KELLY PRICE

: Panelists Michael Blackburn (Petra Capital Partners) and Joe Cunningham (Sante Ventures) address Nashville Health Care Council and Nashville Capital Network members and special guests during a recent discussion on Investing in Health Care: Early and Gro

When opportunity knocks, healthcare investors want to open the door to an experienced executive team with a well thought out idea.

That was the consensus of the experts at a recent luncheon hosted by the Nashville Health Care Council and the Nashville Capital Network and sponsored by KPMG, The Human Capital Group, and Sherrard & Roe. The topic, Investing in Health Care: The Early and Growth Stage Perspective, has become even more relevant in light of tightening financial markets and economic downturn.

Tom Wylly, senior partner at Brentwood Capital Advisors and chairman of Nashville Capital Network, encouraged a panel of highly regarded venture investors to discuss what tools are used in making investment decisions for funding healthcare companies. Clearly a team led by a successful CEO was at the top of everyone's wish list.

The panel included:

Mike Blackburn, managing partner of Nashville's Petra Capital Partners; Joe Cunningham, MD, managing director and founder of Santé Health Ventures in Austin; James O'Keefe, former president and CEO of BH1 who now serves as a consultant to the company; and Casey West, partner, SSM Partners of Memphis.

Panelists agreed they most often look for investment opportunities to help established companies expand organically.

O'Keefe said BH1 is looking for early stage healthcare companies that have been in business for awhile with revenues of several million, adding, "We like to be able to drive to their office, if possible."

West said Memphis-based SSM is a growth equity investor that suffers from a little bit of "Nashville envy." Since healthcare has been an area of focus, they have recently opened a local office.

Cunningham said Santé looks at early stage opportunities all the way down to a "seed deal" in the areas of medical technology, life sciences, services and IT. He said when they take seed deals it is "usually right out of a university, licensing the technology and recruiting the management team."

Blackburn emphasized that Petra is largely interested in investing in the later stage growth of companies with good EBITA (Earnings Before the deduction of Interest, Tax and Amortization expenses) and around $10 million in revenues. Usually these are companies that need capital to expand or buy out a partner.

Cunningham said that, by definition, venture capital is a "long term investment that is illiquid. The trade-off for being illiquid is a higher return on the market." He added, "We are looking for 'three times' returns. In a portfolio, some of the investments fail; some make it; and a few are homerun hits — we want to be in the 'hits' business."

He continued, "We think the way to get to the hits is to look at a big pain area."

As an example, Cunningham explained, the worldwide number one killer heart disease offers investment opportunity.

Diagnosing heart disease, he said, is like "looking at the doughnut hole and trying to figure out what flavor the doughnut is." Worldwide more than $2 trillion is spent each year treating the doughnut hole rather than the underlying problems in heart disease. "That is a real pain point that we can identify," he said.

"We look for major pain points, and then we go to try to find out who is working on that — the 10,000 people in their garages and workbenches are lots smarter than we are. We need to try to find who is finding good solutions for these pain points and try to invest in that sector. That's what we have been doing — going to med schools and universities looking for technologies and pain points."

Cunningham added, "Drug development is very capital intensive and we don't have $100 million to put into development, so we look around the edges and see if we can sell them a 'hammer' — a tool that could automate sample production, for example."

West said, "One of our fundamental beliefs is that we underwrite to a $100-200 million exit. There are a lot of reasons that's attractive. We can't bank on massive exits — if it happens, it's not the norm, and we can't bet on it."

He continued, "We'll make 20 investments in a fund — and don't expect many big, big hits — maybe one or two. Most of our investments we'd expect to make one or two times our money.

"Our firm is coming in later, when the evaluations are higher. There's a difference in the types of business we're investing in," he explained.

O'Keefe said, "We like to look at a company that's very clear where they are going to go for the next step. We invest broadly in services."

Blackburn said bringing technology and knowledge to a growing area that needs efficient control is a very attractive trend.

Cunningham noted, "We would love to do an IT deal, and we've been looking at a lot of companies that help different disparate systems talk to each other. Anyone who has ever been to the doctor knows that the system is not user-friendly," he added.

Wylly asked if investors preferred an executive summary or a full-blown business plan, and panelists agreed that a well-written executive summary briefly and succinctly explaining the opportunity was the most helpful.

West added, "If I can't understand it in a couple of pages, 30 more pages is not going to help me."

Everyone on the panel emphasized the importance of face-to-face meetings, agreeing, "There is nothing like an introduction. Without an introduction, there won't be a meeting."

In arranging meetings with investors, Blackburn added that he "couldn't say enough about how valuable the great angel community in Nashville is."

"I'll add — nobody is as robust as Nashville," said Austin-based Cunningham.

On selecting the best companies for investment, Cunningham concluded, "We don't always get it right — in a previous company, we passed on Whole Foods twice and Dell three times!" But, he added, "We never make an investment thinking we're going to lose our money!"