Revolutionizing The Healthcare Startup Industry
I’m really excited about today’s interview. We’re going to be talking about angel investing and healthcare start-ups with Sean Schantzen, co-founder of HealthFundr.com. Sean and his co-founder Jared are young angel investors who both were attorneys practicing securities law at different law firms. They also have prior experience working for start-ups in the healthcare industry and when they were ready to start investment in healthcare start-ups, they found it pretty challenging. Healthcare start-ups are complicated and require specialized knowledge.
Sean and Jared could not find a great option to invest in healthcare start-ups, so they created their own equity crowdfunding platform called HealthFundr and one of the biggest takeaways from today’s interview is Sean’s recommendation that all young and new angel investors start investing alongside more experienced angels and this is what HealthFundr allows us to do. I hope I’ve piqued your interest enough and so without further ado, let’s get to the interview with Sean Schantzen, co-founder of HealthFundr.
I’m so excited to have Sean Schantzen with us for the very first interview of the Angel Investing podcast. Sean, thank you so much for being here. How are you?
I’ve known Sean for a little bit now. Surprisingly, we actually went to the same college a long time ago but not at the same time and later on we both became lawyers and I guess now we’re both recovering lawyers since we don’t practice. I actually have noticed that there are quite a few recovering lawyers in the angel investing world and Sean, I’m curious to know what has the path been from law practice to angel investing?
My background actually starts a little bit before that. I was coming out of undergrad, joined a start-up as an early employee, was an enterprise software as a service company and we grew from a small number of employees to about 100 employees and sold the company. We had taken on venture capital at the company and so I’ve seen that whole process. I’ve seen the investor relation issues and I had seen the positive side of investing in starch and companies have a good exit and the investors doing quite well.
After that I decided to go to law school and practice securities law for a couple of years and was at a big law firm where I made it about two years. They are hard working places, and not the type of work that I wanted to be doing, and one of my very good friends came to me and said, ‘hey, I’m quitting my job to start a company and you should too’ and I asked what type of company and he explained HealthFundr, which is my current company. After a few months of us talking through some details and deciding how we wanted to do it, I quit to join him and we started HealthFundr. We’re an online market place and we give people access to invest in private healthcare start-ups, but they can do it investing alongside some of the best healthcare start-up investors and angel investors around.
These are funds, these are individuals from around the country that are successful and prominent healthcare investors and people can come online and they can invest in those couples that have been pre-screened by us and by others and access companies they wouldn’t otherwise have access to and do it in a much easier way.
I personally really like what you guys are doing with HealthFundr which we will return to. Your co-founder Jared could not be here with us today, but can you tell us a little bit more about his background, because he has also an interesting story and he is also one of our fellow recovering attorneys from what I understand.
Jared and I have known each other for about 15 years. We were roommates in undergrad and went to the same law school. I’ve known his kids since they were born; we’ve known each other for a really long time. His path is somewhat similar in some ways to mine in that he actually started out at a start-up out of undergrad, but a pharmaceutical start-up and did clinical research with them and afterwards he also went to law school to practice securities law. We both practiced securities law at different law firms and he has also started doing some angel investing, then decided to leave and he’s the one that came to me to start. So, we both have a bit of background around startups, healthcare, all the legal issues, start-up investing, security laws, and the investing side as well, so yeah, he has a pretty similar background. Quite the path to come to where we’re at for HealthFundr.
What I’ve noticed from meeting other angel investors is that it’s amazing that investing in start-ups is so versatile and pretty much any background can find some application in angel investing. My undergraduate degree is in computer science, so I was a programmer for a few years before I became a lawyer and now investing in start-ups. I have a soft spot for software start-ups, because I get to remember a little bit from my college days and my computer science studies. So, I think it’s amazing how angel investing is really for anybody, whatever your background is, you can always find a start-up where your background becomes applicable. In fact, I hear that one of the good pieces of advise when you’re investing in start-ups is to invest in something that you know and understand. So, what’s your take on that?
I think there’s two ways to do things well in angel investing. One is you stick with things you understand well, because you can understand the company’s market and you can have value. The other side is to invest with others that understand and I mean that’s how a lot of this investing happens - you have a friend that you know knows a particular space really well and if he or she invests, that’s a really good signal the company knows.
One of the challenges, if you stick only in the things that you know really well, is you’re going to be probably a little over-allocated to a particular type of company, whereas if you expand out a little bit and take either ‘I need to know it’ or ‘I need to trust someone that knows it really well’ and you’ll just be a lot better diversified. That’s one of the big things that we see in angel investing and one of the things we’re trying to do on a platform is institutionalize best practices and we just have really strong opinions on about this that most angel investors don’t diversify enough.
