At the MobiHealthNews 2016 event in San Francisco earlier this month, two investors shared tips for health tech startups assessing their first deployments with providers and payers. Kleiner Perkins’ Lynne Chou O’Keefe and Hearst Health Ventures’ Ellen Koskinas also offered up the names of some of the best early partners for health tech startups, pointed to a few areas of interest to their funds, and commented on the overall funding environment.
O’Keefe noted that Kleiner Perkins has a long history of investments in healthcare, starting with its first fund in the 1970s and its investments in Genentech. Kleiner is better known for the investments it has made in digital companies like Google and Nest.
“We have two funds that apply to digital health specifically,” she said. “An early stage fund, which is a $450 million fund, anywhere from seed to Series A. We have a late stage fund, which is a $750 million fund, where we do digital growth deals, and can write check sizes around $20 million and up. So we can really invest across stage in digital health. We have been really active: We have about 11 portfolio companies in the space. More recently some of the companies you might have heard of include: Teladoc, which went public last year, was one of our companies. So was MyFitnessPal, more in the health and wellness space, which was acquired by Under Armour [last year].”
Koskinas explained that Hearst Health Ventures is a unit of Hearst Corporation, and as such is a fund focused on both returns as well as strategic opportunities with Hearst’s healthcare businesses. Those four business include First Data Bank, Zynx Health, MCG and Homecare Homebase.
“The venture fund that I head up sits along side that,” she said. “It’s a $75 million fund and we invest in health IT and tech-enabled healthcare services.”
O’Keefe said that she is particularly interested in companies that are ambitious enough to attempt a “reimagination” of a “care vertical”.
“One of our digital companies is Nest and with Nest, you have to reimagine the thermostat and what the thermostat can do,” she said. “With Livongo we are reimagining truly what a glucometer that is connected with 3G into the cloud with services can do. Quite frankly, some of our patients don’t even understand all these services because they have been in the black and white world, the analog world, where there is no data coming in from the glucometer. They are writing things down on a piece of paper, and it’s not until three months later when they see their endocrinologist that care is happening. Then they need to remember what happened three months ago and remember why it happened? It’s just not practical.”
O’Keefe also pointed to the growing number of venture-backed health insurance companies like Oscar, Clover, Bright Health and others as examples of companies working to reimagine a care vertical. “I’d love to see that more,” she said.
O’Keefe is also in the camp that stresses healthcare’s biggest challenge isn’t a lack of technological innovation; he barriers are structural and cultural.
“Honestly, if we just use Saas and mobile, forget about AI -- and for me to say that is a strong statement -- but if we just use Saas and mobile and some of the wearable technologies, we will be lightyears ahead of where we are today,” O’Keefe said. “I don’t think we need more technology or innovations in technology. I think they are here and now. We just need to utilize them in healthcare.”
One particularly compelling segment of the panel discussion centered on how startups should think critically about their first provider or payer customers.
“First, very simply, ask: ‘What are your needs?’ You’d be shocked, but I ask that of strategics and… you can tell within a minute if they really understand [them]... If they can’t answer that question, I usually think they are in a strategic exploration phase versus an execution phase,” O’Keefe said. “The second question is: ‘Who is paying?’ Is it the innovation group? Is it the clinical unit? Is it the business unit? Really understanding the economics of that [is important], because we are really looking for those strategics who are leaning in and are on the execution curve. … Next is, ‘What is your innovation experience? How many partnerships with startups have you had in the past? What went right and what went wrong?’ With those questions I believe you can diagnose where a strategic is ... We find that there are strategics who won’t say yes, but they won’t say no. You can spend a lot of time on that.”
Both O’Keefe and Koskinas said that Providence Health was a good partner to their portfolio companies. O’Keefe also singled out Humana and Dignity Health as great partners. Koskinas added Partners HealthCare to the list.
Hearst and Kleiner both consider the employer market to be a key one right now.
“I think the employer-facing market is of interest to us too,” Koskinas said. “One of the benefits I have at Hearst is that our head of benefits -- for our 20,000 employees -- is a very forward-thinker around benefits and health management. One of the areas we are looking at there is to help employers understand and improve the way their patients are engaging with healthcare.”
Koskinas said if she had to choose an area that is over-saturated with startups pitching investors right now, it’d be population health.
“I say that after having invested in a population health company in the last six months,” she said. “But I say it because there are so many companies putting themselves under that umbrella, because it is a buzzword that everyone feels like must have some value.”
Koskinas and O’Keefe said companies focused on “point solutions” are not of interest. Platform companies are the better investment. Simple patient outreach services or simple HIEs are not of interest to them: “What we are looking for are end-to-end solutions,” Koskinas said.
The two investors also echoed comments digital health companies seeking funding are used to hearing by now: It’s a difficult time to raise money.
“Yes, it is definitely a tougher environment right now,” Koskinas said. “Only one technology company has gone public this year… Secondly, about half the companies that have gone public on the technology side since 2010 are trading below their IPO price. That casts a bit of a shadow on overall IPO investing. That public market overlay really has an impact clearly on the private markets. You are seeing people certainly take a step back. We know a lot of early stage companies that are definitely having trouble raising money, even those that actually have very good performance records, impressive growth and revenue trajectory and are showing a lot of the organizational development characteristics that we look for.”
O’Keefe agreed and predicted that while we’ll see fewer funding deals this year, the overall amount invested into digital health companies will remain about the same.
“Deal volume will go down,” O’Keefe said. “It’s crossing that chasm between Series A and Series B and getting the traction. As we know in healthcare majority of healthcare is BtoBtoC and that’s why we talk about strategic partnerships being so important … That is what people are looking for more so in a [Series] B.”