Brightstone Venture Capital on overinflated startup valuations – and other advice for life sciences companies

By Meghana Keshavan

Every venture firm’s looking for many multiples when it comes to returns – but in reality, they expect things to shake out a little differently. Seth DeGroot, a managing partner at boutique Minneapolis investment firm Brightstone Venture Capital, spoke on what the firm’s expectations in potential investment targets – and how startups can avoid pesky problems like, say, overinflated valuations.

The firm has $25 million under management in its current fund, and has deployed about 40 percent of that capital. The firm tends to invest about $250,000 on the low end, and $1 million on the high end – with up to $2.5 million into any one deal. The 25-year-old firm’s focus is in tech, energy and medtech – and of the eight deals its entered in this current fund, medtech startups account for three. It’s looking, in particular, at precision medicine, regenerative medicine, telemedicine and healthIT.

Startup advice 

Brightstone looks at life sciences companies that aren’t in the earliest of stages – they need to be out of the R&D phase, and preferably in the market – with revenue. It tries to avoid a lot of the inherent risk of whether or not a  company will achieve FDA approval. The firm’s ideally targeting an exit within two to five years.

“Our sweet spot is right when a company is coming out of R&D and is marketing a product,” DeGroot said. “We usually participate in that first institutional Series A – a $5 million to $10 million range with a syndicate is where we like to play.”

Also, it’s sort of a 50-50 intermix of startups approaching Brightstone and vice versa.

“We see a lot of startups coming in here who are too early stage for venture capital,” he said.

Rather than approaching VCs directly, startups really need to bootstrap and chase angels first – otherwise their valuations will get outsized, and they’ll never deliver. But a warning: In healthcare and the life sciences, there’s a trend toward overpricing some of these early rounds.

“We have companies coming in here that are pre-revenue, and pre-FDA approval – and they’re saying they’ve got a $60 million valuation,” he said. “What causes this: They’re raising angel rounds with unsophisticated investors that are valuation insensitive.”

So by the time they’re ready for an exit, they’ve got to sell at $600 million to bring any real value to the investors. And that’s rare.



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