New Transformation Capital partner Mike Dixon talks insights from a decade in digital health investing

The last 10 years have seen a slew of new customer bases in digital health, from pharma to employers to consumers, Dixon says.
By Jonah Comstock
03:58 pm
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After 10 years investing in healthcare for Sequoia Capital, Mike Dixon is moving to Transformation Capital, a dedicated healthcare investor focused on supporting commercialized, growth-sized businesses.

Dixon joins former fellow Sequoia investor Todd Cozzens and Jared Kesselheim, all three of whom hold the title of managing partner at the firm.

MobiHealthNews caught up with Dixon to talk about his big move, as well as his insights on how digital health and healthcare investing have changed over the past decade. This interview has been edited for length and clarity.

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Tell us a little about your background

I started investing in healthcare services and IT companies in 2008 or 2009 at Sequoia Capital. The general thesis back then was, healthcare is this large, attractive market and there are some things going on underneath the surface, namely the passing of the HI-TECH act — which was going to digitize the healthcare system from an EHR standpoint — and the shift over time to value-based care that was part of the ObamaCare legislation were going to fundamentally change a lot of things in this big attractive market, which is usually a good time for startups.

And so we invested in a number of companies over the years at Sequoia and I was a part of those efforts, leading those efforts in many ways, including Health Catalyst, which went public this year and is actually in the fund here in a later round in my new place.

Why leave Sequoia for Transformation Capital?

My passion is healthcare. It’s a large market with a ton of opportunity, but also a ton of challenges that in my opinion requires focus every day on the market and what’s changing. And I joined transformation because these were two people, Todd who I had worked with at Sequoia, and Jared who I knew from a long time ago and he was at Bain and we competed with each other. I knew the team really well and I wanted to be part of a focused fund that was doing healthcare and thinking about healthcare every second of the day.

It was really a move from being a part of a generalist tech fund, which historically has focused on all areas of technology, to one solely focused on healthcare.

What does that shift allow you to do differently?

I think the main differences are we have an entire team here right now, seven investors who are 100% focused on this market and helping our portfolio companies with introductions and help in various ways. Customer intros, board member intros, recruiter intros.

When you’re part of a focused firm, the network you have because you spend all of your time there is incredibly powerful. And I learned over the years that the network required to be a value-added investor in healthcare is just different from the networks that firms have that aren’t 100% focused on healthcare.

And that’s not a Sequoia comment. It’s a general comment about firms that do a small portion of their overall business in healthcare. Healthcare is its own universe of people and incentive structures and regulations and everything. And the benefit to a startup in choosing an investor that is focused is the experience of having invested in the market for a long time. You know Tom and Jared and I have been doing this for most of our professional lives. And the result is an incredibly powerful network and deep domain expertise that you don’t get at really any general shop.

Can you tell us a little more about Transformation Capital?

What we do at Transformation Capital is help with businesses that are already at the commercial stage. And so, when I made the comments that I did about moving over here, what we’re built to do is help companies scale. It’s not necessarily to find product-market fit but to help them scale. And that’s why the network that we’ve developed over the years is such a helpful thing. Because so much about the healthcare system, whether it’s employers, pharma, or payer-provider, is the relationships. And thats’ why I’m excited to join this place.

I think it’s unique. Most healthcare investments that are done at this stage are done by generalists and we’re excited to be very differentiated as business partners for entrepreneurs as a totally focused product.

Looking back at a decade in health investing, has that investment thesis you mentioned panned out? What played out as expected and what played out unexpectedly?

The thing that we expected was that it would be a good time for startups, as I said. Meaning that the changes that would take place from a regulatory point of view and also the data infrastructure being laid, it was generally our belief that that would be good for startups just as it is when tectonic plates shift under any big market.

And that was true. Once the system got digitized — and it happened very quickly, we went from something like 5% of doctors having EHRs to 97% a decade later. And the result has been a ton of companies that exist now that the data is in place that wouldn’t have existed a decade before.

An example would be Health Catalyst, where Todd and I sit on the board. That’s a company that exists to help providers use the data to improve their quality and their cost, through a data warehouse and associated applications.

That company would not have existed 10 years ago in a meaningful way. So at least for me, and maybe I’m not being incredibly succinct about this, one vector of change is in the traditional market of payer and provider, there are a while bunch of companies, now that the data is there, that exist to help payers and providers use that data to improve how they deliver care.

