As Healthcare Venture Capital Funding Tightens, Healthcare Service Firms Need the Right Approach to Attract Dollars, According to PricewaterhouseCoopers Securities/Shattuck Hammond Investment Bankers.

NEW YORK--(BUSINESS WIRE)--April 29, 1999--

While overall venture capital funding grew at a brisk 24 percent pace, venture capital funding for healthcare services and healthcare information companies actually dropped 5 percent in 1998, according to a report by PricewaterhouseCoopers Securities/Shattuck Hammond Partners.

"With more venture capital dollars flowing to Internet and telecom companies, healthcare companies -- especially healthcare service companies -- face a shrinking and increasingly critical venture capital marketplace. As a result, it is crucial that healthcare companies are properly positioned as they attempt to access venture capital funding," according to Michael Hammond, managing director with PricewaterhouseCoopers Securities/Shattuck Hammond Partners. The seven most common areas where companies fail to satisfy venture capitalists' initial screening criteria are:

-- Inadequate business execution team: Creative people with great

ideas are often inexperienced and ill prepared to execute a

strategy. Venture capital funds know empirically that good

management is more important than good ideas, which is especially

true in healthcare.

-- Insufficiently thorough product/technology acceptance strategy:

Venture capitalists have found that in the complex healthcare

services market even great business concepts or technologies meet

resistance from entrenched self-interests.

-- Poorly planned sales strategy: For reasons similar to the

challenges facing product/technology acceptance, venture

capitalists know that the sales cycle can be painfully lengthy.

-- Underestimated costs and capital needs: Venture capitalists see

this as the inevitable consequence of overly optimistic revenue

projections, an under-allocation of resources required to

generate those revenues, and gaps in management knowledge.

-- Lack of focus when approaching venture capital sources:

Management teams of early stage companies often dwell excessively

on their vision, concept, technology and market, rather than on

plan execution hurdles and how the hurdles will be dealt with.

-- Unrealistic valuation expectations: Venture capitalists, with a

statistically significant amount of empirical evidence on which

to base their judgements, will factor the risks associated with

the challenges noted above into their valuations.

-- Founders' shares "liquidity" sales: Company founders who seek to

sell their shares in order to gain "liquidity" may have

difficulty convincing venture funds of the merits of investing in

the company when the founders themselves do not believe that

their shares will provide good returns.

"Although the venture capital community remains interested in the healthcare services market, venture capitalists are battle scarred and increasingly selective," says Mr. Hammond. "In fact, the healthcare information technology venture capital masks a truly dramatic drop in venture capital funding available to healthcare service companies in 1998," he observed.

"Venture capital in general is the most disciplined source of capital in our economy. The recent collapse of the healthcare services public market exacerbates this problem." According to Mr. Hammond, there are six key steps that healthcare companies can take to gain access to venture capital funds in a tighter capital market environment:

-- Address organizational gaps in advance: Put egos aside and,

if necessary, give up some equity to attract a "financeable"

management team.

-- Address product/technology acceptance hurdles: Identify the

key users of the product, their comparable

product/technology choices and switching costs,

product/technology educational strategies and timelines.

-- Overthink the sales strategy, if possible: While it may not

be a pressing issue to management at an early stage, the

sales strategy should be so well thought out that it is

integral to all aspects of the business plan.

-- Thoroughly define the projected cost structure: Thoroughly

identify costs so your plan will engender confidence from

venture capitalists and there will be few surprises which

could lead to an unanticipated capital crunch.

-- Vet plans with experienced professionals before approaching

VCs: Again, put aside egos and get a reality check on the

overall plan, its level of focus and the resulting valuation

expectations from advisors knowledgeable about healthcare

and the private equity markets. There are too few active

healthcare-focused VCs out there to be able to afford to

learn as you go.

Shattuck Hammond Partners is the healthcare-focused division of PricewaterhouseCoopers Securities LLC, a wholly-owned investment banking and financial advisory subsidiary of PricewaterhouseCoopers LLP. Offering truly global solutions to a full-range of companies, PricewaterhouseCoopers Securities provides investment banking and financial advisory services, including mergers and acquisitions, raising debt and equity capital in the private markets and underwriting tax exempt securities.

With more than 100 senior investment bankers and access to PricewaterhouseCoopers' global network and resources in 150 countries worldwide, PricewaterhouseCoopers Securities concentrates on a limited number of specific high-growth industries that include healthcare, communications and media, technology, energy and infrastructure, and consumer and industrial products.

PricewaterhouseCoopers Securities is a member of the National Association of Securities Dealers (NASD) and the Municipal Securities Rulemaking Board (MSRB).

With a worldwide network of 6000 professionals, PricewaterhouseCoopers' Financial Advisory Services ("FAS") practice provides creative solutions and ideas that increase value to clients during critical periods and when they are making important decisions that define their future. The FAS business is organized along five product lines. The Business Recovery Services, Dispute Analysis & Investigations, and Corporate Value Consulting product lines are the largest in the world. The Project Finance & Privatization product line rated second in Privatisation International's global league table by number of privatization financial advisory assignments and second in Project Finance International's global ranking by number of project finance advisory mandates. The Mergers & Acquisitions product line was second in the world in number of deals completed, according to Securities Data Company. PricewaterhouseCoopers advised on 341 deals with a total worth of $33.2 billion.

PricewaterhouseCoopers (www.pwcglobal.com), the world's largest professional services organization, helps its clients build value, manage risk and improve their performance. Drawing on the talents of more than 155,000 people in 150 countries, the organization provides a full range of business advisory services to leading global, national and local companies and to public institutions. PricewaterhouseCoopers refers to the US firm of PricewaterhouseCoopers LLP and other members of the worldwide PricewaterhouseCoopers organization.

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