This year has proven to be a time of reckoning for digital health funding, with few IPOs living up to their expectations, venture capital funds becoming more selective, and scrutiny of startups increasing, said a panel of investors at Health 2.0 in Santa Clara. That said, however, money is still flowing into the industry, but expect a shift in the next year, with more private-to-private mergers and acquisitions to combine technology and a demand for companies to prove their worth earlier in the game.
Anchored by Lisa Suennen of Venture Valkyrie, the panel discussed what trends they are seeing, what they want to see more of, and what steps entrepreneurs should be taking before they even approach VCs. A show of hands revealed that a solid 40 people in the audience were entrepreneurs, and the VCs didn’t mince words when addressing the crowd.
“I don’t want to hear one more company tell me they are the ‘blank of healthcare,’ the Uber or Amazon or anything,” said Jessica Alderman Zeaske, who is vice president of research and development at Lemhi Ventures. “You have to earn that right to make that comparison, and using those kinds of metaphors is diminishing. I would prefer to see companies that are doing something new rather than just replicating something and bringing it to healthcare.”
Sven Lingiaerde, a managing partner at Swiss firm Endeavour Vision, said he wanted to see fewer fitness and beauty apps navigating into the so-called ‘gray line’ into healthcare.
“No more free yoga apps,” he said. “Wellness in general, I’m not convinced you can be that profitable. Direct to consumer products have to have a lot of money in the beginning and you have to be very close to the people who you are offering your product to. We want to see more business to business.”
What investors also want, they said, is more focus on behavioral health analytics, more hospital-focused innovation, and investment strategies wherein funders are carefully aligned to offset the inevitable future friction as the company matures and, possibly, ends up with a different mission from which it set out with.
“So, what is the single greatest opportunity?” asked Suennen. “And please don’t say VR.”
Alderman-Zeaske said they would like to see more entrepreneurs with the chops to work with hospitals and complex administrative systems.
“Deals with a lot of acronyms and knowledge of the administrative bowels of healthcare are good, because that shows they know a lot that others don’t kow,” she said. “To actually understand how to submit claims … there are administrative solutions that are a bit of exploiting flaws, and for CEOs who really understand healthcare complexity, that’s valuable.”
Additionally, Alderman-Zeaske noted that there's a governmental aspect to the space.
“The largest payer in America is the US government, and we are spending a lot of time looking at that,” she said. “We are trying to following the money and see who can fundamentally change affordability and access.”
Kimberly Campbell of Mosaic Health Solutions said the most important trend she is seeing in the technology-enabled healthcare space is consumer engagement analytics that make communications more personalized, leading to behavior change.
“We’re interested in doing for membership what the data actually says are the consumer preferences,” she said. “When there is behavior change, we have action associated with directives.”
Talking about stages of investment, Suennen asked the panel about a shift she’s seen in funding.
“Early stage investment used to be the kiss of death. Now it’s the new black,” she said. “What happened?
The panel said that comes from a tighter focus from corporate ventures on entrepreneurs who come to investors with better plans and more strategic alignment.
“Managed by an internal rate of return, investors are treated more as colleagues, and that is shift,” said Alderman-Zeaske. “Will it shift back in five years? Probably. There are a lot of ways to go about this, but when you start to combine a lot of people, investor alignment gets funky. One may be ready to walk away, the other not. Entrepreneurs need to ask themselves what the co-investors want.”
Suennen said, looking at the past five to seven years of the digital health “revolution,” we’re looking at a lot of companies who have little or no revenue or evidence of efficacy.
“Who’s going to lead us out?” she asked, adding that while healthcare services is an area VCs tend to hate, “almost every dollar in healthcare is related to a service.”
“We are much more interested in profitability, “ said Campbell. “And entrepreneurs will be asked to explain that a lot more. There’s a lot who come to us in a pitch who don’t have a full plan. … We’re looking to invest in companies that have tech-enabled models that help them go beyond the health plan, and we’re learning more about have we have to push with our partners.”
Mergers and acquisitions between private companies will likely happen more, the panel said, nodding to the recent merge of Diasend and Glooko to deliver a global diabetes management platform. They agreed the massive merger was a great example of what will happen more in the industry, as companies around the world that have compatible technologies will combine to go faster.
“What we will not see is small, unprofitable companies buying small, unprofitable companies,” said Alderman-Zaeske. “People will be very cautious of this burn. The gravy train of easy money is slowing down, and you need to be profitable.”