April 9, 2014

Our Journey to Series A

Travis Good, MD

Co-founder & Chief Technology Officer

Datica is the 3rd startup this founding team has launched over the last several years. The first, AccessMobile, ended up focused on global health with paying customers in Africa but without a truly scalable business model. The second startup, Share.MD, was focused on physician collaboration, profiles, education, and communications; we pitched at Health 2.0, had pilots at 3 academic centers and many, many discussions on Sand Hill Road in Palo Alto with “interested” investors before ultimately deciding that we were creating something that we weren’t positioned to distribute and solving a problem we weren’t passionate enough about.

Datica is really the product of what we learned over the last several years in our previous startups and through a countless number of discussions with people in the industry. Yes, Datica is a new venture; but, we started it with the benefit of learnings from an infinite number of mistakes over the last few years. I wouldn’t call it a pivot, but it’s not a totally “new” idea either. Ironically, many of the things we are building and selling now are things that we wish we had with our previous startups. They are the cloud-based services that would have made it much faster and easier to launch those other startups. We saw this opportunity, and discussed it, over the last several years but didn’t pursue it until last spring.

We founded Datica in April of this year with a pretty vague and lofty goal - to simplify the process of building modern health technology. We knew the major challenges we’d personally encountered in building health apps, namely around cloud-based compliance/security and data (access, models, interfaces), were areas we were targeting. We basically set out to build the compliant infrastructure that we wish we had in our previous startups. And have tons of ideas for apps and solutions we want to build on our infrastructure in time.

We also knew when we started Datica that cloud infrastructure outside of healthcare had been created to provide specific tools for mobile and web developers, and those tools had been very successful; so we had good analogs and comparables (more on this later) when we started.

We started out by building APIs so any app developer could add compliant healthcare cloud services (users, authentication, access controls, file and custom object storage, structured patient data storage mapped to existing exchange standards, PHI-flagging) without touching a server or database. We currently provide developers with hosted infrastructure including end-to-end encryption, complete redundancy, dedicated encrypted logging (who accessed what and when and from what source), uptime monitoring, disaster recovery, archiving, and proactive correction of issues. And we provide all of this in an environment that has undergone a 3rd party HIPAA assessment, meaning we follow all aspects of HIPAA - technical, policy, and administrative. There are major differences between us and other compliant hosting providers, but that’s not the point of this post.

That’s all well and good, but it’s a hard sell because 1) infrastructure doesn’t demo well, 2) most investors outside of the bay area (at least the ones we talked to) don’t understand technology well enough to understand and appreciate different layers of infrastructure, and 3) health tech is a bit like a black box to a lot of investors once you say “no, we’re not an EMR” (this is pretty legitimate given the lack of good comparisons other than things like iTriage and maybe ZocDoc and HealthTap). Selling a platform, whether to investors or customers, is hard. It’s great if your successful but it’s a hard thing to sell when you’re getting started. Our experience with large funds was that the healthcare people mostly knew life sciences (meds and devices) and the technical people didn’t really know healthcare. This wasn’t universally true, but it seemed like a major challenge for health IT startups that don’t fit nicely in a predefined bucket. There are funds and firms that are focused on health IT, but there are lots of others that don’t have that experience yet.

And if I’m being completely honest, at the start we didn’t dig deep enough into the specifics of the solutions and apps we were enabling, so we didn’t have concrete or tangible apps in mind at the start. That’s changed a lot as we’ve discovered early enterprise customers are very interested in engagement, or more broadly digital engagement strategy, and the technology to accomplish that strategy. Digital patient or member engagement is at least a little more specific than just “health apps”. And from that specificity some very targeted admin functionality, data access and analytics capabilities, and dashboards fall out pretty fast; all of those things are much easier to demo and sell to customers and to investors.