There’s lots of data out there that shows that the single best thing to do to improve your returns is to invest in a larger number of promising company. This doesn’t mean invest in everything that comes along, but invest in enough companies that you’re not subject to the risk of any one company or any 3 or 4 and 5 and 6 companies that you’re making 15–20–25 investments at least. So sticking to what you know is the starting point and then just learning the best practices of how you can intelligently expand beyond that into other sectors.
We always hear advice not to put all your eggs into one basket when it comes to investing and like you said, investing what you know with start-ups is a great jumping point. Looking at other verticals, like with me I love software and a couple of start-ups that I invested in, were also software for legal space, so it was a really sweet spot for me. It was an intersection of both of the areas that I’m very familiar with, but I would like to expand and diversify my portfolio. I hope it’s okay for me to say that I’m one of the earlier investors in HealthFundr, because I saw that opportunity to invest in a company that has a software platform, but has something besides legal and healthcare is a very important part of everybody’s lives.My experience with healthcare is limited to going to see doctor and, of course, to make a sophisticated investment, I don’t feel comfortable. I think HealthFundr has done an amazing job helping investors like me who are not experts in healthcare to feel that level of comfort with your HealthFundr expertise. Sean, I’d like you to talk a little bit more about the expertise part of HealthFundr and what kind of people are on the expertise side of HealthFundr and how can they help investors?
One quick point on the kind of investing strategy side of things is that with emergence of platforms, and we are by no means the only one out there; there’s AngelList, there’s FundersClub, there’s CircleUP and others that are doing really great things. We happen to think we’re the best at healthcare, but there’s lots of them out there and what this allows is more sophisticated diversification strategies.
In the past, angel investing was pretty regiment to your own personal network and your own geography and that can be somewhat limiting particularly in healthcare, for example, where healthcare is really distributed across the country. A lot of innovation comes from a lot of different places. It’s not like it’s all in Silicon Valley or all in Boston, so platforms and also just offline groups that have gotten bigger and more natural in their reach, give you this opportunity to invest alongside in people you trust. More types of companies from a sector perspective, but also from a geographic perspective, because evaluations vary a lot from geography to geography and just the culture of what types of companies you’re trying to build vary a lot and then also you can vary your trunk size, like your bite size.
You may say ‘in markets that I know really well, I’m going to invest more in each company and then the markets that I know less about I may invest less in each company’, so you may say ‘I do $25,000 to each company I know really well and $5,000 to each company that I don’t know very well, it’s in a market I don’t know very well’.
It’s a really interesting dynamic that’s emerged in the last couple of years. The ability to actually be proactive about diversification and be much more sophisticated in ways you couldn’t in the past leads into HealthFundr. Our whole model is based off these two concepts so healthcare is uniquely complex. It is really broad, there’s lots of science, lots of weird incentives, and a whole issue of you as a patient getting the benefit of the healthcare, but you don’t pay for it necessarily, your insurance provider does.
There’s issues with payment, challenging sales cycles, and also the things that are hard to understand if you don’t know the market. We decided early on that because of this complexity, we’re never going to be able to know ourselves about every little area and we’re never going to be able to have a small group that could know everything and so we actually built this network called HealthFundr expertise. It’s a technology platform within HealthFundr and also a network that is industry experts like topical experts, subject-matter experts, prominent entrepreneurs, and industry veterans from around healthcare and around the country.
This network is something we used to help source opportunities and find promising investment opportunities, and then we also use it to help stream companies. When we get some company in the space that we know a little bit about, but maybe not a ton, we can reach out to this network and pretty quickly find someone that knows that market really well.We have them help us screen that company and then post-investment, we used that same network and on the broader HealthFundr ecosystem on the platform to help the companies get traction better or help them grow more quickly, help them find customers more quickly, shorten those sales cycle, and improve their operations through this platform. It’s a really unique thing that others just don’t have.
I mean, you’re typically limited to your own personal network, but there’s only so many people that you can know and this allows us to extend that concept of trusted knowledgeable people to a much broader group that we can tap into and so that’s health and expertise, that’s the underlining concept of our company. The health is really complex, it’s really broad and it requires broad swaths of knowledge to effectively navigate it, so we built a model that does that, essentially to make up for my lack of omniscience about every market on earth.
I think it’s amazing; I’ve done enough angel investing to realize a few things. Lone wolf angel investing is really hard, you cannot do a lot as a lone wolf investor. You might focus on deal flow and when you’re putting energy into that for a while you can have great deal flow, but something has got to give. If you’re focusing on that then the post-investment support you might be lacking in that as a single investor doing it by yourself. Another approach, of course, is to go into sometime of an adventure fund or angel fund, but then you become limited in your choices and you kind of go with the flow, you go with the fund or you go with the group. I find that equity crowdfunding platforms for accredited investors like HealthFundr, are that perfect golden solutions.
It’s not too hot, it’s not too cold. You’re kind of right smack in the middle, because as an individual investor and as a newer investor, you get access to an amazing deal flow. Especially with the expertise piece that you guys have - amazing deal flow that as a lone wolf angel investor you could never get and in addition to that,there’s a lot of help with screening, deal selection, and the post-investment support. Those are all such important pieces, but then with a platform like HealthFundr, I feel like anybody can be very flexible.
You have a good year as an entrepreneur and you can invest in a handful of companies and the next year, it’s not so good, so you just pull back and wait until your own situation gets a little bit better. So, unlike a fund, you’re not stuck into constantly investing so you can really, really be very flexible and that’s why I think HealthFundr is amazing. Another point as far as deal sourcing and deal flow, I know that you guys have been working on some very strong alliances and developing synergies with different angel groups around the country, so can you tell us a little bit more about that work and the successes that you’ve had so far?
Yes; a lot of the platforms evolving to have both edibility to depict and choose companies and also the ability to invest in funds. The funds are typically a smaller, lower investment minimums than your average venture capital fund and so you can do a bit of pretty diversification through fund structure as well pick your own. Like I said it’s this move towards more sophisticated diversification that you can wake your portfolio up in ways that weren’t possible before.
As far as us on the deal flow side with relationships, we do a couple of things. There’s about 300,000 angel investors in the country and about 15,000 of them are of formal groups and so the vast majority of angel investing happens outside of formal groups and it happens with either the lone wolf like you were saying or most commonly in small, informal groups.
Friends and people you know, professional colleagues, and that’s part of why we built a platform- the expertise platform- is because it allows us to tap into deal flow from all of these sources, so there’s form angel groups. For example we have a partnership with Life Science Angels out of Palo Alto, that when they invest in companies, they’ll syndicate those companies onto the platform and others that aren’t members of Life Science Angels can invest alongside hem and they are the number one rated angel group in the country in healthcare and but at the same time there’s other companies.
There’s other deals that don’t ever make it to formal groups that get a lot of interest really quickly, so they don’t want to take the time to go through a formal group and so they raise their money externally and we see those types of companies too. We just completed an investment not too long ago in a company called Thinkwise Health that was on no platform publicly, but HealthFundr members saw it on HealthFundr, because we have this connection with the expertise network to some other investors that allowed us to have access to the steal.
We build relationships with three main groups to do this; one is a formal group, angel investing groups, the second is individual angels and industry experts, and the third is other funds. There are lots of micro VC funds and seed funds and even venture capital funds that seem like lots of deal flow, and a lot of times especially bigger funds will see things that are too early for them and so they’ll send it to us when it’s not quite ready for their size of investment. They’re typically looking at investing $3–10m in a first round of investing from their fund and that’s just more than these companies typically are raising at this point.
I think that’s great and I know from personal experience, I hope you don’t mind me sharing a little bit about Track Care Now. This was a start-up that I was a mentor for, helping them to do a better pitching job for investors through an organization out of Utah called Wayne Brown Institute that has a pitch mentoring program. I loved what the company was doing. I thought that the team was great and it’s in a healthcare space and I thought that HealthFundr and Track Care Now had to connect. I thought that would be an interesting opportunity and you and your co-founder Jared were great to work with and referring a start-up like that. I believe that Track Care Now is on the platform now. I think they changed their name a little bit, but it was a great experience just working with HealthFundr being able to send a start-up to you guys.
That’s part of the value we can provide because we know healthcare, we can dive into things and a lot of times companies look really good, but they don’t necessarily have the experience in health to invest with the investors, so we tried to supplement that so people feel more confident in what they’re investing. We think that’s really the best way for the investing to happen - this combination of on the ground getting to know entrepreneurs and seeing them, combined with some actual market and sector-specific expertise, because every sector and industry has crazy little nuances and weird things and unusually competitive landscapes.
Healthcare happens to be all that on steroids, but lots of other industries have that same dynamic. Without the sector-specific knowledge, it’s good to have other either individuals or platforms or whoever it is, people in a group with you that they’re able to say, ‘yeah, looks good, but…’ or ‘oh this is good’, when you thought it wasn’t very good, ‘but there’s this issue that you don’t know about that actually makes this company really good’. And what we’re more excited about was platforms has this ability to rise above the fray and see more companies and more expertise around companies.
But wait…there’s more!
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When Tatyana learned that out of almost 9 million accredited investors in the United states only 300,000 (about 3%) were active angel investors, she made it her mission to attract, educate, and inspire the next wave of angel investors in this country.
As a new angel investor herself, Tatyana loves to learn the craft of investing in startups from experienced angel investors. It was only natural to share this process with a broader audience via her Angel Investing podcast.
Follow Tatyana on Twitter at @tatgrayid. We welcome your comments.