HEALTHCARE INSIDERS VS. OUTSIDERS: who are venture capitalists investing in?
a look into what our investing patterns are telling us
NOVEMBER 2022
by Federico Aureli, Adrien Ezerzer & Marta Gaia Zanchi
For many venture capitalists, disruption born of innovation invariably comes from outside the industry that’s about to be disrupted. Taking this position to the extreme, Vinod Khosla stressed to author Sebastian Mallaby in Mallaby’s brilliant new book The Power Law that “If I’m building a health-care company, I don’t want a health-care CEO. If I’m building a manufacturing company, I don’t want a manufacturing CEO. I want somebody really smart to rethink assumptions from the ground up.”
The sentence hit us like a ton of bricks. We at Nina Capital have taken, very publicly, a different point of view. We back entrepreneurs moved by unmet needs to transform healthcare through the meaningful application of technology. And we have always resonated with CEOs who are intimately aware of the idiosyncrasies of the healthcare industry. That generally (but not always!) means coming from within.
Are we alone in thinking this way?
While we agree that, as Khosla states, “all progress depends on the unreasonable man” (or woman, uh-oh), we strongly believe that the unreasonable man or woman must also be well informed about the rules of the healthcare industry that they want to innovate. Strategies that work well in other industries may be ill-suited to healthcare, which consists of a complex and carefully regulated landscape of stakeholders. Health technology solutions need to appeal not just to individual users but to all industry participants — from doctors and patients to regulators and insurers — all of whom have a say in whether a new product is adopted. Not to mention that products considered medical devices according to a country’s regulatory agency (such as the Food and Drug Administration in the United States) may require years of development through complex clinical and regulatory pathways before they even reach the market, and can’t always easily be changed once they do.
Consistently with our purpose to improve healthcare by supporting need-driven founders, we like founders who have an in-depth understanding of the network of healthcare system participants and build on it. True, that does not mean the CEO has to come from this industry — when we invest, we look at the strengths of a team and are biased to prefer teams that are diverse and multidisciplinary, believing they will have a higher chance of success; so, a great company can look like a great industry outsider at the helm of a group with a collective deep understanding of the industry.
Prompted by our reading of The Power Law, we thought a great discussion could be had about the importance of a CEO’s (healthcare) background towards the success of a health technology business. However, we felt that we could not start it without first taking a proper look at the data.
The questions we wanted to have answered were,
- How many healthcare founding CEOs are venture capital firms investing in, as a proportion of the overall number of CEOs in their health technology portfolio?
- How many healthcare CEOs who were not part of the original founding team — but were brought in later — are leading the portfolio companies of these venture capital firms?
The rationale for the first question is simple. We wanted to know what is venture capital’s preference for founding CEOs who are healthcare insiders, by looking at how a carefully selected sample of venture capital firms invests.
The rationale for the second question is a bit more nuanced. In the event a founding CEO was ever replaced, while we cannot be sure why this happened (and in some cases, not even who the founding CEO was!), we were intrigued to learn whether or not their replacements were themselves healthcare insiders.
Driven by these questions, we decided to dig in.
to answer our questions,
we decided to analyze the portfolio of selected five generalist venture capital firms that are investing, also, in health technology.
These are some of our favorite venture capital firms, which we respect for their strong brand personality and recognizable investment thesis (including, of course, Khosla Ventures). They are all active at the Seed stage and have been around for at least a decade, which is the typical lifespan of a fund. The similarities end here. Three are US-based, one is UK-based, and one is Europe-first. One has made only eight healthcare investments; one, over 140.
They are, in alphabetical order:
To study the portfolio of investments of these firms, we decided to limit our data sources to one so that our study could be more easily replicated and expanded by anyone who wishes to do so, with just a subscription to Dealroom.
Using our firm’s Dealroom subscription, we extracted the “healthcare” portfolio companies of these five firms, which include all subsectors, such as computational healthcare technologies and regulated hardware devices (so-called “medtech”).
Dealroom offers some additional data about the total funding, employee count, valuation, and growth of the companies in their platform. By experience, we know that some of these metrics are often underreported by companies/investors and therefore outdated, especially when companies are really young, have not raised more than a couple of rounds of funding, and their online footprint is still small. However, we collected this data to see if we could offer some additional, qualitative thoughts at the end of our work.
Then, we researched the CEOs of these companies, to learn about their industry background before starting (founding CEOs) or later joining (non-founding CEOs) the startup. We asked — are they healthcare insiders, or do they come from a different industry? Here, our main sources were LinkedIn and the websites of the health portfolio companies identified above. In case the company was acquired or dissolved, we considered the last-standing CEO in our analysis.
