Episode 22: Hands-on Investing and Pitching Advice With Empactful Capital Managing Director Sal DeTrane
Tips for Founders from the Other Side of the Table
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In this episode you’ll discover:
How Empactful Capital’s investing model is different and why Sal believes it’s the best way to invest
Why they selected value-based care and behavioral health as two specific areas of focus
What they look for in companies pitching to them
What Sal sees in pitches that he wishes founders wouldn’t do
Sal’s predictions for the types of companies that will do the best in the health tech space over the next five years.
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Read the transcript here:
Carrie Nixon (00:17):
Hi everyone, I'm Carrie Nixon and welcome to another episode of Decoding Healthcare Innovation. I am really pleased to be joined today by Sal DeTrane. He is the managing director director of Empactful Capital, which is a venture capital firm that focuses exclusively in the healthcare space and that really has a really pretty interesting operating model that I wanted to share with the listeners. Sal, welcome to the show. I'd love for you first to say a word or two and give everyone a bit about your background and how you got to the VC space.
Sal DeTrane (00:53):
Sure. Well good afternoon everyone. Sal DeTrane and managing partner at Empactful Capital. I've gotten to the VC space about 20 years ago after a background in investment banking and then moved into the VC space around the 2020 timeframe or 2000 timeframe. Sorry about that. And really our whole model was coined back at that point in time we had had some exposure to an angel organization and working with operators and leading entrepreneurs and that really helped us shape how we structured a predecessor firm called Nucleus Partners based in Palo Alto. And then I went on to actually get some real world experience in being an operator for 12 years in one of my portfolio companies. So it was a company called MedeAnalytics that is still in existence. We helped build that from 1 to over 120 million in revenues and exited to Toma Bravo on our way to going public in 2015 which led me to forming Empactful Capital. And I really wanted to get back to working with early stage and growth stage entrepreneurs focused on the digital health space.
Carrie Nixon (01:59):
Is this Sal, when you first got involved as an investment banker, were you focused exclusively in healthcare for your investments or did it just so happen that some of your portfolio companies were in the healthcare space?
Sal DeTrane (02:11):
So it was actually the focus was on technology companies more broadly. I live out here in California and the Bay Area so it was really a focus on traditional technologies that were sort of common to Silicon Valley. And so then over time as I got more into the investing side was when I actually got more exposure to devices and things that more sort of brought me closer to healthcare. And then when I had discovered the company analytics at the time Medi finance that really was more my first sort of venture into the pure digital health space.
Carrie Nixon (02:47):
How would you say that your experience as an operator at MedeAnalytics has shaped your philosophy as an investor today?
Sal DeTrane (02:57):
Yeah very much so. The aspects of having a higher EQ of how hard it is to build a company was one of the key aspects of my learning from that experience. And then really just having a stronger sense for the type of execution that you have to be able to perform on relative to the strategy. So that whole strategy to execution phase became obviously something that I prided myself in my operating career and we hope to bring to a lot of our portfolio companies and as a recovering operator if you will and more on the investor side, really a recognition now that my job is not to run companies. My job is to help support those companies and one way not be a crutch in terms of trying to offset some weaknesses in the team and on the other aspect, really be able to provide a broader ecosystem of support and relationships that can help catalyze the business.
Carrie Nixon (04:03):
That is totally understandable. I think it is very, very important to understand what a startup organization is going through if you're going to be an investor in a startup organization. So I know you can appreciate that. So you and I met a few years ago you were, I think exploring an investment in a particular company and I think I had come in to give some feedback on the direction that I saw that particular industry in the healthcare space heading. We got to know each other a little bit through that project. And in full disclosure, I ended on coming in as coming on as a ended up coming on as a special advisor to Empactful Capital just in a role where so often I am able to sort of weigh in and lend some of my expertise to some of the investment decisions. So I have found your approach in Empactful Capital, which is a very, very hands-on approach to make a ton of sense. And I would love for you to tell our listeners a little bit more about that sort of hands-on model and why you believe it's the best way to invest.