There also is another vector, which is the growth of new end customers for digital health. For example: pharma companies.

In the fund here at Transformation Capital there are four companies that are helping pharma, in various areas of their value chain, change how they’re going to market and doing business, because they now have access [in] some way to clinical data. An example would be Boston Health Informatics, which helps pharma companies pick sites where the patients are, rather than trying to drive new patients to trial sites where they might not already be a patient. So, reimagining clinical development.

So I think pharma as an end customer for digital health is fairly new, but we see a ton of businesses that serve that market. And an example of a successful exit there would be Flatiron, which was bought by Roche last year. That company doesn’t exist 10 years ago.

Consumers are a new end customer. At Transformation Capital we have an investment in an exciting company called LetsGetChecked, which is re-imagining direct-to-consumer lab testing. I would say consumers as a customer for digital health didn’t exist 10 years ago in a meaningful way. Maybe deductibles weren’t high enough, but certainly telemedicine regulations weren’t in a place to allow for asynchronous telemedicine.

But now that it is, companies like Let’sGetChecked, companies like Hims, or Roman, or Nurx, or SmileDirectClub which requires a prescription, can exist and they couldn’t have 10 years ago.

And finally employers. You know self-insured employers in the United States cover something like 120 million people. But only now has that gotten up to the CFO-, CEO-level conversation about how much they’re spending in their cost structure for healthcare. And it’s prominent because Jeff Bezos and Warren Buffet are up there on CNN talking about it, but also because, quite frankly, it’s just a big number.

There are many employers spending almost a billion dollars on healthcare and it’s a runaway expense. So it’s quickly becoming a business decision rather than a benefits decision. And so, between those three new categories and the growth of existing categories, it’s a pretty exciting environment.

So where do you think healthcare is going next?

I think we’re just at the beginning of this. Healthcare is really making up for lost time. Other major industries — banking systems, retail — they digitized a really long time ago. And healthcare’s the biggest of all of these. Almost $4 billion and we still waste almost a trillion of it. So we’ve got a long way to go to improve the efficiency of the system.

And by the way, I just think there is no way to do that without technology. And so I think employer, pharma, consumer, provider, payer, those are going to be strong end markets for digital health for a really long time.

And I don’t think it’s a coincidence that Tim Cook, on the latest Apple earning call, talked about the impact Apple wants to make on healthcare. And Amazon buying digital health businesses and introducing new products. Who knows where any of that goes, but it’s no accident that the biggest consumer companies in the world are turning their attention to this market because it’s big and it’s broken and I think we have many decades of tailwinds behind us.

Any other interesting companies in your portfolio?

We’re excited about many of them. I mentioned Health Catalyst, I mentioned LetsGetChecked. Another one I’m excited about is PatientPop, a business that sells software to small- and medium-sized provider groups to help them acquire and retain patients.

If you think about these provider groups, they are running a business. And over the last few years, the number of consumers, as I said before, who are self-directing their care has gone way way up. And they’re doing it on review sites, they’re doing it on Google. And all of a sudden doctors can’t get referrals the way they used to, maybe on the golf course. They’ve got to be tech-savvy and they’ve got to run like any other small business. And PatientPop set out to tackle that and the company is doing incredibly well.

And another one, just to highlight a company in the employer space, is Vera Whole Health. This is a company that runs essentially capitated primary care clinics for employers and has also seen lots of interest from providers and from payers for this idea that having and offering your employees really high quality primary care not just for urgent care but also for chronic illness, really helps with downstream savings. And Vera is growing like a weed and delivering great outcomes.

I could talk about every company, but we talked about three or four — Boston Health, which is a pharma business, Vera which is an employer business, Health Catalyst which is a provider business for health systems, and PatientPop which is a provider business or small and medium-sized provider groups.

The average growth rate in our portfolio is like 90 percent over the last three years, so it’s a portfolio that’s growing really fast.

A look back at the big news and trends emerging in 2019

In December, MobiHealthNews is taking a step back to examine the emerging trends and biggest news of 2019. So-called "new entrances to health" among tech and retail giants continue to make waves in the industry, and we are also seeing an increase interest from pharma.