Just a few years ago, you would have had to scour the show floor to find a startup exhibiting at the HIMSS Annual Conference. But, for the first time this year, they will have a major presence at this show that gathers more than 37,000 health IT professionals and innovators who are developing next-generation technologies. In fact, more than 200 startups will be on the floor at the inaugural Hx360 event taking place at the conference in Chicago– demonstrating the perceived ripening of the industry for disruption and the rising expectations of entrepreneurs and the investors supporting their efforts.
Drawing these innovators like the Sirens from the Odyssey is the newly empowered and often under informed consumer with their high deductible and array of chronic diseases. Healthcare provider organizations, payers and pharmacies must adapt to them and view them as actual customers not untapped wells overflowing with potential CPT codes. Now, more than ever, the industry needs to focus on quality experiences and good clinical outcomes for patients – and many startups are developing new approaches and technologies to tackle these issues. In order to make these new approaches a reality sooner rather than later, larger industry players need to understand the dynamic landscape, and work with and invest in these emerging companies. Incumbents with their large feet planted squarely on the traditional solid ground are sensing some seismic rumblings and how well they are leveraging and embracing these emerging companies to help maintain their balance may determine whether they can sustain themselves moving forward.
The herd must be thinned to survive.
There is no doubt that an unprecedented amount of venture capital has been pouring into healthcare, particularly in the area of digital health. Mercom Capital Group, for example, recently reported the amount of venture capital funding in health care information technology more than doubled to $4.7 billion last year from $2.2 billion in 2013. It’s great news for an industry that has long suffered from inertia and an incentive structure that optimized for consumption of high-cost services and treatments rather than for value and improving patient experience and provider accountability.
These investors justify their check writing by citing a number of compelling new dynamics. Among those are the HITECH Act, the ACA, the availability of new wireless and mobile technologies, the healthcare needs of an aging population, energetic evangelists like Rock Health, rising healthcare costs and the sobering realization that the system is broken and we have no choice but to change. Meanwhile, the innovators are citing Uber, Amazon and Square as both evidence of what is missing in healthcare and what they plan to bring to our antiquated ecosystem to meet the market’s new needs
Although the money invested so far has funded critical foundation-laying work, for the most part we have yet to see the new companies move to scale. One would be hard pressed to come up with an example of a venture backed healthcare service or IT company or even a paid for app that could lay any legitimate claim to be a Taxi Magic, let along the Uber of X or Y in healthcare. Most of the funding has sponsored initial product iteration, business model exploration and proof-point gathering. We’re now at an awkward but exciting stage where some “culling” is going to happen. That’s the reality, and the thinning of the herd will probably increase dramatically as these companies go out for large Series B and C rounds of financing. Many will be left in the dust if they don’t have differentiated value propositions and paying customers to give references.
We’re going to see some maturing take place in this space. The leaders that emerge will be the ones who learn how to navigate the often brutal healthcare enterprise sales cycles or those that acquire the much-anticipated but rarely sighted “healthcare consumer.” For those who understand the underlying sources of inertia and inefficiency not just the vision of a navigable and digitally enabled future, like my prior employer Cambia Health, now is the perfect time to enter the market as an active investor and support some of those emerging leaders.
Success Calls for Expertise
Much of the money that’s been directed toward these early-stage companies has come from tech investors, life-science investors and passionate angels.
What has been in shorter supply and will be critical at this moment when emerging companies are facing fierce competition, are investors that understand why the friction is so high for driving innovation and behavior change in healthcare. I expect that participation and active investment from venture firms that really understand the healthcare industry and the healthcare market soon will be in greater demand.
In order to create change in the industry, we need investors who understand that the lifecycle for success in healthcare is much longer than in tech and the specific reasons for that include regulatory policy and the unique challenges that clinicians face. We need investors who can do more that spot the need for disruption and a savvy charismatic entrepreneur with a great idea.
Healthcare innovation is hard. A few, rare companies will achieve compelling liquidity without having to go deep into their bullpen, but most won’t be so lucky. The market needs more investors that have healthcare compasses, even if they may appear rusty at first glance.
Tom Rogers is a SVP at McKesson Ventures.