should-be-funded_us_583285a9e4b0eaa5f14d47a4
This is a guest post by Laurence Girard. Laurence is the CEO and founder of the telehealth software company Fruit Street. He was previously a pre-med student in the Bachelor’s Degree Program at the Harvard University Extension School. Fruit Street is funded by 160 physician investors and is a public benefit corporation.
Every year more than 600,000 new businesses launch in the US. Of those, only a few hundred are funded by venture capital. The probability of a new business being funded by a venture capital firm is a minuscule 0.0005 percent (300 out of 600,000). Still, for some reason, many Silicon Valley healthcare entrepreneurs make “getting VC funding” their exclusive goal. Without a single VC dollar, we have raised over $6 million in funding from 160 physicians.
Why did we focus exclusively on physician investors?
A VC firm’s sole objective is to provide maximum return on investment for its limited partners. As a result, VCs put inordinate pressure on portfolio companies in the hope that one in 100 will become a billion-dollar unicorn. This approach results in a large number of these companies failing. They otherwise may have been successful had they attempted to grow at an organic pace. Physicians are much more patient than VC investors.
At Fruit Street, we would prefer to raise $25 million of funding if needed from 500 physicians investing $50,000 each while benefiting from their advice, rather than having only a few venture capitalists as investors that gave us the same amount of investment.
Some traditional angel investors and VCs I’ve spoken with have said that physicians are “stupid investors,” but this reputation is completely unjustified. In fact, it is the traditional angel investors and VCs who are rapidly earning that reputation. Famous VC Vinod Khosla was asked by TechCrunch founder Michael Arrington which VC is the “most full of shit that you’ve ever heard.” Vinod responded, “I would be offending too many people. Maybe some percentage that’s substantially larger than 95 percent of VCs add zero value. I would bet that 70 to 80 percent add negative value to a startup in their advising.” I strongly prefer an investor with a medical degree than any VC.
A recent Harvard Business Review Article titled, “Venture Capitalists Get Paid Well to Lose Money” explained that “2013 annual industry performance data from Cambridge Associates shows that venture capital continues to underperform the S&P 500, NASDAQ and Russell 2000.” Why would I as an entrepreneur want to seek money from investors who are clearly not generating returns with their business model? The VC model is broken. The article goes on to point out that venture capitalists get paid a 2% management fee paid annually regardless of what returns are generated and they do not invest their own money. I would rather have physicians as investors who are investing their own money and have skin in the game. This gives our investors more motivation than a venture capital firm to help our startup succeed at all costs.
A leading VC in Silicon Valley, Sequoia Capital, has stated that 45 percent of founding CEOs within their portfolio are fired within 18 months of the initial investment. Yet, according to a recent study conducted at Purdue’s Krannert School of Management, companies at which the founder still plays a significant role consistently outperform those companies at which the founder is no longer active.
Most venture capitalists will never interact with a patient, much less hold a medical degree. VC investors do not use your product. Our investors commonly use our product with their patients and provide valuable feedback we can use to continuously improve our product.
Our healthcare software company, Fruit Street, is a public benefit corporation. In addition to being for-profit, we write our social mission into the company bylaws. We chose to work with physicians because we wanted to make a social impact on the industry, not simply turn a profit. It was for this reason that we identified physicians as the optimal investment partners. Fruit Street’s mission is to “prevent and treat lifestyle related disease using telemedicine, wearable devices, and mobile applications.”
There is no greater honor as a healthcare entrepreneur and founder than being able to learn from physicians who instill these values as the core of their profession:
I will respect the hard-won scientific gains of those physicians in whose steps I walk, and gladly share such knowledge as is mine with those who are to follow.
I will apply, for the benefit of the sick, all measures which are required, avoiding those twin traps of overtreatment and therapeutic nihilism.
I will remember that there is art to medicine as well as science, and that warmth, sympathy, and understanding may outweigh the surgeon’s knife or the chemist’s drug.
I will not be ashamed to say ‘I know not,’ nor will I fail to call in my colleagues when the skills of another are needed for a patient’s recovery.
I will respect the privacy of my patients, for their problems are not disclosed to me that the world may know. Most especially must I tread with care in matters of life and death. If it is given me to save a life, all thanks. But it may also be within my power to take a life; this awesome responsibility must be faced with great humbleness and awareness of my own frailty. Above all, I must not play at God.
I will remember that I do not treat a fever chart, a cancerous growth, but a sick human being, whose illness may affect the person’s family and economic stability. My responsibility includes these related problems, if I am to care adequately for the sick.
I will prevent disease whenever I can, for prevention is preferable to cure.
I will remember that I remain a member of society, with special obligations to all my fellow human beings, those sound of mind and body as well as the infirm.
If I do not violate this oath, may I enjoy life and art, respected while I live and remembered with affection thereafter. May I always act so as to preserve the finest traditions of my calling and may I long experience the joy of healing those who seek my help.
-Written in 1964 by Louis Lasagna, Academic Dean of the School of Medicine at Tufts University, and used in many medical schools today.
Healthcare entrepreneurs should strive for these same Hippocratic values. The best way to do that is by receiving funding from the very people that uphold those values.