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(Intro) Whatever combination of ai, machine learning, whatever you need to do it efficiently. It doesn't matter. It doesn't like whatever works. I don't care if there's. Large language models in it or not. What matters is if you're delivering measurable value that customers are willing to pay for.

My name is Bill Russell. I'm a former CIO for a 16 hospital system and creator of This Week Health, where we are dedicated to transforming healthcare one connection at a time. Our keynote show is designed to share conference level value with you every week.

Now, let's jump right into the episode. (Main)

All right. It is Keynote Today we're joined by Branden Fini, partner with Allumia Ventures. Branden, welcome to the show.

Thank you. Thanks for having me, bill.

We're gonna talk investing. We're gonna talk healthcare it investing.

Let's see I've, most of my career, like 95% plus, has been spent not having a real job, which means being an investor.

moving money around, so to speak. The de pessimistic view is yes, moving money around and helping things work out. But on the more optimistic side of things and how I'd like to think of it is really there are several inputs and stakeholders that are required to make change happen and innovation happen in any industry in healthcare,

there's no exception. And, being an earlier stage and growth stage investor is one of those inputs to providing capital and other non-financial things to companies trying to make a real difference. And so , I've had various investor roles for it's been almost 15 years now.

Leaving the classroom and leaving the research lab, I got pretty disillusioned with where healthcare as an industry was heading, outside of the purely scientific endeavors of healthcare. 'cause healthcare is so much more than that, for better or for worse. So I shifted my eye towards wanting to do something

I believe would make a different kind of impact than being a sole practitioner in this very convoluted but critical industry. And so I made this decision to go into to venture capital. Not from the financial perspective, but from the let's change healthcare perspective.

So really healthcare first, finance second mentality. I wasn't like this investment banker guy.

Although you're really both, you're the numbers guy and you're the healthcare guy.

And so shifting my mind towards something that's very fuzzy and uncomfortable, which is like making predictions and putting money where your mouth is, which is what investing is. It can be very uncomfortable. It was quite the transition for me, given like my very framework based way of thinking.

But anyway, so I made that leap at the, to venture capital. I started out at Sandbox Industries Sandbox is on the other side of where I was with Providence Ventures, where they were strategic, but on the payer side of things, so Sandbox Industries, they started over 20 years ago now.

But they're one of the, exclusive strategic fund manager for dozens of blues plans around the country. And they too focus on healthcare it. So that was my entry point into the world of healthcare investing.

So these were like. Ophthalmologists, a lot of plastic surgeons and dermatologists, very private practice, heavy type specialties that deal with a lot of cash pay stuff. So I was there for four or so years and man, that just validated my thesis on healthcare, especially for physicians and providers, really needs to be fixed.

I left there, I went to business school. 'cause I had no business training at all formally, outside of the job. And learned what business even means for the first time. I was at Wharton for two years and that's when I kind of, you know, with that experience combined with.

There's a lot of names for it. Working with healthcare companies that are using some flavor of information technology to advance healthcare, whether it's for patients directly for providers, for payers, name your healthcare stakeholder and specifically companies that are earlier stage.

that are on the edge of doing something new versus those that are, a hundred million plus in revenue, ready to go public, that sort of thing. So that's what I chose to eventually do with my life.

Here's what's interesting to me about this. was in a room with you and some other healthcare leaders and we were talking about investing and whatnot.

After you got done talking, I realized when I was at St. Joe's, we got some money and me and three other people, the CFO and some other people, we were hobby investors. And I use those words 'cause I'm not offending anyone. 'cause St. Joe's doesn't exist anymore. But man, we had no idea what we were doing.

Yeah. Yeah. I was in that room with you and I was listening to people talk about their investments and we talk with great pride about our investments.

And really you don't know how good your investment is. Today you were giving, I remember you threw out some stat in terms of the number of early stage investments that actually become, I think we were talking about unicorns at that point, number that actually become unicorns. It was really low.

I'll give you two stats that I like. I have on my mind these two stats almost every day, , it'll give you a glimpse into my investment philosophy, which then determine the decisions I make and how I view companies.

It's 200 million is the median exit value, and two thirds of these companies are exiting below the 300 to $350 million mark. And so the fact that this pool of data, and these are thousands of companies, this pool of data already represents outliers because they succeed in actually returning proceeds to their investors.

So when we invest in a company, we have that in mind. We're like, this company. On average it, if we exit it. We're targeting a $200 million exit value, and there's certain characteristics of the specific company that might make us confident that they could go above that, sometimes even well above that.

