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Paul Desmarais III eyes healthy returns from startup investment

March 26, 2019 By: Nick Zarzycki

When it comes to supporting high-growth startups, Paul Desmarais III sees little downside. As executive chairman of Portag3 Ventures, one of Canada’s most successful VCs, chairman and CEO of Sagard Holdings, and a director on the board of top Canadian startups like Wealthsimple and KOHO, he knows first-hand the advantages of investing in early-stage companies. Unlike their corporate cousins, startups are expected to take risks and thrive in the face of disruption. These companies create new solutions to new problems — something particularly attractive to potential clients like Canada’s complex $50-billion healthcare system.

This April, Paul is the keynote speaker at HealthKick Invest, one of the primary events during Health Innovation Week, Canada’s largest gathering of health startups, VCs and system stakeholders. Recently, MaRS spoke with Paul about his evolving investment strategy, how Canada’s health entrepreneurs stand to attract unprecedented international investment, and the importance of creating home-grown health giants.

Why is it important to support Canadian health tech companies and entrepreneurs?

First, let me start with why supporting health tech is important. Health is a significant part of our government expenditure and is likely unsustainable as it stands. As a country, we will struggle with ever-growing deficits unless we significantly improve the efficiency of our health system. Such improvements will come through the adoption of technology and innovation driven by the private sector. Second, why is it important to support homegrown companies? Canada is full of ambitious, creative entrepreneurs reshaping the business landscape in the country, in healthcare, fintech and elsewhere. Our goal at Sagard is to give entrepreneurs the tools they need to build national champions and the confidence they need to expand internationally. It’s important for Canada to create large global companies headquartered here. That’s how we will attract the best people and create wealth, jobs and opportunity for our citizens.

You recently launched Sagard Healthcare Royalty Partners to invest in the healthcare space, including drug and medical device companies. Why is it a good time to move into healthcare investing and what makes you most interested in deploying capital in health technology companies in particular?

Healthcare royalties fit very well in our model given their niche and uncorrelated nature. As with all investment strategies, the recruitment of a great team is essential. Sagard Healthcare Royalty Partners is led by a respected veteran of that space, David MacNaughtan. We’re confident David will lead us to become a premier investor in the life sciences sector. It is our belief that the number of innovative new drugs will increase rapidly as a result of increasing data and technology. It’s also our belief that an ageing population will have an ever-increasing need for these new drugs. These elements combined should bode well for our strategy.

You recently invested in MaRS-supported startup, Dialogue — what made you decide to support the company?

Our investment in Dialogue is showing early signs of success and I am so proud of the team there. In just two years, Cherif Habib, Anna Chif and Alexis Smirnov have made a leader out of Dialogue, employing hundreds of people and, most importantly, helping patients across Canada. Dialogue is a virtual care platform offering integrated healthcare services for employers. A full range of health professionals (nurses, physicians and allied health practitioners) is available on the platform at the click of a button via mobile phone or computer to help employees optimize their work-life balance. Employers and employees both love it because of the convenience, and they don’t have to leave the office to see a doctor. Virtual healthcare is a net win for everyone involved: the patient, the doctor on the other side of the screen, and even the workplace that offers Dialogue as a benefit, which reduces absenteeism. The platform is now the Canadian leader and has expanded to Europe. It also raised capital from a leading international investor. Of course, we have tremendous confidence in the founders of Dialogue — they made this investment a no-brainer.

Recent data on venture capital investments in the Canadian healthcare sector point to increased momentum. Why do you think we are seeing this trend in investing?

The question we need to ask is, “Why now?” It’s my belief that the convergence of mobile technology, wearables, connected devices, big data, AI, quantum and other technologies is going to drive the opportunity to transform the healthcare space. These are all technologies that were not prevalent 10 years ago.

Some international VCs have said the Canadian healthcare sector is “under-tapped” and a great source of deals. Why do you think international investors are increasingly drawn here?

I believe there is a general trend for VC investors to look more broadly beyond their home markets. Places like Silicon Valley have become extremely competitive and the cost of living for entrepreneurs is unaffordable. I also believe that the political environment is making Canada highly attractive to talent. Long-term, I believe that the central data pools of our public health system may make Canada a very attractive investment location for VCs looking to invest in AI-related companies.

Are there areas in particular where Sagard Healthcare Royalty Partners is looking to invest? For example, in the medical device or other health technology spaces?

We’re looking to invest in opportunities that have strong intellectual property protection, which can range from pharmaceuticals through to diagnostics and medical devices. While this strategy is directed at later-stage products and companies, many of our counterparties are universities, teaching hospitals and research institutes that have successfully licensed innovative technologies to commercial partners. These tend to be in the US and Europe, but we would love to partner with Canadian institutions if they develop promising IP. Royalty financing is a way for these institutions to accelerate the returns on technology transfer and reinvest the proceeds in R&D and infrastructure. For companies, royalty-based financing can be a source of non-dilutive, flexible capital to fuel the growth of revenues through product acquisitions and investments in sales and marketing.

Which areas of the Canadian healthcare sector do you see being of particular interest to investors in the next five to 10 years?

As you know, technology improves exponentially. Telemedicine was only a pipe dream until smartphones became powerful enough to support it. Advances in robotics and AI will drive medical technologies and devices; data mining will unlock innovation and create new standards in the practice of medicine; and the continued translation of genomic research will lead to novel personalized therapeutics. That said, I think the innovations we will see in the next five to 10 years will be tremendous, and some of them are probably inconceivable today. Canada can absolutely lead the charge.