Sal DeTrane (05:29):
Yeah, so I think it goes back to the operating experience and really having great investors. We had Bank Capital Ventures is our primary equity sponsor at the patients that you need to have in building an early stage growth stage company. But also really we started with the team and it hearkens back to what I was describing earlier relative to Nucleus Partners and then the way we've built Empactful, which was to really find a dynamic group of individuals who have been highly successful in the chosen area of our focus. And then for us that happens to be healthcare executives and digital health entrepreneurs. So we've built and established a national network of these individuals. Many of them come from my relationships that I build at analytics. So these are 15, 20 year relationships and working together with other companies CEOs and senior executives and then as they sort of progress in their careers kind of coming back together and impactful, which is pretty cool.
(06:27):
One great example of that is a partnership I've had with at the advisory board company and one of their leading executives who is my counterpoint is now one of our venture partners. And that was a highly successful channel distribution relationship. And Hamilton and I have had a relationship for over 15 years really focused on these areas. But we have built a partnership of now 10 partners with a national footprint and coverage model. And that also allows us to have bandwidth in a very unique way, not only in sourcing and vetting deals but in the other area where you need to have substantial bandwidth, which is on the other piece of value creation and portfolio management. And so those two areas are where I think it's really critical to have that expansive bandwidth. And then through that team we have an ecosystem of relationships that really allow us to get in touch with or be able to put opportunities in front of pretty much anyone in healthcare, in the healthcare services environment, whether it be a payer, a provider, an ACO organization, as well as other investors and executives that we want to recruit to our companies.
(07:33):
And so that ecosystem is really critical to our model. And the last piece is really a very disciplined approach that wouldn't be able to be executed on if we didn't have this team I just described of partners and advisors. We also have a network which are one of our advisors you just referenced, of 25 senior executives across the US as well who bring different perspectives and are making obviously a contribution to our firm. And so in our process we spend about four to six months, which is really unique. Instead of just doing traditional due diligence, we actually are performing more of an operational due diligence where we get to know the entrepreneur and they get to know us in a more material way. And we think that's really a two-way street and very, very mutually beneficial because then they get an opportunity to understand whether we're the right investor and we get a chance to really assess whether it's the right investment and we'll unpack more of that. And we take a very milestone of based approach to investing at a seed series A or series B stage, which again I'm happy to unpack. And then really being able to leverage a set of downstream investor relationships that help us support our companies in their series B or series C rounds when we've basically made our series of investments and then it's a chance to pass the baton to them.
Carrie Nixon (08:54):
So finding the fit right between the company and the investor is really, really important. It can be a very close relationship and it can be a very synergistic relationship. And I think you've done a fantastic job at cultivating some of those relationships with your portfolio companies and identifying companies that are really a good fit. So tell me a little bit about what it looks like for you to take a look at a particular company. What do you look for specifically in companies that are pitching to you and how do you think about deciding whether or not it makes sense to invest?
Sal DeTrane (09:37):
Yeah, so great question. As we look at our deal flow on a particular year, I'm just going to give you some metrics and then the things we look for. So we'll look at close to 300 or more deals in any particular year, and then we'll spend considerable amount of time with about 30 or 40 where we're doing multiple meetings. So that down selection seven to one is really based on the vetting and the sourcing mechanism we just described with the partners and the advisors. And then we'll take that down to 10 to 15 companies that will actually develop over this four to six month period that I described earlier in a process where we're getting to know each other and making sure it's the right fit and ensuring there's alignment around the plan, the team and the strategy moving forward. And then out of that group, we actually only make three to five investments per year.
(10:25):
So for a variety of different reasons, those that we're developing there may just not be a fit that they discover as we're going through that process or we discover relative to the investment strategy and some of the things we're going to like. So the things we like and the things we're really looking at is one is how thoughtful were they and what are the sort of ecosystem relationships that they've deployed to build their team? And it's not to say they have to have a complete team, but we want to understand how they built the team and how that team is built to last. And so that it all starts with the team. And then there are other aspects that really are around their knowledge of the market, how do they think about the industry and how does that align with our thoughts on the market as well?
