The interesting part of this shift is that VCs are taking a more holistic or "systems" approach to investing than they typically do in developed markets. Traditionally, VCs evaluate each investment as a discrete entity; the firms in their portfolio rarely interact with one another. In contrast, emerging-market VCs such as Nadathur Holdings (established in 2000 by N.S. Raghavan, one of Infosys' co-founders) create intentional links between firms. Nadathur's portfolio includes firms operating in drug discovery research, companion diagnostics, pharmaceutical analytics, reimbursement claims processing, patient relationship management, and specialty healthcare delivery for running clinical trials — and they all work together. In effect, the VCs at Nadathur Holdings serve as the executive team for a miniature healthcare innovation ecosystem.
Why do VCs in emerging markets take a systems approach? Because of three significant challenges innovators face in emerging markets:
Innovation ecosystems are not well-developed. The supporting industries that an early-stage tech start-up needs simply don't exist locally. VCs encourage upstream and downstream, often service-based, investments. These can be exited at lower multiples, with the trade-off of higher success rates for the R&D-intensive high-multiple investments.
Technology-intensive firms are expected to generate revenues before they make an exit; local investors are reluctant to put money into start-ups centered on intellectual property. Portfolio firms upstream or downstream can help establish commercial proof, generate retained earnings and make it easier to get additional customers.- Few local financial intermediaries (including VCs) exist. A portfolio that contains an entire ecosystem helps to decrease risk by allowing inferior business models to be refined or killed faster.
We believe that this holistic, systems approach to venture capital is highly relevant to developed markets, as well; it can speed things along in three specific ways:
- VCs need to be able to demonstrate the value in new products or innovations, and to do that they often need scaled-up facilities. Investing in a specialty hospital or HMO can accelerate the process of demonstrating value. For example, famed VC John Doerr realized that his electronic health record start-up would be difficult to scale up from the physician group he'd started with. In 2007, he invested in Essence Healthcare, a Seattle-based HMO; this larger facility allowed him to establish scaled-up proof of concept for the electronic health record. He followed up with an investment in a medical analytics start-up to track health outcomes.
- Investing in linked ventures simultaneously can get VCs in and out more quickly, at a time when global markets are not highly liquid and IPOs are delayed for long periods. For example, it's possible for a drug discovery start-up to identify the most relevant patients, and improve clinical trial success and reimbursement rates, if the VC invests in diagnostics or biomarkers at the same time.
- Many current therapeutic innovations require iterative feedback from the clinic to the lab and back again. These same therapies tend to require highly-trained specialists available in the developed world only at state-of-the-art academic hospitals. Prescient VCs may make global investments in low-cost, high-volume specialty hospitals to complement their R&D start-ups.
The emerging complexity of the global healthcare industry presents investors with a need to solve non-linear, complex problems and to accelerate technology adoption. Investing in a portfolio of linked businesses is already helping to solve these problems in emerging markets, and is poised to do the same in developed markets. Reverse innovation of venture capital is a powerful illustration of how emerging markets can drive healthcare innovation.
