Velocity launches a new pre-seed fund dedicated to health tech startups

Quick Summary

• Velocity announced its second pre-seed fund, the Velocity Health Tech Fund, dedicated to health tech startups at the 26th Velocity Fund Pitch Competition (Winter 2020).
• The Fund was launched with the support of Communitech.
• There were 27 health tech startups incubating at Velocity as of 2019; Velocity has evolved its work to support companies in health since 2013.
• First close of fund is already 80% committed against the $1M USD initial target.
• The Fund will invest in winners of the Velocity Fund Pitch Competition going forward.

The Waterloo Region’s health technology (health tech) ecosystem is more vibrant than it has ever been [1]. In 2019, over one-third of the companies incubated at Velocity were health tech companies.

Solving the challenges facing human health has become a critical societal need. Yet, despite a very large market opportunity, securing funding for innovation in this area remains very difficult, especially for early-stage health companies. That is why with support from our ecosystem partner Communitech, we have launched a second micro-VC fund dedicated to the support of early-stage health tech startups.

The brand new Velocity Health Tech Fund will make investments of $50,000 to support very early-stage founders working in areas such as medical devices, therapeutics, diagnostics, digital health, or emerging health sector spaces. With room for additional investment in the portfolio’s most promising companies, this fund will be able to help more startups scale.

"The rise in health technology companies incubating at Velocity reflects an increasing number of founders wanting to dedicate their energy and passion to simultaneously capture not only revenue from a multi-trillion dollar market, but also an opportunity to improve longevity and manage or cure disease," says Adrien Côté, Velocity's Executive Director. "As our world faces growing (and already massive) challenges in human health, the commercialization of health technologies will be essential. Simply put, it's good business.”

Velocity supporting a vibrant and rapid growth in health tech startups

As shown in our 2019 billion-dollar investment milestone, health tech is an emerging area at Velocity. The number of health tech companies at Velocity has increased significantly over the last six years. At the moment, there are 27 health tech startups being incubated at Velocity. The mix of these companies across the health tech spectrum (medical devices, diagnostics, digital health, and therapeutics) shows a vibrant and wide array of health care products and business opportunities.

What is health tech?

Velocity defines health tech as investment areas across a spectrum of health technologies. We're interested in the following five:

1) Medical devices: companies working on a wide range of health and medical instruments used in the treatment, mitigation, diagnosis, or prevention of diseases and physical conditions.

2) Therapeutics/Medicines: companies exploring the application of technology in personalized healthcare, genome sequencing, and CRISPR research. Companies in this space may also work on finding the most effective combinations of drug compounds, reducing the time and capital required in drug discovery.

3) Diagnostics: companies that leverage technology and/or software to detect and diagnose diseases at an early stage.

4) Digital health: companies in the health care space that use technology and software as a key differentiator. Everything from disease diagnostics and management, to health insurance built on a new tech infrastructure, to AI tools for drug discovery.

5) Emerging fields: companies working on a health-related innovation without a defined field (by definition!).

As we support health tech startups, we have been learning what needs to be offered to maximize the success of these companies. Our interest in this area have led us to reshape our work in the following ways:

• Added business advisors with health tech experience;
• Furthered our engagement with research labs likely to have health tech spinouts; 
• Expanded our network of health tech investors;
• Added more focus on IP and key opinion leaders (KOLs) in our validation/discovery stage; 
• Bolstered product development equipment access via our co-location agreement with PerkinElmer’s Customer Demonstration Lab; and 
• Upgraded product development lab facilities that now include a BSL-2 lab. 

The results have been astounding. Our startups are commercializing health tech products faster and more successfully than ever before. The time and money to validate the product/business, protect IP, raise capital, prove efficacy, and begin seeing adoption has and continues to drop; thereby increasing success and the likelihood of major health care innovations being brought to global markets.

More early-stage investment is required to fuel a thriving health tech startups scene. Combined with the benefits of Velocity’s highly differentiated startup resources and Communitech’s scale-up programs, we’re on pace to create high impact global health tech juggernauts for Canada based out of the Waterloo Region

Dave Caputo, past Chair of Communitech as well as early advocate and investor of the Velocity Health Tech Fund

Since 2013, health tech companies we supported have gone on to raise over $51M of private investment, a strong signal from private market investors of their potential and the quality of their foundational IP. Thirty percent of these companies have gone to world leading accelerators (Y-Combinator, IndieBio, HAX, TMCx). Of the 27 health tech companies incubating in 2019, one-third are in the process of (or have already completed) preclinical/animal studies and two are in human clinical trials.