(11:08):
And one of the big aspects to our model because we hands-on is their openness to hands-on support and input into the business. And if for whatever reason that is not a good fit, that would be another reason. And then equally so back to us and what we have to perform is to hold up our end of the partnership with the entrepreneur. It has to be a business. We can actually add value and impact and there may be something we discover in the process where we're not able to impact that business as much as we originally envisioned to be the case. And the last is really around practical application of advanced technology. We're focused on value-based care tech enablement and behavioral health tech enablement. And it really comes back to has this group of entrepreneurs found a practical application of artificial intelligence or telehealth or virtual care or remote patient monitoring or natural language processing or whatever it might be, blockchain, but is it a practical application with a tangible <inaudible>
Carrie Nixon (12:10):
Yeah. So for me when you were first telling me about Empactful that question that you ask, which is can we add value to this company by playing a role not only as an investor but as a mentor and as a connector that type of thing was really what struck me as a pretty important differentiator. Okay. So you mentioned now that you're focused on value-based care and behavioral health, so you are specialized not just in healthcare, not just in health tech, but you have really drilled down to two particular areas. Talk about that a little bit and why you have decided on those areas.
Sal DeTrane (13:02):
So going back to the experience at MedeAnalytics, we were really focused on how people paid their downstream ecosystem of healthcare providers and how those providers got paid. And so we had a suite of analytics on that equation. So as the models continue to shift and will only continue to shift in the coming years, there's still an infrastructure to be built and to be sort of further iterated on relative to value-based care enablement. And that includes everywhere from how do you contract to how do you set up provider networks, how do you execute on those provider networks, how do you transform care and benefits? And then the last piece, how do you transform outcomes? And then similarly on the behavioral health side, I had a colleague that worked with me at analytics, our chief medical officer, Dr. Terry Foutz, who has said to me in the past that if you don't fix the behavioral health condition, you don't have a chance on the chronic care disease. So very early on we made an investment going back to late 2016 in a business called the NovAtel Telepsychiatry, which actually back in December was recently acquired by Quartet Health and at back at the time no one was investing in behavioral health and it was
Carrie Nixon (14:11):
Yeah those were the predays, right, exactly.
Sal DeTrane (14:12):
Yeah. And the market was, it was a belief in the market that you couldn't make money in behavioral health as either an entrepreneur or as a service provider. Well, a lot has changed. Covid obviously only has exacerbated a lot of those conditions or the crisis that exists in mental behavioral health. So similarly what we've focused on is actually not just those two areas, but the intersection of those two areas where value-based care has so much interdependencies on behavioral health and likewise relative to behavioral health with value-based care, you almost can't have the other one without the other. And so that's why we really feel that a specialty in these two areas and the way in which we've built the partnership out of both partners and advisors who are experts in those areas gives us a leg up to find the very best companies in both of those areas, again on a national basis here in the us.
Carrie Nixon (15:03):
Absolutely. The synergy there is tremendous and extremely important for success in value-based care in particular as you mentioned of, are you seeing any interesting trends in either the behavioral health space or the value-based care space in general that you're really keeping an eye on?
Sal DeTrane (15:26):
Yeah, I think we're seeing more and more adoption of value-based care models and whether you want to call them pay for performance models or the design of the networks that actually execute on these models and how a lot of advanced technologies are being practically applied. So I think there had been a lot of funding in 2018, 2019, 2020 and even last year in these segments but I think there's still a lot long way to go. We still see there being continued evolution of 2.0, 3.0 models within the value-based care side, and the same really applies to behavioral health. What we're seeing is we had done some early work around outcomes in behavioral health and how do you measure outcomes, measurement-based care, those sort of things. And what's interesting now is that that has become table stakes or telepsychiatry that is a table stake to any behavioral health solution, which is what the big reason that Quartet bought in Novotel is they didn't have that capability where they had a lot of advanced technology on the demand side of behavioral health and how do we precision behavioral health. So there's just a lot of, I think, evolution that will continue to occur as we think about what are version 2.0, version three point of each of these particular markets.