Then, we looked into
- founding CEOs: % of healthcare insiders vs. outsiders
- non-founding CEOs: % healthcare insiders vs. outsiders
- all (founding & non-founding) CEOs: % healthcare insiders vs. outsiders
We compared these results with those we derived from an analysis of our own portfolio. Importantly, contrary to the five firms above, we are a specialist healthcare firm — hence our initial assumption was that we would be more biased than any of these firms to prefer healthcare insiders. Also, we are younger as an organization than any of them.
Finally, we offered some personal observations based on these results. Observations are totally subjective and you are welcome to challenge and debate them with us by sending us an email at research@nina.capital.
We decided to stick with the KISS philosophy (Keep It Simple, Stupid) and leave opportunities for further investigation to another time… Or to you, if that sounds interesting.
naturally, we had to set some (arbitrary) definitions.
We defined a healthcare insider as someone who has:
- higher education in life sciences, medicine, healthcare, or health technology (including but not limited to biomedical engineering, medicine, biology, biotechnology, etc…), regardless of the degree (BS, MS, MD, or PhD);
or,
- at least three years of operating experience in the healthcare industry.
In the remainder of the post, we will use the terms “healthcare insider” and “[person] with a healthcare background” interchangeably. Consistently, we will use the terms “healthcare outsider” and “[person] without a healthcare background” for anyone who does not meet the above definition.
we analyzed 259 healthcare companies
from the portfolios of the above-selected five generalist firms and our own specialist firm.
*we at Nina Capital have approved investments in 37 companies since the launch of our first vintage in September 2019, the last two of which have not been announced yet; therefore, we did not include them in this list.
In aggregate, 80% of these companies today are led by a CEO who was also a member of the original founding team — or at least so they claim on their LinkedIn profiles and companies websites. (We did not independently validate such claims.) Some firms, especially those with a smaller healthcare portfolio such as Caffeinated Capital and Seedcamp, are investors only in startups whose current or last-standing CEOs were also founders.
founding CEOs: % of healthcare insiders vs. outsiders
Of the 259 healthcare companies in our data set, at the time of our analysis, 207 are still led or were last led by a CEO who was a member of the original founding team — or at least so they claim. We call them “founding CEOs” and we studied their backgrounds to understand if they are healthcare insiders or not, based on our own definition.
Looking at only founding CEOs, and against some venture capitalists’ stated preference for industry outsiders (often call “outside disruptors” or “unreasonable” entrepreneurs), venture capitalists tend to have a bias toward healthcare insiders when it comes to investing in healthcare companies. The rate of healthcare insiders tends to be higher in VCs with smaller health portfolios.
non-founding CEOs: % healthcare insiders vs. outsiders
Of the 259 healthcare companies in our data set, at the time of our analysis, 52 are still led or were last led by a CEO who was not a member of the original founding team. We call them “non-founding CEOs” and we studied their backgrounds to understand if they are healthcare insiders or not, based on our own definition.
CEOs sometimes change — every venture capital firm has experienced such transitions, sooner or later. To be able to draw some definitive conclusions, it would have been interesting to know whether a new CEO was brought in with a different industry background than the original founding CEO (for example, an industry insider succeeding an industry outsider, or vice versa). Alas, this was not possible with the sources at our disposal — the data was patchy, and our results would be difficult to validate and replicate. However, it remains interesting to see, when a new CEO is brought in, whether the preference is for someone with or without a healthcare background.
The result was, more than two-thirds of the newly brought-in CEOs have a healthcare-related background. The sample is small, however, it was impressive to find that 100% (twelve in total) of non-founding CEOs who are part of Correlation Ventures’ healthcare portfolio are all healthcare insiders.
This could make us conclude that healthcare companies recognize, as they grow and even more so than at the moment of founding, the value of an industry-relevant background for managing and scaling a healthcare company. (In the example of Correlation Ventures mentioned above, we don’t know if those twelve non-founding CEOs who are healthcare insiders were replacing all or some founding CEOs who were healthcare outsiders… so, we cannot draw definitive conclusions. What we are pointing out here is only that, when hiring for a new CEO, the preference seems to be for a healthcare insider.)
all (founding & non-founding) CEOs: % healthcare insiders vs. outsiders
If we look at all these 259 CEOs in aggregate, without separating founding from non-founding CEOs, what do we see?