Along this journey, three insights regarding early-stage funding for health tech startups emerged:

1. They generally require more capital in their early stages. Intensive capital investment is generally required for product development, proving efficacy (i.e., trials), devising and executing a robust IP strategy, understanding reimbursement/insurance/billing, and navigating regulatory requirements. This is atypical when compared to a non-health tech startup.
2. There are fewer early-stage investors (angels, pre-seed funds) that are comfortable with and/or equipped to evaluate and invest in what is by definition a more complex sector.
3. Health care professionals are keen to see innovation in their sector. While they often have a willingness to invest in such innovations, they rarely have the time to do so on a sustained basis.

“More early-stage investment is required to fuel a thriving health tech startups scene. Combined with the benefits of Velocity’s highly differentiated startup resources and Communitech’s scale-up programs, we’re on pace to create high impact global health tech juggernauts for Canada based out of the Waterloo Region,” says Dave Caputo, past Chair of Communitech as well as early advocate and investor of the Velocity Health Tech Fund.

Launching the Velocity Health Tech Fund

This knowledge, combined with our experience launching our first pre-seed fund in 2019, led us to the strong conviction that if we were to launch a health tech specific fund, it would have an incredibly high impact. It would also fill a particularly acute gap in early-stage capital and garner the interest of new investors (e.g., health care professionals) that were keen to support this sector. Our friends at Communitech were having similar observations and discussions, so we teamed up to test the waters with prospective investors.

Four weeks later, we are pleased to announce the first close of Velocity Health Tech Fund with significant participation from local medical professionals, such as physicians and surgeons in the Waterloo Region and surrounding areas. In this short time, the Fund is already 80% committed against our $1M USD initial target.

In addition to unlocking new and much needed early-stage capital, these health care professionals (turned fund investors) bring their wealth of highly relevant experience, insights, and connections to further provide benefit to health tech startups. We anticipate that their involvement would translate into the following:

• Provide an early feedback loop (validation);
• Help with designing and executing studies/trials; 
• Establish connections to more key opinion leaders; and
• Support adoption paths.

This “cross pollination” of industry professionals and innovators will further the success of the sector.

"I invested in this fund early because I believe in the impact that startups can have on our healthcare system, and I am passionate about health," says Dr. Richard Weinstein, an ophthalmologist based in Kitchener, Ontario and a Velocity Health Tech Fund investor. "Because my ability to holistically judge the business potential of health tech startups is limited, this kind of Fund provides me with a more straightforward, vetted way to invest in the sector.”

As we approach the Velocity Health Tech Fund’s final close, we anticipate more health care professionals will take notice.

How the Velocity Health Tech Fund will work

Similar to the first Velocity micro-VC Fund, our Health Tech Fund will add more capital to our existing Velocity Fund Pitch Competition (VFPC), which runs tri-annually and invests in 12 companies per year. In true Velocity style, we’re moving quickly. We have already made two investments at our most recent Velocity Fund Pitch Competition in Life Sciences Key Technologies and Caribou.

Anchoring our investment decision-making process around the long-running VFPC gives us an established process that has tremendous past success. Moreover, to ensure that both founders and investors are best served by our process, we have added and will be adding even more industry expertise in health and domain expertise in deeptech. This will ensure that we can effectively screen, interview, and evaluate VFPC participants from the health tech vertical.

We take our role in supercharging startups in the Toronto-Waterloo tech ecosystem seriously. Ensuring that founders are connected to capital and unlocking new early-stage capital (arguably the most difficult to secure) is a critical function we can build. This new Health Tech Fund ensures exactly that for an industry category that faces exceptional challenges raising initial capital. We’re delighted to have yet another way to foster more health tech success stories in our regional ecosystem and Canada as a whole.

[1] Over 130 health tech companies operate across the region, with 75 of those being fast-growing startups and scale-ups. The size and momentum of this ecosystem is the result of an formidable array of supporting activities, including University of Waterloo’s health programs -- we are home to (Canada’s only English-based optometry school, School of Pharmacy, Biomedical science and engineering programs, and the Research Institute for Aging, etc), the recently launched Medical Innovation Xchange (as Canada's first industry-led medtech scale-up hub), Communitech’s health-focused advisors, and collaborations with local innovative health care leaders such as the Grand River Hospital, the Waterloo Wellington Local Health Integration Network and grass-roots support with the likes of Waterloo MedTech and Hacking Health Waterloo. 

Note: You may also read the University of Waterloo announcement here.