Carrie Nixon (16:45):
So investment of the kind that you do plays in my view of a tremendous role in facilitating innovation in healthcare. What do you see as you're listening to these pitches as barriers to really innovating in the space?
Sal DeTrane (17:13):
Yeah, I think you really have to be a student of the specific area that you are solving that problem. Not to say you have to have 30 years experience in that area, but you can't bring an naivete to how hard it is to build businesses in healthcare because one thing I've learned and many people have reiterated to me along the way is just whatever, however long you think it's going to take to build a healthcare IT company or digital health company, it's going to take that a year longer than that. And so you have to prepare for the fact that you're going to have to be nimble and iterate. And one of the things we are always looking for is as someone fallen in love with a technology and it's sort of a technology in search of a problem versus it being, I really want to solve this problem now, I'm going to bring best of breed technologies to bear, and we have the expertise to do so to solve that problem.
(18:08):
So I think that that approach is something we prefer versus the latter where it's just or should say the former where it is more of a technology in search of a problem. And the other issue is I think it's also very easy to get caught up in the validation. You think of you're doing pilots in this industry and you just got to be careful that those pilots become paying customers and long-term customers. And that transition is so critical in a company that we have worked on together at beta, beta data and the DC area is a great example of that and how they were able to make that transition over the course of the last couple of years. And I think the other aspect in the last one I'll say is just it one of the, it's hard to build a company in this space, as I said earlier but you got to surround yourself with just the best and the brightest people to help support you in that.
(19:03):
And at this stage of my career, what makes me most excited is not being successful on my own and building my own company. It's seeing that success through the entrepreneur's eyes. And so that's the approach I take with the entrepreneurs, but it has to be one of which that's going to be well received in the sense of, again, wanting to have input and wanting to have the sheer, you're kind of co-rasing a child together, if you will, and that level of partnership. And I think there has to be a common respect for the partnership on both sides, not from the investor having too much say into the business and the vice versa. The entrepreneur also has to be willing to accept that partnership with the investor. And so obviously something we're always looking for. And if we don't see that, that would be one of the reasons we wouldn't move forward.
Carrie Nixon (19:51):
Yeah, that makes sense. Okay. I think you mentioned that you see about 300 pitches a year, is that right? Yep. Okay. That's a lot of pitches. I think we have a lot of entrepreneurs that listen to this podcast. What do you see in pitches that you, number one, wish founders would do more of or number two wish they would not do at all?
Sal DeTrane (20:18):
Yeah, I think there's a fine line between being very passionate about an area versus trying to have always have a personal story. I think that was common years ago, but I think now I think people really want to really understand why you're passionate about this, why you're going to do everything it takes to make this business successful. And at the same time, you're going to be open to lots of thoughts around how you could develop this further. So part of it is I think just be careful with the personal story aspect of it because it is meaningful, but I don't think you have to hang your whole hat on that. I mean, people are most concerned you have a very compelling value proposition and is it differentiated and as it's sustainable, and if you have those things, your passion will come through. I think it's more of you don't have, it's more of what you do than what you say kind of thing.
(21:11):
And so I think that that's important in these pitches as well. And then I think the other one that I would think is worth mentioning here is really being able to think about the competitive landscape and really understanding that a lot of these spaces are crowded, so you're really going to have to have a clear view on differentiation. And I think that that also stems from, I've seen some recent articles in the last couple years around, instead of presenting the Gartner Magic Quadrant or saying you don't have any competitors, which would be the worst thing they said, because you do, you have some, and it could be in internal IT at that, but instead of doing a Gartner Magic Quadrant to actually have a view that says, here's the status quo and here are the things that the challenges with the status quo, and then here's our solution and here's how it's differentiated from the status quo. And I think that's a very clear way and a very concise way of showing your value proposition and differentiation in one slide. And if you can do that well, that I think crystallizes the value proposition for folks.