The data suggests that approximately six out of ten times, VCs investing in healthcare have a bias towards CEOs who are healthcare insiders versus CEOs coming from any other industries (be it automotive, fintech, semiconductors, mobility, climate, space… you name it!).
our study has limitations.
we trusted our sources; they are not perfect.
We already mentioned that Dealroom does not always have 100% accurate information, especially for very early-stage companies that have gone through only one or two rounds of funding, as they tend to fly under the radar or have a very small online footprint. Also, we often relied on CEOs’ own descriptions of their relationship with a company; by experience, we know that some CEOs may claim the title of founder even though they joined at a (slightly) later time, for example.
CEOs matter; teams matter more.
A background in healthcare is no guarantee of success. Technical competencies, business savvy, and communication skills are a must, and many bright founders come from different backgrounds. In the end, what makes a difference is a team’s makeup of diverse backgrounds, experiences, and talents, where all team members are united by the same mission and values. We have not tracked the backgrounds of all the founders, but we would expect the rate of at least one founder who is a healthcare insider to be higher than we consider just the CEOs.
backgrounds matter; thoughtfulness, commitment, and a need-driven approach matter more.
Successful founders in healthcare do not necessarily need to be healthcare insiders to understand the complexity of this industry. We ourselves have backed some thoughtful founders who are driven by the knowledge of an unmet need in healthcare that has affected them personally, or that touched the life of a close friend or a relative. They have made direct observations and developed deep insights into the problem because of these experiences, and have dedicated themselves to studying the healthcare system for quite some time before deciding to embark on their innovation journey. They may not have chosen healthcare — but healthcare has chosen them, and they committed themselves to finding a solution to help others who are struggling with the same challenges.
we made up a pretty critical definition of healthcare insider; it is debatable.
You may argue that higher education in biomedical engineering hardly makes a CEO who has then spent ten years applying their engineering skills towards building communications networks in the mobile communications industry (for example!) a healthcare insider. We agree and this is certainly a limitation of our research. (Interesting, by sampling the career outlook pages of some universities, we consistently learned that more than 8 out of 10 graduates of these disciplines tend to stay in the healthcare industry or app.)
we took a snapshot in time of six firms and their 259 healthcare companies; many of them will look different in some years.
It would be interesting to repeat this study on the same pool of companies in two or five or ten years. We cannot rule out the possibility that we might draw different conclusions then.
other studies are limited, in the sense that there are not many.
When looking for other research analyzing the background of CEOs of healthcare companies, we could not find much. We did come across some interesting, studies for companies in other industries, and one for biotech companies that went public in the first half of 2021 specifically.
- The Best-Performing CEOs in the World — Harvard Business Review
- A systematic analysis of biotech startups that went public in the first half of 2021 — Huayamares S.G. et al.
- World’s Top CEOs — How To Get There? — Aaron Wallis
The point is, this is a white space and more research on this specific topic with a healthcare angle would be very desirable. Are you ready to roll up your sleeves?
our conclusions based on this research are
- founding CEOs are only slightly more often healthcare insiders than outsiders; do consider, however, that outsiders can come from any of a long list of industries (any except only healthcare). In other words, healthcare is a relatively small corner of a humongous pond, yet CEOs of healthcare companies still generally come from it. To us, this still points to a preference for healthcare insiders;
- one of every five founding CEOs is ultimately succeeded by a new CEO. As to the role played by these companies’ venture capital investors in making this change, we simply do not know. What we know is, the rate of insiders among newly brought-in CEOs is higher than among founding CEOs. This may suggest that an insider background is desirable not only to start but also and more importantly to manage a company in healthcare at scale;
- finally, we did not observe large deviations in our results across firms that have different sizes of healthcare portfolios and geographical reach. With the exclusion of firms with very small numbers of non-founding CEOs, the results of which cannot be generalized, the percentage of CEOs who are healthcare insiders tends to be fairly similar.
Every limitation of our research is an opportunity for you to pick up from where we left off, and improve it. If you’d like, contact us and we will be happy to send you a full list of the 259 companies we analyzed.
Interesting future directions of this research could include replicating it for the subset of the companies that have been most successful, by some criteria that could be based on a combination of revenue growth and valuation, for example. It could also be interesting to break down healthcare into different subsectors, which are very different from each other, such as companies that improve healthcare provider operations with unregulated technologies using SaaS business models, or companies that engineer and bring to market (via clinical and regulatory pathways) hardware-based medical devices eligible for reimbursement, and see how the percentage of healthcare insiders changes across those.
Federico, Adrien, & Marta Gaia
