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Section 32’s newest partner shares investment approach going into fund three

Former Foundation Medicine COO and Third Rock Ventures Partner Steve Kafka joined Section 32 as its newest managing partner last fall. The San Diego-based firm was started by Google Ventures founder Bill Maris in 2017, splitting its investments between healthcare and technology companies.

The VC’s most recent deals have emphasized companies that bridge both sectors.  For example, Section 32 invested in EQRx, a biotechnology startup looking to develop new drugs at a fraction of the price of their brand name counterparts, to close its second fund.

Now, Section 32 is raising $ 350 million for its third fund, according to filings with the Securities and Exchange Commission. In a phone interview, Kafka shared more details about its investment approach.

MedCity: What’s the breakdown of your investments? How do you think about investing in healthcare and technology?

Kafka: Our thesis is that we want to be investing in companies that are generating great returns but really having an impact in humankind as well. We think that a very powerful way to do that is by investing at this intersection of technology and healthcare.

Much in the same way that, we used to talk about the software sector and the hardware sector, the internet sector — That’s all just technology. I think in a similar way we see a convergence in healthcare and life sciences. Healthcare and technology are blending together.

I could say to you that in fund one, our mix was two-thirds tech and one-third healthcare. And in fund two, it was the reverse. … But that’s a little bit like using the ICD-9 code to figure out how we’re classifying that. A company like MedCrypt, (one of Section 32’s investments) which is an internet-based security company, is applying that knowledge to basically all of the connected hospital equipment that is used in a healthcare setting. So is MedCrypt a tech company or a healthcare company?

I think you’ll see that theme continue into fund three.


MedCity: With the dynamic of this ongoing pandemic, how are you approaching investments right now?

Kafka: I am a believer that in moments of great change, some of the best and most creative ideas emerge. We are in a situation where we are relying on innovation in healthcare to move us forward in this current situation, so that makes it a little bit more straightforward to provide funding to these types of companies.

That said, we are being a little more careful. The macroeconomic conditions may get such that it will be more difficult for some companies. We’ll have to take a little bit of a harder look. … In a contracting market or a volatile market, it cranks that hurdle up a little bit higher.

MedCity: What changes are you watching for as a result of Covid-19?  

Kafka: Of course, though none of us want to be going through this, one of the silver linings potentially of the Covid situation is that it will be a renaissance in the way we’ve been thinking about diagnostics. Diagnostics have been really taken for granted…  It’s been viewed as a commodity for the industry, an afterthought. It isn’t valued properly in the whole healthcare continuum. It isn’t paid for properly.

I think that’s changing now. … I hope this floats this part of the healthcare value chain back to the top. It’s going to be really important. It’s not going to just be infectious disease. It’s going to be cancer. It has been important for cardiovascular disease. … I think there’s a lot of really great stuff on the horizon. I just hope this teaches us a lesson that we should be willing to support it and pay for it, because it will result in better outcomes.

Photo credit: StockFinland, Getty Images

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