Carrie Nixon (22:20):
That is great advice in one slide, cut to the chase, what's the value proposition? We know? How are you different than the status quo? I agree totally. The story is important in that and that it does show where it's coming from, but it's got to be a little bit more than that. So you have been very successful in your first fund, the first fund that you closed and the investments that you made. I believe you are in the midst of raising another fund, is that right?
Sal DeTrane (22:52):
That's correct.
Carrie Nixon (22:53):
Excellent.
Sal DeTrane (22:54):
Yeah, we'll just be down that
Carrie Nixon (22:55):
Process. Yeah, so that's got to be very exciting. So you're at the beginning of that process and any sort of thoughts or predictions for down the road as you are we going to continue to see the amount of investment in healthcare and digital health that we have seen at record levels over the past year or so?
Sal DeTrane (23:21):
I believe so. I don't think there's anything that's changed in the last couple years in fact with, I think it's only pointed out the problems with the adoption of value-based care and that it is a better model over time that has more predictability to it. And that behavioral health has only been more exacerbated by a lot of the trends. And that there is a real problem this country around health equity as well. And all of those things need to be solved for. And if you think about it, it's not just these multiple areas of opportunity. Every single population, whether it be Native American or it also be women's health or different populations of Medicaid, and you really want to be able to provide solutions into these marketplaces that are really burgeoning. There's only more money being downstream from Medicaid. This is your area more than mine, but downstream from Medicare to Medicaid and and more managed care options being put out there.
(24:22):
So I believe there will continue to be a proliferation of opportunities and new novel waves of solving these problems. I think one of the challenges that has occurred in venture capital is that there has almost been an overfunding of certain companies and an underfunding of others. So you look at just statistics, statistics from last year of the 330 billion invested in venture capital in the US in 2021, almost 60%, 58% of those dollars went into mega deals. And mega deal now is defined as a hundred million dollar round for a series A company or for
Carrie Nixon (25:03):
A Series A company. Oh my goodness.
Sal DeTrane (25:04):
Yeah. Wow. So think about it in that context that those are, that's what a lot of young companies are up against. However, I still think we're going to see a return back to people building companies in their right phases and stages of development where you fund the company properly for the series to get to a certain level of milestones and so on to the series B as opposed to getting ahead of themselves. Because when you do, the pressure goes way up and you may be trying to do some unnatural acts to sort of perform against those metrics. And I think that's where we see some of the problems or lack of governance that presents itself when the Theranos of the world and others are out there where people have such pressure to perform that unfortunately, sometimes it goes down the wrong path. And so I think we're going to start to see more of a return.
(25:58):
Particularly there's a huge opportunity for early stage funds like ours because many funds have moved about market to really help entrepreneurs take from a seed stage to a series A stage and what are those specific milestones and what is the amount of gas you need to tank to achieve that with a little bit of buffer too, because it will take a little longer than you all expected but not try to, because we have a big fund, we need to put more money into you and that sort of whole aspect. So I think we may see a return more back to basics, particularly with a lot of the uncertainty that's going on in the markets currently.
Carrie Nixon (26:35):
Those mega deals can create a bubble too, right? And I've seen some investments in some companies that have been a little bit of a head scratcher to me, and I see other companies out there that I think are absolutely fantastic that are having a really tough time. So I'm with you, it makes sense to spread the wealth, spread the spread risk take full advantage of the talent that's out there by making sure we're funding as much of the talent as we can in the right way. So I think that's a great end note for us. Sal, I really appreciate you taking the time to record this webinar. I will say to our listeners that I had a little bit of a technical mishap earlier today and Sal is gracious enough to reschedule with me for this evening. So I really appreciate it. It's great to catch up with you as always. And listeners, stay in tuned for the next episode of Decoding Healthcare Innovation. We'll see you next time.