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Solving the funding formulas - Kapil Khandelwal, Director, EquNev Capital


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My views on funding ventures in healthcare in India

Kapil Khandelwal
EquNev Capital Private Limited

Published in: Business
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Solving the funding formulas - Kapil Khandelwal, Director, EquNev Capital

  1. 1. 48 | March 2012 Healthcare Executive K apil Khandelwal runs his own investment banking and advisory services company, EquNev Capital. In his 25 years of his career, he has carried out over 30 transac-tions including cross-border. His particular area of focus is invest- ment banking, business advisory, and driving business results through mentoring leaders and his passion is connecting people and making an impact on the lives of people in this region. He holds the unique distinction of being among the elite club of Chief Information Security Of- ficers (CISOs) in the early-phase drug discovery in the world. He has played an influencing role with the Governments in India and abroad. Kapil is a recognised industry leader and speaker on topics like health and business strategy. He also serves several company boards and industry advisory committees. He was the Founder Board Member of DMAI; and among other positions, currently is a Member- Advisory Board at Pfizer and the Fund Advisory Board Member for several funds. Here, he tries answering some of the frequently asked questions on healthcare finance… Q. We are in the course of expanding our hospital services. How can we choose the right PE partner? First and foremost, for expand- ing the services, you need to really ask, if you are ready for welcoming a PE firm into your governance. As a running hospi- tal, you need to evaluate if you can do with bank/institutional debt to fund expansion of your additional service lines. If you have exhausted all your bor- rowing limits, then you need to consider PE funding. Secondly, the question you need to ask is: Is your service expansion plan large and siz- able enough for a PE to justify investments and upside on the investments? If your answers are affirma- tive to the two issues, then you should start looking at the right PE firms as investors into the hospital. The key points that you should look into are: 1. Hospital/healthcare services industry experience including portfolio companies where the PE firms have made investments in the past and exited them suc- cessfully or are currently holding investments in similar ventures 2. Working understanding and comfort with the PE team 3. The hospital operator should look for industry references 4. Networking in the hospital industry in India and abroad 5. Lastly, a question that needs to be asked is will the PE firm in question add strategic value to the hospital for the growth in the services. Q. What should we keep in mind while presenting our case for fund requirement, so as to receive a positive response? Every healthcare entrepreneur’s dilemma is getting the business model right and articulating it properly to the PE or VC or investors through the funding proposal or the information memorandum (IM). Having defined the value proposition correctly as outlined above, the corresponding delivery proposi- tion and the financial proposition has to be outlined clearly. These Solving the funding formulas Kapil answers some of the questions hovering in your mind on funding U Ask
  2. 2. Healthcare Executive March 2012 | 49 would become the inputs to putting the formal funding pro- posal that clearly articulates the purpose of seeking the funding (money), clarity in describing the opportunity we are addressing through the medical technology (markets), and the ability of the team to ensure the results (man- agement). I call them the 3Ms. Q. What are the top 3 factors that the PE/ VCs look for while in- vesting in healthcare? My assessment of any funding proposal in healthcare is judged on the following 3 issues: • First, does the product/service improve clinical quality, or at least deliver equivalent outcomes in a less costly and better way? • Second, does the product/ service more than offset its cost through reduced overall health care expense to the system, such as reducing costly side effects or replacing or eliminating other expensive procedures? • Third, does the product/service offer clinical and/or financial ad- vantages for patients, insurance, and providers alike? Q. When to raise mon- ey and from whom? The promoters must determine how much money to raise, and when to raise it. Promot- ers typically start out raising a small amount of money to prove the feasibility of the product or services idea, and then raise more over time. How much money to raise and when to raise it is an issue that needs to be mapped to major milestones over the life of the venture. Q What strategies should be followed and at what stage of funding? Each stage in the business life cycle of the venture brings about different issues and opportunities and hence each stage is unique from the other in terms of risks, problems, rewards and outcomes that accompany it. The strategies that can be followed need to be carefully considered by the promoters before seeking the funding from different funding sources. The effect on the business cannot be considered in isolation but has also to be viewed in the light of the changes that will occur as a consequence of the funding. How does the VCs and PEs funding process work out? The typical process followed by VCs and PEs which are active in the healthcare space is set out below: • Determination by the potential promoters that cash is required in the venture for growth, buy back existing investors, or buying out IP, etc. • Preparation of business plan and funding proposal (IM) • Initial presentation to the VC or PE firms • Preliminary analysis by the VCs/PEs followed by meetings and visits • Preliminary offer letter (term sheet) • Discussions of the terms by the promoters and their consul- tants • Acceptance of the indicative offer given by VCs or PEs • Due diligence by the VCs and PEs team and their advisors • Study of results of due diligence and indicative offer confirmed or modified term sheet • Investment committee proposal by the VCs or PEs and indica- tive terms approved, modified or rejected • Issue of full offer letter (subject to legal stages) by the investee • Legal stages, which are first meeting between the VCs or PEs and their lawyers to draft the shareholders and legal agree- ments, then meetings between the venture and their lawyers to consider its reply and finally a series of meetings between what has been offered and what will be accepted and agreed • Signing and completion of the contracts between the VCs or PEs, their lawyers and the promoters and their lawyers • New investor joins the com- pany and their board (in most cases) • New governance processes after this. Q How reliable are for- eign PE and VC play- ers? Do they under- stand Indian healthcare so much to be able to invest with us? That is a million dollar question in itself. India is an attractive destina- tion for PE and VC firms and hence many PE and VC firms have started their Indian opera- tions headed by Indian partners and associates. Hence, it is fair to say that they do possess the depth and knowledge to invest in Indian healthcare sector over the last few years. Q Mostly, we see for- eign investors pump- ing money here. Are there any Indian play- ers too, with whom we can source funding and investments? We do have a large number of In- dian players who are very active LPs. Indian healthcare investors include business families trusts and their investment arms – in- cluding the Reliance, Birlas, Tatas, Azim Premji, etc; PEs such as ICICI Ventures, TVS Capital, Apax Partners, Matrix Partners, Lumis Partners, Ven- ture East, ePlanet Capital, Nexus, Helion Partners, Song Invest- ments, NEA, Bearing PE, Sequoia Capital, and many more. Q Should I appoint professional advi- sors? My venture can- not afford it! I always recommend that promoters appoint professional advisors for their technical inputs in preparing the business plan and the funding proposal that you would like to present to the VCs and PEs. However, it is prudent to restrict their scope of work. Outside lawyers and accountants have their con- tribution in the funding pro- cess, however they should be employed at the right time. Some considerations are: • costs burden will increase on the venture at the start up phase (certainly) • time taken to complete will extend (probably) • harmony between the manage- ment team will unravel (possibly). Every healthcare entrepreneur’s dilemma is getting the business model right and articulating it properly to the PE or VC or investors through the funding proposal or the information memorandum