By JEFF GOLDSMITH
These are grim days for innovative healthcare companies. The health tech and care innovation firms mature enough to make it to public markets have been eviscerated in the ongoing market correction. As of January 29, 2022, high fliers like One Medical (down 83% from peak), Oscar (down 83%), Bright Healthcare (down 85%), Teladoc (down 77% but still selling at 6X revenues!), and AmWell (down 90%) are the tip of a much larger melting iceberg. The dozens of digital health unicorns (e.g. pre-public companies valued at more than $1 billion) and their less mythical brethren, into which investors poured more than $45 billion during 2020-2021, are sheltering in the comparative safety of VC/Private Equity balance sheets. They are protected from investor wrath until those firms’ limited partners force a revaluation of their portfolios based on the market value of their publicly traded comparables.
Yet it is the next moves that these innovative firms and their equity holders make that will determine whether these firms realize their full transformative potential or fade into insignificance. The Gartner Group, which tracks the technology industry generally, popularized the notion of the Hype Cycle- a seemingly universal trajectory that tech innovations and the firms that produce them follow (see below).
The Gartner Hype Cycle
Everyone seems to focus on the colorful first phase of this cycle- the inflating and deflating part- where an innovation rises on a wave of the adulatory press (and breathless futurist punditry), then crashes ignominiously into the Slough of Despond. A classic example was the Apple iPhone’s ill-starred great uncle, the Apple Newton, which launched in 1993 and crashed shortly thereafter.
For founders and investors, as well as customers, however, it is the less visible succeeding phases that determine if the innovation survives and the firms that produce them become ubiquitous and indispensable parts of our lives. The rising initial phase of Gartner’s Hype Cycle is driven by the question “Is it cool”?, mediated by hyperactive media and Internet buzz. The inevitable crash, on the other hand, is almost always driven by the troublesome real-world question, “Does the product actually work as advertised?” Analysts, writers, and, most importantly, customers press uncomfortable questions about not only functionality, but also reliability, affordability, stickiness, and “value for money”.
How do firms survive the crash and climb Gartner’s “Slope of Enlightenment”? This is the unglamorous “pick and shovel” part. If the sticky “product integrity” issues (does the product actually work?) are resolved, then a host of important questions challenge the firm, its founders, and owners, which answers the crucial question: whether it is a real business: