Earlybird Health Presents its Impact Investing Framework
We have seen a series of unprecedented events since the start of this decade, ranging from the global pandemic to extreme weather, to Russia’s invasion of Ukraine, which triggered a global energy and economic crisis. These events serve as a reminder of the vital role that health, sustainability, and democracy play in a functioning economy and society. For Earlybird Health, they have accelerated our mission to fund innovation for a healthier world.
Investment in breakthrough innovation that has a long-term positive impact on people’s health and well-being is what Earlybird Health values most. As venture capitalists, we have a unique opportunity and a social responsibility to support innovation that develops solutions to the biggest problems facing society. Our health funds’ main goals are to enhance health outcomes, encourage preventive measures, and increase the availability and affordability of health goods and services, all of which help to achieve Sustainable Development Goal 3 (SDG 3): Better Health and Well-Being.
Earlybird Health is proud to be a signatory of the UN PRI, contributes to the achievement of selected SDGs, and strives to be Sustainable Finance Disclosure Regulation (SFDR) Article 8 compliant in our everyday activities and investments. We are cognizant that the innovation behind Article 9 funded companies is often issued from Article 8 funded companies.
To date, our portfolio of nearly 50 innovations and technologies has the potential to positively impact the lives of more than half a billion people.
Impact can mean many things to many people. For us, impact means improving patient outcomes whether through new therapeutics, increased access, or improved care delivery. This drives everything we do. As the only VC with a public health insurer as a cornerstone investor, we have a unique position that allows us to prioritize impact alongside traditional VC metrics.
Defining and Assessing Impact
When evaluating a potential investment, we always consider the future impact of this investment both on patients and society as a whole and not just on financial returns. Companies with a large potential for impact and a clear path to achieve it are more likely to operate in innovative areas and bring revolutionary solutions to market, rather than competing for incremental gains. Investing in such high-impact companies also ensures a sustainable business model and makes them more resilient to economic downturns.
Having recently raised our second dedicated health fund, we are excited to deploy the capital entrusted to us to support innovation that will meaningfully improve patient outcomes. As such, over the past year, our team has developed a framework to ensure future investments are genuinely making an impact on patients and society.
To that effect, Earlybird Health has created a proprietary Impact Investing Framework (IIF) to assess investment opportunities. This framework is customized and adapted for each of the verticals that we focus on (digital health, diagnostics, medical devices, R&D tools, and biopharma) to ensure relevancy and allow us to compare across the spectrum of opportunities to advise us on investment decisions. At the core of this framework is health economics, which evaluates the future societal benefit (or impact) in financial terms for every euro invested today. We adhere to strict criteria, only investing in opportunities that exceed our impact threshold.
As strong believers in the crucial role cooperation plays in propelling advancements in healthcare, we opted to share our approach below.Should you have any inquiries or feedback, please don’t hesitate to reach out to Junkai at junkai@earlybird.com.
We hope to engage further in dialogues and collaborations, as well as co-develop best practices in healthcare impact investing!
Our IIF Approach
The principles behind our IIF are inspired by the methodology developed by the Rise Fund in partnership with Y Analytics and Bridgespan Social Impact. Per this methodology, impact is calculated by the amount of social value (measured as social euros) generated per one euro spent on an investment. The new metric is called the Impact Multiple of Money (IMM). More information can be found in Harvard Business Review’s: Calculating the Value of Impact Investing.
A review of industry benchmarks (incl. Social Return on Investment (SROI) of mental health related interventions, SROI for patients with long-term chronic conditions, Average SROI for Public Health, and SROI for post-natal depression.) led us to conclude that 5x should be the minimum requirement for an investment in healthcare in terms of impact. As such, as part of our IIF, we intend to solely invest in companies where we can generate an IMM of at least 5x. This means that for any potential investment, we will assess during our due diligence whether we can convert every euro invested today into five social euros in the future.
Step-by-Step Process to Calculate an Investment’s IMM
- We start by estimating the number of patients likely reached over the lifespan of each product / technology developed by the target company. We define lifespan as until patent expiry for biopharmaceutical drugs and 10 years after commercial launch for medical devices, tools, diagnostics, and digital health therapies.
- Next, we calculate the relative increase in Quality-Adjusted-Life-Years (QALYs) on a per-patient basis when taking the product over the current Standard-of-Care (SoC). To quantify QALYs, we decided to use the monetary value of €40,000 for 1 QALY. Currently, the UK defines 1 QALY to be equivalent to £20,000 — £30,000, and the US defines 1 QALY to be equivalent to $50,000.
- In addition, we project the cost savings incurred by the hospital system on a per-patient basis when using the new product over the current SoC.
- The quantified QALYs are then added to the above-calculated cost savings, which results in an overall financial value per patient generated by the product. This value is then multiplied by the number of patients reached over the projected period.
- As we invest in early-stage companies, we recognise that there is a high risk that not all companies in our portfolio will achieve the level of impact projected. Thus, we risk-adjust the numbers by either (a.) using the success rates of historical clinical trials in the indication of the chosen therapy, or (b.) discussing internally for an appropriate percentage if the standardised numbers are not applicable.
- These risk-adjusted values are then discounted back to the present day using an appropriate discount rate. Beyond the projected period, we assign a much higher discount rate to include any further impact made by future variations of the product, acknowledging the high uncertainty of these projections. This generates the Net Present Value (NPV).
- As we invest only a proportion of the capital required for the product to successfully reach market authorization and patients, we only attribute that proportion of impact made back to Earlybird Health. Our proportion of the NPV is then divided by the investment we made to calculate the IMM.
While this framework aims to standardise the calculation of IMM across various healthcare sectors for comparison purposes, we acknowledge it is crucial to customise the set of assumptions and modify the model based on the specific vertical in which the analysed company operates as well as for each company we evaluate as a potential investment.
As our IIF is still a work in progress, we aim to continuously evolve it to better capture impact and, for this purpose, hope to kickstart the conversation with other investors in the healthcare field.
We will share results from our IIF for the initial investments of our second Health Fund in our upcoming 2023 Impact & ESG Report. We look forward to continuing our conversation then!
