Catalyze co-founders Travis Good and Mohan Balachandran share their company’s success in obtaining Series B funding and the insights that helped them get there.
Although investment dollars continue to pour into healthcare IT at a breakneck pace globally, many startups could end up enduring some serious whiplash. Obtaining seed funding is one thing, but reaching the next round is another. Investors are becoming less impressed by innovations and more discerning with their dollars. Thus, the question remains: can startups survive making the steep financial leap, or will they fall between the vast funding gaps?
“I would encourage startups to be like cockroaches and ‘refuse to die’,” said Mohan Balachandran, co-founder of Catalyze, a Madison, Wi-based cloud hosting and data integration services provider. “Startups should remember that it took Ben Silbermann of Pinterest much more than 50 chats to get the funding he needed. Startups in the seed stage should continue meetings until they’ve found the one individual who believes in the mission and vision.”
If Balachandran sounds optimistic it’s because he and fellow co-founder Travis Good have accomplished what’s becoming increasingly challenging in fundraising—they’ve made it to the next round. In September, the company announced it raised $6.5 million in Series B funding. The additional financing will allow it to accelerate growth with its core healthcare integration and hosting products and services.
Catalyze has successfully raised funding over the last three years by adapting to the changing HIT landscape. “The founding premise of our company remains consistent, but in each of those rounds we’ve framed the questions of ‘why now?’ and ‘why Catalyze?’” “First, the market focused on EHR, scaling digital health content and digital workflows, then around enabling innovation in a post-EHR world, and now, specific applications of Catalyze to help healthcare enterprises transform to more value-based care,” said Good.
According to both Good and Balachandran, each of the three fundraising rounds has brought with it a deeper understanding as to how to navigate the current, tumultuous financing scene. Here are three key insights for fundraising in 2016:
1. More Proof and Due Diligence Are Required
For a new startup, little is available, so little is expected by investors. Investors in the seed-funding stage typically ask for the startup pitch, market potential and background information on the founders. The new company, or idea for a company, has little to show. However, as the company evolves and moves from seed rounds to Series A or B, more is required — everything from historical performance and current customer metrics to future-looking projections.
This kind of due diligence is necessary because of the competition that created by the abundance of seed stage funding; there are tons of companies out there that have received funding and are making approximately $1-2 million. Now, those companies have to compete in convincing investors that they are capable of getting to the next level (earning about $10 million in annual revenue). Good said, investors now have to weed through similar deals and similar stages. The outcome: investors want to see more differentiation in product, or team, or customer base. The main takeaway here, is you need to think about the long-term metrics right from the start.
“For us, it makes sense to look at our company in stages,” said Good. “We tie those stages to funding rounds. In each round, we must plan for what we want to achieve concerning metrics and proof for what will be required to close the next round. Revenue is a good thing, but revenue that tells the story of how you will go from one million to $10 million to $100 million is more valuable. At some point, saying ‘no’ to non-strategic revenue is essential, if you’re going to succeed as a venture-backed company. It’s easy to lose sight of the forest for the trees, and this can come back to bite you if you are running out of ‘runway’ and haven’t pursued the essential proof points needed for your next round.”
2. More Fundraising Rounds Require More Pitching
Catalyze talked to 12-15 funds during its first round and 20-25 funds during its second round. However, it presented to a record 55 funds during its most recent fundraising effort—why? Well, for one thing, maintaining investor relations throughout the year provided more contacts, and the company’s customers recommended their investors. But the biggest reason was in response to the tightening that’s taking place in the financing scene as of late. Bottom line: you can expect better outcomes by talking to more investors.
Although, this may prove difficult for startups with limited resources, Balachandran says this is one area where efforts must be focused even with limited funds: “We think that we should have talked to more investors at every stage,” he said. “The only way this is possible is through a division of responsibility and hiring great people. We realized scaling sales by hiring people was not scalable. Therefore, we needed people to reach out to us. As a result, we focused on content to create inbound interest. That has been working well for us. So as we went out to fundraise, we knew we had this inbound flow. That goes back to planning for the long term.”
Good added: “Getting an investor to write a check isn’t all that different than getting a customer to write a check; it’s not time-consuming if you continue to send updated emails that include market intelligence, ideally framed in the context of what your company is doing. It’s a great way to build your brand with investors.”
When it comes to researching possible investors, there is no checklist of qualities to look for, but it’s wise to think to consider how certain investors could accelerate sales or support the company operationally. The priority is to extend your reach to as many investors as possible; there is no such thing as reaching out to too many investors. “The one thing to always remember is that investors will often talk, so there’s a high likelihood that your deal will come up between them; it’s a good thing. Just make sure your story and data is consistent,” said Good.
3. Bigger Brands Heighten Investor Interest
Both Balachandran and Good say that startups will find that brand association offers tremendous value in raising awareness of a company in pursuit of its next round of funding. Venture firms had either heard about or invested in many of Catalyze’s customers through investor presentations. Out of the company’s customers (100+), roughly 25 of those have representation in 80-100 funds. Catalyze has proven this approach works, but how should a startup pursue adding bigger brand names to its customer base?
Balachandran said startups should have a clear value proposition and be persistent in targeting organizations that are innovative. He cites Veeva Systems, Inc. as a good example. The company primarily focused on landing a few big pharmaceutical companies, which then resulted in them gaining many pharma customers. Subsequently, the cloud solutions provider went public in October 2013 and was ranked the fourth fastest growing public tech company by Forbes in May 2016.
“Chasing logos that are repeatable and representative of the larger market is the key,” said Good. “Remember that investors aren’t writing you a check for your current customer list; they are writing you a check because they think your current customer list is representative of a much larger market and that your product and team can scale the success you’ve had to that market. The beautiful thing about healthcare, as a market for investors and founders, is that a niche in healthcare is often larger than the GDP of many countries.”
Despite the present turmoil, the co-founders of Catalyze believe the funding environment in healthcare is growing and will see lots of early and growth-stage investment. Gone are the days of meaningful use and the EHR era, which was a distraction for health systems. Now, the focus is moving to solutions and platforms focused on value-based care. So startups shouldn’t lose hope but should perhaps shift their long-term approach. “My advice for startups is to focus on building proof around why your company can win the much larger market; this means more variety of customers that are representative in healthcare,” Good concluded.