Because both of those two variables the valuation and how much money the company raises, those will affect the ultimate. Return because you have this kind of target, median return of 200 million. And if you're targeting, depending on the stage you're investing in, let's say you're targeting a three x return, which is like a gold standard growth, equity return, and that's a number that we hear thrown around by a lot of different stakeholders in our community.

And that's something that we hold ourselves accountable to. If you wanna make a three x return on an investment, if you value the company too highly or other investors do, and you join in and put money in, then that'll depress your returns, even if the company does really well. 'cause they're gonna exit for whatever they're gonna exit for.

If you look again, if you look at the data and do just do a correlation analysis, there's next to zero correlation between. A company's exit value and how much capital has been put in the company over its lifetime. So you see these companies coming out of. Certain really hot sectors or geographies, and they raise a $50 million seed round, for example, and they end up raising hundreds of millions thereafter.

Sometimes it works out, but on average, there's no correlation to how much money they raise in their ultimate exit value. And so those two big kind of statistical threads. Determine this philosophy we have, which is you have to be very disciplined in how you value companies and what you price them at when you enter as an investor.

So my investment thesis in the market has always been I invest in people, not in companies. Yeah. And so I look at leaders of companies. I remember back in the day, I made a bunch of money investing in Disney and I, and this back when I was, oh, just coming outta college and Michael Eisner was there.

And everything I read about Michael Eisner. I'm sitting there, I'm reading it going, yeah, that's right. That's right. He was just, he was making good decision after good decision. And I invested in him. I made a bunch of money on Sprint because I invested at a time when I believed in the leader.

How important is the leader or leadership team? I read articles on investing and they seem to weight that very heavily.

. So the short answer is yeah that's like among the most important things. And we weigh that heavily and we weigh, a CEO's ability to do a lot of things.

Critical information to the board and that does happen. So we do all that. But I'll tell you more specifically just coming from personal experience, if I were to add a little more detail on why the intuition actually proves to be correct in this case, it's because as an investor we have a standardized. General framework of how we evaluate investments. We look at the company's performance line of sight to future growth, the profitability profile, how differentiated their product or offering is the market size and, competitive dynamics, et cetera.

You realize that. You could collect all the information and that you're given time to collect, but at the end of the day, by the time you make the investment decision and actually wire the money to the company, you still only have. Some low percentage, well below 50% of all information that will fully inform the outcome of the investment, of course. And so how do you get comfortable with the balance of information you need to really feel confident in the investment. That's where the people come in.

They're the ones that are actually navigating the business through a dynamic environment. They're the ones making day-to-day operating decisions. They're the ones actually talking to customers and doing, the day-to-day activities that investors sometimes take for granted.

But then what happens a year later, two years later, when you don't deliver on the implementation or you're not delivering on the product, on the roadmap that you're promising the customer, you're gonna lose that customer and then you'll have to pay the Piper two years later or whatever the timeline is.

And seemingly mundane, things like that , a lot of investors don't think about. Again, that goes back to, that's the management team and their ability to do a variety of things that you need to depend on. 'cause you're not the one in the room. It's the management team and then others.

Every now then I coach startups. And don't specifically coach them on going and asking for money or looking for money. It's really interesting to me. That's a whole consulting gig in and of itself, but when they ask me, one of the things I will say to them is, do you need the money?

Because knowing what I know about sales within healthcare, a lot of it is referral based. You get that first client, you go to the second, go to the third. I would spend a majority of my time there versus, man, how are we gonna position this to raise money and all that other stuff? Or am I not thinking about this correctly?

No I completely agree. I would go even farther and say even when you're working with your initial customer, call them like an anchor customer or innovation partner, whatever you wanna call them I agree with that strategy, but even within that customer

And I would hope entrepreneurs choose the latter which is. , you don't want to over-engineer and overinvest on this fancy, cool, slick tech product and hoping you'll come across some use case that you can attack and customers will pay for it. It should be the other way around.

Like you, you gotta. Be very clear in what pain points you're solving. Make sure that the pain points are clear. They're a top priority for whatever customer market you are addressing. And then you build something that's unique and that delivers tangible business value that's measurable.

It's interesting, I think a year ago somebody said, yeah, hey, we need 18 month ROI, or as a health system buyer or leader, we need 18 month ROI or we can't even consider it. And I've only heard that number go down. Yeah. Yeah. I'm now hearing things like, Hey, if we can't get ROI on the big product project, within a year, we need to do a smaller project, get the ROI and that will fund the the project after that I'm hearing.

Just getting to that point of solve a very distinct problem for me as a health system leader and be able to validate that ROI a lot of times that measuring that ROI is a very difficult thing for organizations to do. They'll say things like we're solving the burnout problem.