Back to fundraising. Since we’re located in Wisconsin, we focused most of our investment efforts in the Midwest, and met probably every fund and angel group from Chicago to Minneapolis. We met and spoke with others, both large and small, in Nashville, Boston, Los Angeles, Austin, Florida, New York, Ohio, Nebraska, and Palo Alto. I don’t have the exact number of funds we talked to but it was probably 35-40, and at least that number of angel investors. I genuinely liked probably 95% of the investors I met. Even when saying “no” most of them were very courteous and thoughtful about it. Some investors knew almost nothing about healthcare, others knew a lot; but, I discovered that knowing healthcare wasn’t necessary to ask good questions and provide good feedback.

The hardest part about raising money in the Midwest, and the big reason I think it’s so much easier in Northern California, is the proximity and large amount of time required to meet with investors. In the bay area, you can easily do 6 or more meetings in a day, all with real funds that can write checks quickly. In the Midwest, we tried to package our days in places like Chicago but it’s still a pretty significant effort and eats a lot of time, especially when it comes to doing follow-up meetings.

The other issue most people cite for raising in California is the high valuations startups get there. This is a valid argument. Angelist has very nice visuals for valuations if you’re interested. In the end valuation wasn’t an issue for us but I know other founders in the Midwest that raised money on very low valuations. It’s almost a running joke in startup circles in the Midwest.

We started talking to funds in late July. Those last 2 weeks in July were mostly warm up, refining our pitch, learning where the holes were, and more importantly learning how to ask for and get a direct answer about investment. Investors can waste a lot of your time if you don’t just ask them directly if they want to invest or what they’d need to see to invest. Closing a pitch with “email me if you’re interested” doesn’t work. We just asked if they wanted to invest and, if they hedged or said they needed time, we asked when we would have an answer. If investors said no we simply asked why not. Getting a “no” with a reason is much more valuable than dragging out the conversation without an answer.

We really started fundraising in earnest in August. At that time we were targeting a seed round of $700,000, and thought it would be smaller funds and angels filling it. We got commitments, but no term sheets, from a few angels and a smallish WI fund for about $500,000 of the $700,000 by the end of August. We pushed for term sheets but it just took a bit of time.

We had a few larger funds that we’d met that we really wanted as investors, and we targeted them with follow-up each time we got a new commitment from an investor. Those funds had all said “no” to us in August because we were too early stage. So we pestered them in a very nice way. We also updated those funds on product and revenue status whenever we had something we thought was material. We signed 2 new enterprise contracts at the end of August so those helped us a lot in engaging investors.

At the end of August we pitched at the demo day for Gener8tor, the accelerator program in which we participated. After the pitch, one of the larger funds we’d been targeting approached us and said they wanted to lead our round, but $700,000 wasn’t enough for what we were trying to do and they’d like to raise that number to over $1 million; that was a conversation I’ll probably never forget and thankfully I already had a beer in my hand so I didn’t have to go far to celebrate.

The following day I had coffee with one of the partners of another one of the funds we wanted, and they also committed to leading a larger round. And a couple of days after that we got a call from a 3rd large, strategic fund that wanted to co-lead. In the end, we got the 3 funds to co-lead the round together and commit $2 million to our Series A. The funny part is, we started getting calls and emails immediately from funds that had previously said “no” but now wanted to invest. All of a sudden, miraculously almost, the barriers to investing had been lifted. It was a bit surreal saying “no” to investors asking to put in money, and to say no to increasing the size of our round. We really didn’t want to raise more money than we needed. A few of those conversations were painful because I’d grown to like the investors personally.

We signed term sheets on September 17th and finally closed the round about 8 weeks later. If you asked me in September, right around signing the term sheet, what I thought of the fundraising process, I would’ve said it’s exhausting but not so bad really. The people are nice and you learn a lot about how people interpret your message. We were happy with what we raised, the terms we raised it on, and the funds that invested.

