B8128: Healthcare Investment and Entrepreneurship Following a successful graduation from School, you have landed a job as a Senior Associateat Healthcare Growth Drivers IV, L.P., a $100 million dollar private equity firm investing in healthcare IT and healthcare services. For the last six months, you have been courting a company, TransparentTransactions (TT) . TT, further details of which are provided below,is a new entrant in the fast-growing consumer transparency space: the products and services that allow consumers to make more informed choices around the care they receive. TT offers two products: â€¢ PlanLiberationâ€”Allows health plan members and covered employees to set appointments, search for providers, compare treatment costs across sites of care, and engage in conversations with communities of like-minded patients â€¢ VolumeBlastâ€”Online platform for providers to access market insights on de-identified patient behavior (e.g. treatment searches, appointment setting at competitor institutions). This data allows for more targeted consumer marketing campaigns. As you approach the investment decision-making process, you will need to produce an investment memo (4-6 pages plus exhibits) for the investment committee at your fund. The memo will consist of the following sections: â€¢ Executive Summaryâ€”Brief description of the investment rationale and the proposed deal (price/terms). In structuring the deal, you should apply the lessons you have learned in class and from Brad Feldâ€™s book on term sheets. â€¢ Pre and Post-Transaction Cap Tablesâ€”Fully diluted ownership by shareholder before and after the investment by Healthcare Growth Partners. â€¢ Valuation and Returns Analysisâ€”Valuation and basis for arriving at valuation. In valuing the company, you should draw upon the lessons youâ€™ve learned in class on how to value a HCIT company. You should also feature a return profile for your fund at a rangeexit values. â€¢ Market Overviewâ€”Total addressable Market, Served Available Market and Share of the Market (TAM, SAM, and SOM) for TT, as well as key market drivers. â€¢ Competitive Landscapeâ€”Description of the other players in the market and the sources of competitive advantage. â€¢ Exit Dynamicsâ€”List of prospective buyers by category and their associated rationale for acquiring the company. â€¢ Investment Strengths & Risksâ€”List of the positives and negatives of the investment. â€¢ Diligence Approachâ€”Description of the proposed diligence plan and corresponding time frame. In assembling this memo, you will draw upon some of the supplemental information provided below, as well as conduct your own primary and secondary research on the market. Supplemental Information Customer Segments: â€¢ Health Plans â€¢ Self-Insured Employers â€¢ Providers Product Set â€¢ PlanLiberationâ€”Allows health plan members and covered employees to set appointments, search for providers, compare treatment costs across sites of care, and engage in conversations with communities of like-minded patients â€¢ VolumeBlastâ€”Online platform for providers to access market insights on de-identified patient behavior (e.g. treatment searches, appointment setting at competitor institutions). Target Raise: $3 million in primary, $2 million in secondary/founder recap Desired Pre-Money Valuation: Not disclosed Pre-Transaction Cap Table Entity Capital Invested Date Invested Security Shares FD Ownership Founders Common 7,800,000 78% SaaS Partners II $1,250,000 12/31/16 Participating Preferred 2,000,000 20% Unallocated Option Pool 200,000 2% Financials (provided by management): 2015 2016 2017 2018P 2019P Revenue $800K $2.3M $4.5M $10.0M $16M EBITDA ($1.2M) ($2.0M) ($4.0M) $100K $3.0M Pricing â€¢ PlanLiberation: $2.50 per employee (or member) per month. 24 month contracts â€¢ VolumeBlast: $200 per seat per month on the platform. 18 month contracts â€¢ Implementation: Typically 150K per customer and 3 month process Bookings Report: Current Customers* Product Start Date End Date # of Seats/Members Customer A PL 12/31/16 12/31/19 10,000 Customer B PL 12/31/15 12/31/18 9,500 Customer C VB 12/31/16 6/30/19 500 Customer D VB 6/30/17 12/31/19 750 Customer E PL 2/1/13 2/1/19 11,200 Customer F VB 12/31/17 6/30/19 1,000 *Excludes implementation revenue Organization/Headcount: â€¢ Executive Leadership (CEO, CTO, and VP of Finance) â€¢ Product: (3) â€¢ Sales (4) â€¢ Account Management (1) â€¢ Implementation (8) â€¢ Finance (1) Use of Proceeds: â€¢ 15% Executive Hires (Chief Sales Officer, COO, CMO) â€¢ 45% Sales and Marketing â€¢ 40% Product Management Backgrounds: â€¢ CEOâ€”43 years old. Co-Founder of TT. B.A. from Babson College. Worked in sales for Microsoft for 15 years, before starting own business process outsourcing firm (sold to Infosys in 2008 for $32M). Started second company in the online payments space, through which she gained an interest in the power of payments to transform healthcare. Company was acquired by a strategic a year after it was founded, when it was doing $2M in revenue. â€¢ CTOâ€”40 years old. BA from University of Michigan. Co-founder of TT, former colleague of CEOâ€™s from MSFT. Spent last 15 years working in product roles for Emdeon, WebMD, and Cerner. First gig as CTO. â€¢ VP of Financeâ€”45 years old. BA from Babson College. Career spent in corporate finance roles at Unilever, Lands End, and American Express. Husband of CEO. Market Size and Drivers: You have done some preliminary research on the category, which has validated, at a high level, that consumer engagement is a huge priority and pain point for providers and plans alike. However, you sense that platitudes and top-down market analyses will not suffice to convince your partners of the opportunity in front of TransparentTransactions. You will need to do some independent market sizing research and work using external sources. Competition: Youâ€™ve come across a few competitors already in your preliminary workâ€”Castlight being the most prominent example thus far. Others include Change Healthcare, Healthcare and Vitals.com. You sense that there is some market confusion. Comparable Transactions and Publicly Traded Comparables: Consult external sources.