Interview with Dreamit Venture’s Adam Dakin: “Sophisticated investors will focus in on the QMS”
Cannon Quality Group recently had the opportunity to sit down to talk shop with Adam Dakin, Managing Director of the Healthtech segment at Philadelphia-based Dreamit Ventures. We were interested in Dreamit-backed companies (some of which are also CQG clients), Dreamit’s approach to investing in and building healthtech companies, and the role of quality management is assessing the viability of medtech startups.
Adam Dakin has started five companies, was CEO of three, and has raised money for all startups in which he’s been involved. He’s served as a board member, angel investor, advisor, and teaches a class at the University of Pennsylvania on how to take ideas from the lab all the way to commercialization. Dakin is also a mentor in residence at the Penn Center for Innovation.
“About 2 and a half years ago, Dreamit came along and said we’re looking for someone to run our healthtech vertical, which was kind of the dream job for me because I get to be both an operator and an investor. I knew that I probably always wanted at some point to move over to the venture side, but this was a nice opportunity to keep one foot in each world.”
The Dreamit Difference
“We are different from a traditional venture fund,” Adam explained, “even though our returns model is based on being a traditional venture fund. What’s different is that we run what some might call an accelerator, although we prefer to call it a growth platform. I like to call us the ‘sleeves-up’ venture fund because we run this growth program alongside of our venture fund and our fund only invests in companies that have gone through that growth platform. It’s different from what you might think of as a traditional incubator/accelerator because our companies are later stage. On the digital health side, our companies are in market, they have referenceable customers, are generating revenue, they’ve already raised capital, and it’s all about scaling the business. And leveraging our stakeholder network, which includes payors, providers, and large multinationals, where we have red carpet access to decision makers in those organizations which greatly accelerates the sales cycle.”
“That’s how we add value” Dakin says. “We do the same thing with access to our investor network – we reach out to over a 1000 venture funds who know how carefully selected our cohorts are. We run 2 cohorts a year; there are typically 6-8 companies in the healthtech and securetech verticals; For healthtech, it’s medical devices, diagnostics, and digital health. These companies are all typically raising their first large round of institutional capital, and they are raising in order to scale. It’s important for our model that we help them raise that institutional capital, because we need to create the opportunity for us to co-invest alongside the institutional investor. We’re not getting a huge chunk of equity upfront for the program; we get our returns by investing after the program. We don’t take board seats, we don’t lead deals, we don’t set terms; we just work like mad to find a lead investor for them, so we get that opportunity to co-invest. Our not-so-secret sauce is that we get to know these companies really well during the 14-week program which informs our investment decisions.”
“We are in regular communication throughout the week; we’re deep diving into every critical assumption behind their business model; we’re tearing all the key assumptions apart; and making sure that everything is tight because with our operating experience we bring a lot of pattern recognition; we know what customers are going to ask, we know what investors are going to ask, so we’re pretty good at surfacing the soft spots and making them do the work to tighten up those weaknesses. So by the time we put them in front of customers or investors, they’re bullet proof. They are extremely well prepared. We get positive feedback from customers and investors all the time when they say ‘wow – I can tell that’s a Dreamit company, that pitch was tight. We covered what we needed them to cover, they were super-efficient, the value prop and problem statement was crystal clear – we get it!’ “.
Common Pitfalls in the Pitching Process
We were curious to know what mistakes he sees entrepreneurs often make during the pitching process.
“It is frequently on attitude and style” Dakin said. Some are overconfident, not acknowledging some of the critical risks and how challenging it will be to overcome those risks. He might ask about clinical risk, for example, and hear something like “oh, no problem – we’re going to run some clinicals…” but a button-downed, crisp plan has not been developed. The Dreamit team will ask details on statistical significance, sample size, how much it is going to cost, who the principal investigators will be, and other aspects.
If it’s regulatory risk, Dakin will ask how they plan to navigate and mitigate that risk, and have they really understand the requirements. Some founders minimize risks, citing predicate devices, but Dreamit wants to know what testing will take place, what data will be collected, what claims the company plans to make, and if they have had a pre-sub meeting with the FDA.
“Sometimes we hear ‘I met with a regulatory consultant, and they thought we were fine’ but we’re not going to take your consultant’s response at face value,” Dakin said.
In digital health, Dreamit looks carefully at the critical nature of go-to-market strategies. Often, applicants haven’t thought through who the customer is, who the decision makers are, the stakeholders, how to reach those customers, and call points. They are sometimes fuzzy on pricing – is it transactional, is it SaaS, or some variation?
“Just saying ‘we’re going to hire some reps..’ is not a go to market strategy” Dakin said. “That’s a sales tactic. I want you to tell us very specifically where your first $1m of sales is coming from – is it 10 customers at $100k? How are you going to attract those 10 customers, how will you reach them? Companies fall down when you pressure-test their go to market strategy.”
Investors Evaluate the Quality Management System
Do investors consider the robustness or appropriateness of the company’s Quality Management System?
“Sophisticated investors will focus in on the QMS assuming the device or platform is regulated”, Dakin said, “and it’s one of those things that you can ask entrepreneurs – how familiar they are with QMS, do they understand, are they planning for that in the beginning of the process because to go back later forensically and put in a QMS is just a bad idea. A venture buddy of mine says ‘There’s never time to do it right but there’s always time to do it over.’ Doing QMS-lite in the beginning is just fine. You don’t want to encumber a startup or small company with ridiculous requirements but you want to make sure as they move along that they don’t have to go back and re-do a lot of things, when for a small amount of effort in the beginning they could have put those underpinnings in place and just made life so much easier.”
“Some companies will say, ‘well we’re not regulated, we don’t need to worry about a QMS’ and that may or may not be right at that moment, but if you want to expand your claims later on to make an efficacy or diagnostic claim, that’s when you may cross over to being regulated. At which point you will have to have a QMS. So it’s skating to where the puck is going to be if you think about your business in the future. “
Some say they want to stay on the unregulated side at first to prove some level of market acceptance. But the forward-looking companies know that’s just the beginning of the go-to-market strategy, and later they may want to make a claim around safety and efficacy and go to the FDA. “And if that’s the moment we decide to put a QMS in place,” Dakin says, “It’s going to be a lot of work.”
Other bits of wisdom: it always takes longer and costs more than you think it will to build the company and get to market. Startups, he believes, should always raise more than they think they need, and always take money when offered. “Later, if you need it, it will be the cheapest money you ever raised.”
Some CEOs see their role as being focused on building a great team and a great product. “But the top priority answer is to keep the company well capitalized.”
“Everybody wants pedigreed entrepreneurs out of central casting, but we look for coachability.” Dakin says. “That reveals itself in the due diligence process. When a founder appears to be uncoachable, that’s a show stopper.”
About Us: Cannon Quality Group provides outsourced Quality Management System solutions that are efficient and compliant. Cannon’s number one priority is delivering QMS solutions that make sense for the stage and goals of its clients’ business. Cannon Quality Group’s mission is to be the Change in Quality. www.cannonqualitygroup.com