It's soft.

Yeah. There's oh my gosh, there's so many dimensions to characterize what ROI means. So one is, so you mentioned a couple. One is like the payback period of ROI number two is like , attribution, like to what extent is this ROI. Like measurable and coming from you the vendor.

Which is why. This gets back to the stage of investments that we choose to focus on. You mentioned like what metrics we look at, we certainly look at metrics, but metrics are manifestations of what we really care about fundamentally, which is.

And understanding if it's scalable to a broader swath of the market and how that translates into the adoption rate and ultimately the growth of the business long term.

And I'm trying to figure out these different rounds. So I've seen rounds where I. People will take that money and they will double down on the product, maybe enhance the product, maybe come up with a new application for the product and that kinda stuff, and they will hire some key people.

I see other rounds where all of a sudden they're out hiring 20 salespeople and five marketing people. I see some investments where they come out of it and all of a sudden there's marketing dollars going all over the place.

Yeah.

Is that how it goes? You have different kinds of conversations depending on where they're at.

Yes. Yeah. I was writing down a list over here of the different inflection points I guess you can call it, of a business where, like once they reach that inflection point, that's when they should on average raise money.

'cause that's when they've demonstrated a certain stage of. Maturity. So like the first one would be coming up with the actual idea that's very early and that's like a founder and one or two founders. And then it's building the actual working product, the MVP product that helps that idea become actualized.

And then once that product,

and that's, we're still not at an early stage. You're still not investing in that company?

I'm still, yeah, we're not, we're still not investing at this point. . This is still like pre-seed investing is when you have a small founding team, like two to three people.

So then you have the product that's built, but you still only have like less than five people doing it. And maybe they end up realizing, okay, hey. The product is built, it's working. We're working as a small founding team. This is great. Let's go back, beyond angel investors, , and our own money, and let's raise maybe from a seed stage.

Vc, an institutional investor that will give us two to four or $5 million to take the product we've built that works, , that we believe will be validated in the market and let's grab a few customers and actually sell this thing into customers, including that anchor customer you talked about.

We need to hire, a small engineering team. We need to build out some just company infrastructure like accounting. Someone who heads up finance, still keep the team small, less than 15 people, but like something's real here. And after they're able to do some of that's when we would come in.

So we would come in when they have a few customers that are not pilot customers that are showing really strong signs of Hey, these customers are happy. There's clearly a value prop they're delivering. They've been working with these customers for more than a brief period of time to show how they actually work with customers.

, the founder CEO, is still doing most of the sales work. There's not this huge pipeline of prospects because they don't have the resources to build that pipeline. And so like with our capital. They would hire a handful of full-time salespeople. They would, institutionalize the company a little bit more and they would go grab additional customers and, expand the product in Richard's feature set.

Maybe there would be some pivots along the way of what the ideal client profile might be. And then we would go all the way up to a company that's already done all that and has the beginnings of a sales team and they just want to expand. They just wanna, it's purely execution and they want to just continue growing like they have been.

And upside opportunity is like expanding into a new product category or a new market. And that's upside opportunity.

Now I'm sitting there, I'm reading this thing going. Yeah. And everybody's buying it. So everybody's buying it. Do they really need the clinical val, how important is clinical validation versus commercial traction? Is it just one of those feel kind of things?

It's a sliding scale, it's a spectrum. So on one extreme end of the spectrum, if it's an interventional clinical technology, like a medical device, like they have to get FDA approval, clinical validation is everything

right?

Everything right, everything all the way to something that's not even really dealing with clinical things. It's more administrative. But maybe clinicians are using it, but again it's not a clinical solution. Then there's clinical validation is even a relevant question. So that's like the spectrum.

Whereas in other categories, clinical validation is actually a part of the value prop. Like to give you a tangible example a care navigation. Tool that helps, identify patients that need referral loops closed, or they need to see a specialist because something was identified , in a clinical documentation and they want to close those care gaps, that sort of thing.

The clinical validation is less important. What's more important is making sure it works and that you're not hounding patients and you're just compliant.

I have a million questions. Let's do quick answers on this. Does it matter, if they only have two clients, does it matter who those clients are

definitely.

Yeah. It matters , whether market representatives or not. Whether they're early adopters of solutions or not, if you're selling to an academic medical center that's known to have a really big budget for new shiny stuff, that's different than being able to sell into Providence, right?

Really hard to sell into.

Areas in health IT investing that are oversaturated right now.

Are there any spaces, telehealth was there for a while. I don't know. Is AIgetting are there other spaces?

