There’s no question that funding for digital health companies is high -- a recent report from Accenture predicted funding for digital health startups will reach $6.5 billion by the end of 2017, up from $3.5 billion in 2014. But that doesn’t mean it’s smooth sailing for digital health investors or the companies seeking funding. At a Tuesday session at Health 2.0 in Santa Clara, California, a panel of digital health investors and startup veterans, moderated by "Venture Valkyrie" Lisa Suennen, discussed some of the unique circumstances of healthcare investing.
One point several of the panelists agreed on was that it’s not just about getting the most money possible from investors. The relationship with investors is important too, and sometimes companies can get in trouble by raising too much money and then not being able to deliver — a real concern when valuations are getting higher and higher.
“You have to be careful,” John de Souza, President and CEO of MedHelp said. “If you overreach on your first round it could be your last round. […] You can get to the point where it’s very hard to get into the second round of funding. Who the investors are matter a lot and some investors can take you to the second round, third round. So if you have people with deep pockets that’s great, but if this is already a large investment for the fund you’re in deep trouble for the second one. You have to be careful. The funding is not the exit and I think a lot of people forget that.”
Glen Tullman, CEO of Livongo Health and an investor with 7wire Ventures, argued the point, saying that under-delivery was the real problem, not taking too much money.
“I think right now there’s a tremendous amount of dollars chasing a small number of quality opportunities and companies,” he said. “In terms of the second round, the issue is simply one of success. If you're successful doing what you’re doing and you have the metrics to show for it, it’ll look like a good deal. And if you’re not, it doesn’t matter if you raised a valuation that’s $50,000 less, it’s not going to mean much. Either you’re delivering or you’re not.”
Evolent Health’s Frank WIlliams suggested a strategy that should help health tech startups to raise funds while also making sure they can deliver — seek strategic investments from health stakeholders.
“One of the things I do think is very important for a lot of entrepreneurs is this trend toward health systems investing in companies,” he said. “They’re willing to make very large investments, and in many cases they’re willing to throw in a customer agreement. … I think that’s a great way to increase your chances for success.”
The panelists talked about one of the biggest things that makes med tech investing different from other kinds of investing: the mix of people from the healthcare and technology worlds.
“The complicated part is not just the technology adoption, because this is where tech investors tend to be overly optimistic because they think adoption is similar to other areas,” said Milena Adamian, who was representing Azimuth Ventures. “This is health tech, so the health part of it represents a number of constituencies, an incredibly complex ecosystem and those are not very often aligned well in their interests. The adoption curve for companies in healthcare, it’s expected to be longer , but when it takes off, it takes off.”
This was another point that de Souza and Tullman tussled on, however. De Souza painted a picture of tech entrepreneurs as largely naive about the health world.
“The blessing and curse of health is that it inspires a lot of passion,” he said. “If you’re a financer, you don’t go to a bank and have a bad experience and say ‘I’m going to change the financial system’. But when you have a bad experience in health you’re going to change the whole system. But the problem is the system is very complex. And the fact that you had a bad experience in hospital may give you a lot of passion, but it doesn’t help you understand the system. … So there’s companies that have a lot of passion, but they find out about the complexity of the system in a painful way. A lot of the tech investors that don’t have the health background, you better find a way to get that knowledge of how it works.”
Tullman pushed back, saying that this attitude was actually a kind of dangerous rigidity on the part of people familiar with the healthcare space.
“We thought Uber was going to get taught a lesson by cab companies because for a hundred years they’ve been buying these medallions,” Tullman said. “The fact of the matter is … all that history went away overnight. This arrogance of healthcare — 'It’s so different, you just don’t understand’ — I think that’s going to be overtaken by the ability to deliver realtime information to consumers, and I think there’s going to be a fundamental shift. And the people who figure that out are going to be enormous beneficiaries.”
Finally, the panelists talked about the volume of mergers and accquisitions in the health tech space. Suennen broke recent deals into big companies acquiring big companies, like Cerner and Siemens, product line extensions like Practice Fusion’s acquisition of Ringadoc, and “acts of desperation.”
“I do think you’ll see a lot of companies that have completely missed out on major trends,” de Souza said. “Too many CEOs of large companies on record saying you can always catch up [by buying a company]. You’ll see a bunch of that. But when you see a lot of small companies getting together, it doesn’t bode well.”
“I would add, this is an area of disruption in the space,” Williams said. “Payers trying to become providers. Providers trying to become payers, physicians starting to take on risk. And then of course a lot of the device and pharma companies wanting to remake who they really are. I would agree it’s an attractive M&A environment with all sorts of players you wouldn’t have expected.”