Kevin Ryan on Healthcare Investing: Where the Big Money Is

Kevin Ryan's Shift to Healthcare Technology Investment

Kevin Ryan has achieved significant financial success through astute timing and entrepreneurial ventures. This includes his early role at DoubleClick, where he was the twelfth employee and later served as CEO, as well as co-founding MongoDB, a publicly traded software company currently valued around $30 billion. Ryan retains a substantial ownership stake in MongoDB, stating he still possesses “at least half my shares.”

A $100 Million Bet on Healthcare Innovation

Recently, discussions were held with Ryan regarding his latest investment focus: healthcare technology. His firm, AlleyCorp, is dedicating $100 million – largely from Ryan’s personal funds – to launching and supporting companies within this sector. This investment supplements approximately 20 pre-existing related ventures. The shift in focus prompted inquiry into how his interests evolved, given his previous projects were largely unrelated.

The Catalyst for Focusing on Healthcare

TC: Considering your past successes, your current emphasis on healthcare tech is unexpected. What initially sparked your interest in this field?

KR: AlleyCorp consistently evaluates long-term trends, typically spanning five to ten years, to identify promising investment areas. Some sectors become saturated, limiting opportunities, while others present significant potential. Approximately two to three years ago, I recognized substantial opportunities within both the New York healthcare landscape and the broader healthcare industry. Many facets of the current healthcare system are demonstrably inefficient and excessively costly.

The widespread frustration with the existing healthcare system signals a clear indication of potential for innovation and improvement.

Prioritizing Early-Stage Investments

TC: You are primarily utilizing your own capital for these investments. Why not leverage outside funding, given your proven track record and the current market conditions?

KR: My preference lies in the early stages of company development, an area where I possess the most expertise and comfort. I am less inclined to invest in established companies valued at $3 billion with the expectation of reaching $10 billion. I aim to be involved from the outset, accepting the inherent risks associated with early-stage ventures, which also requires a comparatively smaller capital outlay.

We are not limited by capital availability, as evidenced by our simultaneous incubation of multiple companies within AlleyCorp, such as Nomad Health, which secured a $63 million funding round, and Pearl Health, which closed a $18 million round.

Typically, launching a new company requires an initial investment of $1.5 million to $2 million. We then seek external funding, scaling our investment as needed, while aiming to cap our stake in any single company at around $10 million. The opportunities are plentiful, and this is the space where I want to concentrate our efforts.

Navigating the Changing Seed Funding Landscape

TC: How does this investment model function in an environment where $100 million seed rounds are becoming increasingly common?

KR: The evolving landscape actually benefits our approach. Consider Pearl Health: we initially invested around $1.5 million, securing a significant equity position. Depending on the company, our partners typically hold between 30% and 60% equity, factoring in management and potential co-founders.

When firms like Andreessen Horowitz participate in subsequent rounds at higher valuations, we often contribute an additional $3 million to $4 million, while retaining control over who joins the investment group. Should a later round occur at, for example, $400 million, we would likely cease further investment. This is a natural progression for seed funds; dilution is expected, and it doesn’t pose a problem.

Our capital is most effective when we anticipate a ten-fold return on our investment.

Focus on High-Growth Potential

TC: Are you uninterested in participating in later-stage funding rounds?

KR: Generally, no. We recently invested further into Nomad, which is currently valued at approximately $250 million. However, I believe it has the potential to become a $2 billion company, justifying our increased investment. This is likely to be our final investment in that particular company.

Other funds are well-suited to pursue 2x or 3x returns, operating at a later stage and with a shorter investment horizon of around five years. We prefer a longer-term commitment, aiming for a nine-year investment period and a hundred-fold return.

Future of AlleyCorp and Succession Planning

TC: Many of your peers are transitioning away from the venture industry. How are you approaching the future of AlleyCorp? Do you have a designated second-in-command? What plans are in place for your eventual departure?

KR: I don’t foresee that happening in the near future. Currently, Brenton Fargnoli leads the healthcare initiatives, while Wendy Tsu oversees the non-healthcare ventures. We anticipate adding two or three additional partners within the next year, positioning me as the managing partner of the firm. However, I am confident in my ability to continue leading for another decade.