# Funding healthcare innovation: know the ground you are growing in Canonical source: [https://www.braver.net/en/blog/funding-healthcare-innovation/]() The Braver journal I am not very fond of comparing companies' journeys, because each often has distinctive qualities that explain the path it has taken. My observations should therefore be taken not lightly, but with the understanding that they are shaped by my own experience. ![Marie-Lou Gagnon]() Marie-Lou Gagnon February 8, 2024 ![Funding healthcare innovation: know the ground you are growing in]() Funding a *Healthtech* company like ours has a unique character. I use the word *unique* because, although there are well-established funding approaches in the *tech* world, financing *technological innovation **in healthcare*** seems somewhat different to me. I am not a venture capital expert, or even a business financing expert, so I do not intend to give you an introductory course on the subject. But I want to approach this critical aspect of bringing innovation to life through the eyes of an entrepreneur who has been navigating this reality for 5 years now. Since I do not want to assume that you all understand how technology companies like ours are financed, let's start at the beginning. ## Funding technological innovation Before a healthcare technology solution can reach clinicians' hands, an enormous amount of work is required. Among other things, a great deal of software development is needed to meet this market's high standards. This software development can carry an impressive price tag and takes time. The company must therefore find funds to finance its project before it has even secured any sales or contracts. In our case, this period lasted about 3 years. Three years of building a solution with a team of software developers, refining our product, testing it, validating it and analyzing our market. But how can a company with no revenue survive for 3 years? First, our governments provide remarkably good support for innovation through grants and tax credits specifically dedicated to it. However, most of the time, these cover 50 to 80% of the project cost. In other words, the company has to find the other 20 to 50% of the capital, and 100% for expenses that do not qualify under any program. Most of the time, this is money from the entrepreneur, their family or their friends. Since not all entrepreneurs and their families are wealthy, they sometimes, or even often, have to turn to private investment, including venture capital: > *Venture capital refers to funds injected by investors \[…\] into selected private companies \[…\] that demonstrate strong growth potential and an ability to generate excellent risk-adjusted returns for investors. In exchange for their capital, investors receive an ownership stake in the private company. — RBCx* ## The economic context of 2023 Once again, I do not intend to provide an economic analysis of 2023, but rather to share what I observed and heard through the many meetings I had with people who have been part of the investment ecosystem for years. In 2023, with a recession looming, venture capital investment slowed considerably. > *Venture capital investment slowed sharply in Canada in 2023. And the impact was even more pronounced in Quebec, whose share of the Canadian total fell from 30% in 2019 to 22%. [(La Presse)]().* We thus moved from a frenzied investment cycle *from* 2020 to 2022 to a fairly widespread slowdown, although it varied by sector and by companies' stage of development. In other words, market volatility forced several investment funds to review their strategies in a context where risk had changed. Chrissy Farr, a well-known journalist and investor in the startup world, explains this in her [December post](): > *The collapse in startup valuations in 2022 due to rising interest rates; a contracting mergers and acquisitions market, narrowing this potential path for startups that cannot raise venture capital; and increased competition among startups, with more and more seeking to raise funds.* New market dynamics took hold, and the impact on technology companies was very real. Those in Quebec were no exception. ## A startup's strength: knowing how to adapt quickly to the market We watched the economic environment we operated in throughout 2023 gradually take shape, month after month. Whether through our own experiences or those shared by fellow entrepreneurs, mentors and industry experts, we had to **listen to the market.** But listening is not enough: we also have to act and adapt quickly. In these situations, Mathieu and I see an opportunity to question what is sometimes considered unchangeable. And, interestingly, when these periods of major upheaval arise, a kind of excitement emerges. Imagine giving your imagination permission to branch out, explore without constraints and do things differently. And that is what we did: the scarcity of capital in the funding ecosystem pushed us to redefine the parameters of our financing strategy. Make no mistake, it was not easy. But ease is not the point. What matters is that we put our mental flexibility, adaptability and creativity to work. But I wonder: what will happen in the financing world in 2024? I am worried. Not about Braver, because I am optimistic about what we will accomplish in the coming months. No, I am worried about future healthcare technology companies in Quebec. ## How to keep innovating in healthcare despite economic conditions On one hand, our healthcare network has a pressing need for innovation; on the other, the capital needed to help it flourish and overcome barriers to entry is extremely scarce. This is obviously a very complex problem that requires examining the various sources of financing for digital health companies, and it is not solely about venture capital. However, I came across [this article]() that I had to share with you. Christina Farr offers a refreshing perspective on venture capital investment in healthcare: > *That’s not to say there are no unicorns in health-tech. I’m personally excited for the potential of some of the companies that haven’t gone out yet, but are waiting in the wings for the public markets to open up. But as venture investors, we need to think carefully about what kinds of companies within our sector can even grow at the pace that we expect to achieve the kinds of returns that keep LPs happy.* > *And no, this doesn’t mean stop investing in health care services to hard pivot to AI or biopharma. I do think that we should be taking on more technical and scientific risk. *And* I believe there is a role for tech-enabled services investing *if and only if* these businesses are valued correctly. These are not software-as-a-service companies. And we should stop treating them as such. Growth will be slower, margins will be lower, and that needs to be baked into the thesis.* With its distinctive economic dynamics, healthcare is absolutely fertile ground for startups aiming to generate an impact and an attractive return on investment, even if “[unicorns]()” are rarer there. Investors can therefore find worthwhile opportunities, provided their investment strategy rests less on the presence of unicorns and more on a deep understanding of how this market works. Furthermore, market dynamics in the investment world have changed in recent months. Not only for startups, but also for financiers and investors. And my hope is that they, like us, will see an opportunity to redefine the parameters of the equation, drawing on this nuanced understanding of the wonderful world of healthcare.