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hedge funds and digital health

“Comparing traditional pharma with digital health sounds very similar to comparing hedge funds to VC funds”

This weekend, I had brunch with a friend that runs her own hedge fund, and between eggs Benedict and Caesars (it’s a Canadian thing), we talked shop.

As an ex-corporate VC (focused on digital health), I was intrigued with how similar her hedge fund model is to how traditional pharma operates, and how doing digital health within a larger pharma is more similar to a VC (versus hedge fund) mindset.

Here's what I mean:

🤔 Similar to pharma’s reliance on IP, secrecy is often part-and-parcel of a hedge fund - revealing details of your trading strategy is a big no-no given a fund’s zero-sum nature

🤔 Whether it’s a new algorithm to create alpha or spotting market inefficiencies, like pharma’s reliance on multifaceted science, the hedge fund approach is often extremely analytical

🤔 Similar to business decisions in pharma, hedge fund managers can dissect a trade and review quantitative data as inputs to make a decision

🤔 The drug discovery process is well defined and can be managed with a ‘waterfall’ approach, which is very similar to how successful hedge funds run their shop

🤔 Like in pharma, the hedge fund investment process is continuous, as go/no-go decisions and position sizing can be adjusted and mitigated in real-time

Conversely, the VC mindset differs from hedge funds and is closer to how we run digital health projects within larger pharmas:

💡 Open networks and networking are encouraged and are a large part of building a VC’s competitive advantage – it’s a positive-sum game where everybody introduces everybody to grow the pie together (e.g., less secrecy)

💡 It’s hard to pin down the ‘secret sauce’ of a successful VC – while high-level analytics are involved, there’s a lot of instinct and subjective judgement with choosing the right projects

💡 Most VC investments are experimental, using an agile methodology to quickly find a market fit and pivot as required before committing large sums of capital

💡 Unlike hedge funds, VCs operate in a world with little data – startups often have no revenues or profits to analyze and it’s often a subjective judgement about a person / team

What I find fascinating is that while there are different approaches and mindsets used in drug development versus investing in digital health, the overall likelihoods of success are similar – the likelihood for drug approval hovers at around 6-10% (depending on the therapeutic area) while ‘successful’ VC investments typically see 10% of their investments become a ‘blockbuster’, 80% of their investments fail and the remaining 10% of their investments chug along and do ‘ok’…

The key takeaway from these parallels?

Toronto remains the brunch capital of the world and a great spot for thought-provoking lazy-Sunday morning conversations.

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