If you asked me the same question, what I thought about the fundraising process, in the beginning of November, right before we closed the round, I would have told you fundraising was the absolute worst part of my experience in startups. The legal and administrative process, and document signing, and on and on and on was incredibly painful and distracting. It just dragged on, and there always seemed to be one more document to sign or person to track down or approval to get. On a bright note, the new Docusign interface is pretty sweet so that made using it every day a little less painful. Hopefully if we ever raise money again we’ll have more internal resources to spread the admin load around.

The one other thing that shocked me, and still shocks me, about the fundraising process is the cost of legal work to get to closing. Being well represented is essential in the process, but the amount of legal time, and cost, is substantial. By the time we paid both law firms, our own firm and the firm representing our investor syndicate, we could have paid a full time developer for a year. I like our attorneys and they were a huge help, but they certainly weren’t cheap.

So what got us to “yes” at a much higher number and valuation than we originally set out to raise? I think our investors, and I think all investors that invest in early stage, are betting on a formula. That formula is some variation of market size and opportunity, team to execute, and early traction. I think there are some intangibles in this as well, but by and large I think that’s the formula. If you need to fundraise, and not every startup does or should, then building messaging around that formula is extremely helpful. If you’ve seen any of the YCombinator demo day pitches, they pretty much all follow this formula.

Our pitch mapped exactly to that formula. Stepwise it went like this - 1) healthcare is broken and massive changes are coming, 2) a hole exists to help build the tools needed for those changes, 3) healthcare is a multi-trillion dollar industry, 4) we have an experienced team to fill the hole, and 5) we have customers already using us; my hope is that the actual pitch was more interesting than that but you could boil the message down to those points.

I’m betting almost every health startup raising money has the same #1 and #3 above, probably with variations of the same values and charts; those seem to be a necessary part of the story but investors, almost every investor I talked to, already get those.

Item 2 above, the specific problem being solved, will be unique, at least somewhat unique, to each startup, and will need to be defendable when questioned. For us, the most effective way to explain and defend our specific problem was to make comparables to other successful hosted services and companies outside of healthcare. There aren’t any perfect analogs for us, but there has been a ton of activity in the API infrastructure industry over the last few years. And, from an investor perspective, a lot of the activity has been acquisition activity. So that helped us a lot to tell the story of what was missing in healthcare, and defending our #2 point above.

But, I believe getting a health startup funded, and the reasons we were successful in our fundraising efforts, are all about #4 and #5 - team and traction. You need a team and you need to show real interest and demand from the industry. Starting with our team. It helped us to know health and health IT well enough to answer a broad range of questions about the industry. We can go broad and deep when it comes to health. It also helped give us technical credibility to have commitments from technical people with brand name backgrounds and experience building production technology. We built our team to cover industry, enterprise sales, and technology - the three main areas we felt were required for success. And just like with selling, we pre-hired and got commitments before we got funding.

Last but not least is traction. If you have any customers, and especially if you have any real revenue, then you prove your #2, about the problem. You also prove #4, the team, because you are already selling. So customers are key. I realize it’s hard to build anything for free, which is largely why we took seed investment from an accelerator. That seed funding of $50,000 enabled us to get a prototype and pre-sell a couple early enterprise pilots. That, I think, is what really got us funded.

As I said, it was exceptionally painful at the end, the getting to closing part, so I’m grateful for my friends and family that put up with my lack of being present and my constant grumpiness when present. We have a very long way to go from here but we’re happy with where we are. Funding, despite all the press and attention we give it, is not a great measure of success. Revenue and happy customers are the real metrics that count. And now we have real accountability on those metrics - a board, professional directors, monthly investor updates, and so on.

This post was originally posted on HIStalkConnect.

tag Company


Digital Health Funding - 9/2/2014

Datica Editorial Team

Ybrain, MyDoc, AirStrip, uBiome, and more...

event-note September 2, 2014

Planning for our first board meeting

Travis Good, MD

Co-founder & Chief Technology Officer

We're excited for our first real board meeting and will report back on how it fit our expectations.

event-note January 27, 2014