Those are the two big segments. AI, low hanging fruit is an administrative stuff like revenue cycle related activities. Anything related to patient communication and engagement like replacing a call center. Or whatever it is. Yeah, there's a lot of stuff out in both of those like patient communication and relationship and the revenue cycle.

Any areas underfunded

That's part of being an investor is you can't just identify good opportunities.

You have to identify good opportunities that are also in, categories that are underlooked. Because if they're underlooked, then there's gonna be less investor competition, and you're gonna have more leverage as an investor in getting and actually pricing that asset appropriately 'cause of supply and demand dynamics.

And then they'll bemoan the fact that it's like their teams move too slow, they can't get this implemented, whatever, how much I always put it back on them. I'm like, look, if my business required health system to implement this correctly and quickly, then I would spend just as much time on that aspect of my business, the implementation quickly and effectively as I do Totally agree on the product.

Totally agree.

Oh yeah, of course. I hear it all the time. And we've dealt with it ourselves. Even though we're not entrepreneurs selling a product like we are investors dealing with managing health systems capital, so we too are selling to them.

So we know how slow health systems can move. And I think we have a better appreciation of why that's the case, and it's still incredibly frustrating sometimes.

We have Doge, which people are concerned about. We have potentially taxing the endowments We have NIH funding. We have a bunch of things going on that creates uncertainty. I assume uncertainty is just bad in for investing in general.

It could be good or bad.

It can be bad on one hand because yeah, you don't have all the information that can make you squeamish. Or it could be good because it might filter out a lot of these. You said hobby investors tourist investors that don't know as much about that certain category of regulation. And so it creates, less crowds and filters, investors out and if you are able to access information that others can't, as an investor.

These are private markets. , there are huge information asymmetries. Then that could open up investment opportunities. So it just depends on exactly what you're talking about when it comes to the new administration. Like I don't think they're gonna repeal the ACA,, Trump tried that last time.

And, so we expect scrutiny in those categories, but that'll just really inform how we look at companies versus making us. Less optimistic about the investment universe.

This will be the biggest softball question in history. Having been in a health system and part of a team that was investing in things, would you recommend for health systems that they just partner up with investment firms who know how to evaluate this stuff?

I think about the investments we were making we had an advantage in that first of all, we knew the problem set. We knew how we were using it. We knew what the returns actually were on the product.

You already know what I'm gonna say, but I'm gonna preface it with saying , this is no different than any other buy versus build decision of any company ever, which is when you build your own stuff, it's gonna be when you are able to leverage your unique.

Employing and working with providers, managing hospitals and other healthcare facilities and their unique assets are gonna be that patient reach and patient relationship and brand recognition and access to providers. That's what health systems and hospitals you uniquely have when you, as a health system wanna do anything outside of that scope.

That is when you should start considering outsourcing or partnering because that's not your core competency. And when it comes to financial, investment strategies and decision making that could not be farther from delivering care to a patient, it is extremely out of scope for health systems.

Even though they know the product that you're investing in that is one of. Countless dimensions that go into making an investment decision that could return capital at an attractive rate.

In a lot of cases, those billion dollar funds are being managed by somebody else.

Yeah, that's the thing is like when you think about these large health systems or insurance companies or, it doesn't have to be a health system. They can have tons of cash and so that's their asset is they have the cash, but how to deploy that cash into, an investment strategy outside of just actually running your operations.

There are experts for that, and that's why investing in fund managers is why that whole universe even exists.

We'll close with this. As you're looking at Allumia and how do you see the next year unfolding?

Where do you see opportunities? Where do you feel like you will spend the most time over the next year?

That's a big question. At least I'll tell you what I hope will happen.

And so we want to spend time on really trying to find a technology solutions that are actually going to alleviate that shortage and actually scale provider's ability to care for more patients better. So that's one big category. Another one is like when you think about the changes that the new administration is likely to make you think about, like I said, Medicaid and more vulnerable populations.

Vulnerable populations are a, it's a big nut to crack on a variety of levels. Lack of funding, profitability when it comes to Medicaid solutions and just, they're a hard population to manage and they drive a lot of spend. And so that's another category that we're gonna spend a lot of time on is like alternative care delivery models or engagement models for that hard to reach and hard to manage.

'cause I think, since. With payers becoming providers, more new market entrants coming in, providing care like Amazon with its acquisition of one Medical, and then health systems, financial models, like the fee for service financial model being compromised. Those three mega trends have all been, I think, intensified since Covid.

So looking at things that could help advance that even more

I wanna thank you for your time and thank you for the education of Bill Russell. I appreciate you participating in that prayer.

Sure, of course. Of course. thanks for giving me the time.