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Angels with green wings: Investors support innovative health-care ventures
by Anne DeGheest
18 April 2011

On April 12, 2011, Mary Beth Hislop from the Los Altos Crier wrote an article about Anne DeGheest's efforts with her new angel group HealthTech Capital:  Health care was a $2.5 trillion industry in 2009 - in 2007, $2.2 trillion. It's a safe bet that amount was higher last year, and will be again in 2011.  So when seasoned angel investor and Los Altos Hills resident Anne DeGheest realized that 80 percent of that money is spent on health-care delivery systems, she saw an opportunity for investors to support innovations designed to reduce the costs of delivering health care. With a master's degree in engineering from the University of Belgium, a master's degree in business administration from Harvard University and 25 years' investing experience with MedStars Ventures Partners, De Gheest launched Los Altos Hills-based HealthTech Capital in June 2010. Unlike other health-care investor groups that focus on funding startup companies for therapeutic drugs or medical devices, HealthTech's goal is to support technological innovations that improve health-care delivery and reduce costs.  "Our sweet spot has minimal or no government regulation oversight by the Food and Drug Administration or centers for Medicare and Medicaid services," DeGheest said.  What makes HealthTech's business model special is that startup support involves more than monetary funding. "(This) is a new private-equity investment model that leverages professional investment management oversight with the collegiality and shared expertise found in organized angel-investor groups," she said.

Statistics support this mentoring model.

A study conducted by the Ewing Marion Kauffman and Angel Capital Education foundations, "Returns to Angel Investors in Groups," tied three major factors to increased returns on investment: due-diligence time, experience and participation.

Published in November 2007, the survey of 539 angel investors with 1,137 exits - positive returns garnered from acquisitions or Initial Public Offerings or negative returns from company closures - found that careful evaluation of prospective business ventures correlated with higher investment returns.

"Simply splitting the sample between investors who spent less than the median 20 hours of due diligence and investors who spent more shows an overall multiple difference of 5.9X for those with high due diligence compared to only 1.1X for those with low due diligence," the authors wrote.

An angel's experience and expertise in a venture is a positive factor in the business' success, the study revealed, noting "investment multiples were twice as high in ventures connected to investors' industry expertise."

Another factor correlated to positive earnings - involvement with the company through mentoring activities, strategy consults and monitoring finances - made significant impacts on return on investments.

"Angel investors who interacted ... a couple of times per month experienced an overall multiple of 3.7X in four years," according to the study. "In contrast, investors who participated a couple of times per year experienced overall multiples of only 1.3X in 3.6 years."

Forty-eight percent of the exits earned investors more than their original investments - 7 percent achieved more than 10 times the investment.

While it's too early to determine return rates for HealthTech Capital investors, DeGheest said returns at MedStars averaged 5 times. She and HealthTech's managing partners Don Ross and Kathy LaPorte share and inculcate similar philosophies and methodologies with the company's investors that the Kauffman study cited as key for positive outcomes. And low-product risk in a high-market-risk atmosphere just might be lucrative for some investors.

With a concept-to-company process that's "getting faster and faster," De- Gheest said it takes just a few million dollars to validate a product to determine its viability on the market.

"People are looking for (investors) at the early stage," she said. "And it's better getting in on the ground floor."

As an adviser and investor, DeGheest mentors entrepreneurs to develop a business model - at the base of business architecture, conceptualizing the problem and developing a solution.

For example, a pharmaceutical error that caused a patient's death prompted a doctor to develop a new drug-delivery system. DeGheest suggested improvements to the startup dispensary that would improve nurses' satisfaction and reduce medication errors. After going public with its successful product, MedStars was able to sell its Pyxis MedStation System to another company for nearly $1 billion.

DeGheest was a ground-floor investor and adviser for Visicu, which used technology to bring an air-traffic-controller approach to managing patient care in hospitals' intensive care units. Visicu went public in 2006 and was later acquired by Royal Philip Electronics.

MedStars helped raise more than $500 million in venture capital for life-science companies, creating more than $6 billion in market capitalization, DeGheest said.

It's the same kind of success DeGheest hopes to bring budding entrepreneurs with HealthTech.

"We want to really help them build successful companies," she said.

Prospective startup leaders fill out an application posted on HealthTech's Web site and accessed only by its angel members. DeGheest said a select few are chosen to present to the group at a screening meeting where investors rate and comment on the presentations.

"It's like speed dating," she said.

A positive rating secures an invitation for the entrepreneur to give a fuller company presentation at a monthly membership dinner. The choice to invest in any of HealthTech's adopted entrepreneurs is up to each member.

"Every angel makes (his or her) own decision," she said. "They're not forced to invest."

While health-care delivery systems and technologies can improve patient outcomes, DeGheest said health ultimately rests on each individual.

"The Holy Grail in health care is how we can change people's behavior," she said. "It doesn't make sense that we try to treat patients after a crisis."

Membership levels vary within HealthTech Capital. Currently, HealthTech has approximately 50 members nationwide with expertise at different levels, including corporate management, health-care providers, venture capitalists, individual investors and others.

DeGheest would like to see that grow to 100, particularly with participation from Los Altos and Los Altos Hills residents.

"Silicon Valley is really ground zero for this," she said. "This is a good opportunity to make a change in health care."

tagsTopics: Angel funding, Entrepreneur, HealthTech Capital

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