The reality of today’s funding environment for digital health entrepreneurs is that it’s traditional tech investors who have the lion’s share of the money, while most long-time healthcare investors are on the ropes, contending with fleeing LPs and at least the perception of disappointing returns.
While it’s great news that some tech funds seem interested in dipping their toes into the healthcare space, it’s concerning that the investors with the most resources are not necessarily the ones who understand healthcare the best.
Tech investors, in general, are not always comfortable with physicians, and seem much more at home with engineers and developers. These investors also tend to gravitate to businesses selling directly to consumers rather than dealing with the sordid complexities of our current healthcare system.
Many tech investors are also — understandably — drawn to the power of data, and the possibility of analytics, a sensible affinity but one that at times can translate into an excessively reductive view of medicine that fails to capture the maddening but very real ambiguity of medical science, and especially of clinical practice.
It didn’t appear on the lightning strike map, but lightning did indeed strike a young medical student inside the Washington Convention Center right in front of about 1,500 amazed spectators on the first day of The Health Data Initiative Forum III: The Health Datapalooza. Everyone is fine—though our medical student may never be the same again.
Actually, this story began long before Datapalooza, of course. Fourth-year medical student, Craig Monsen, and his Johns Hopkins Medical School classmate, David Do, started collaborating on software applications soon after they met in first-year anatomy class. Craig graduated from Harvard with degrees in Engineering and Computer Science and David from University of Minnesota in Bioengineering.
They’re not quite Jobs and Wozniak—neither dropped out of anything—yet—although Craig, at least, is planning to skip or delay residency. You see, after seeing the Robert Wood Johnson Foundation (RWJF) Aligning Forces for Quality Developer Challenge last year—they got very serious about bringing to life their vision of new applications that could help patients and consumers make great health care decisions.
Just recently, the New York eHealth Collaborative and the New York City Investment Fund held an awesome information session for the New York Digital Health Accelerator at the chic digs of the TimesCenter in NYC. The Accelerator is a program for early — and growth — stage digital health companies that are developing cutting-edge technology products in the areas of care coordination, patient engagement, analytics and message alerts. The event was open to the public and provided thorough detailing of the accelerator, insights as to the types of solutions that participating providers hope to receive and – of course – some networking. If you missed this exciting event, you can check out the recorded stream. If you are interested in the program, access the application.
Twelve companies will be invited to participate in the nine-month program. A review committee — comprised of hospital leadership, technology experts, clinicians and investors — will select the companies. The committee will evaluate applicants on their product innovation in the four focus areas, the track record of their management team and their company life-cycle stage.
When I entered the VC business 10 years ago, I tried to keep thinking about venture capital as a business, where the key focus area was on meeting the needs of our target customers — entrepreneurs and limited partner investors.
In the case of entrepreneurs, those needs have changed radically in these last 10 years. The surge in seed investing over the last few years has been well-reported and analyzed. With advances in cloud computing, open source infrastructure, development tools and general “Lean Start-Up” techniques, entrepreneurs need less capital than ever before. And when entrepreneurs’ needs change (i.e., requiring less capital), smart investors adjust to meet those new needs. Hence, the rise of angels, super-angels, incubators, accelerators, micro-VCs and VC-led seed programs.
But as the “Great Seed Experiment” (as my partner, Michael Greeley, calls it) matures, a new trend is emerging. Entrepreneurs are beginning to learn the difference between what I’ll call Passive Seeds and Activist Seeds. And entrepreneurs are learning that the difference between the two, although somewhat subtle, matters greatly.
Passive Seeds are when a VC invests a small amount of money (for a $200-500M mid-sized fund, typically $250k or less, for a large $1B fund, perhaps $500k or less), to achieve a very small amount of ownership (typically less than 5%) to simply create an option to participate as a more meaningful investor in the future. Passive seed programs get most of the press attention because of their sheer volume.
The federal government is on the cusp of leveling the playing field for healthtech startups. Health 2.0 events have shown an unprecedented wave of innovative healthtech startups have developed over the last few years. You can also see them at demo day events that Blueprint Health, Healthbox, Rock Health and StartUp Health host. However, the health sector may be the single most challenging arena for startups.
I would argue nothing would result in population health improvement (while decreasing healthcare costs) more than having greater engagement by patients in the healthcare process. The Office of the National Coordinator (ONC) could catalyze an unprecedented wave of innovation with a stroke of a pen by strong inclusion of patient engagement requirements in the Meaningful Use requirements.
Having high expectations for Patient Engagement will cause healthcare providers to rise to the occasion to solve this critical issue. It’s well documented that three-quarters of healthcare spend is on chronic disease and decisions that drive outcomes are made by individuals (aka “patients”). It’s long been said the most important member of the care team is the patient. Now is the time to transform that from a catchphrase to reality. The ONC can do that.
The biggest potential stimulus ever for healthtech startups
We have seen how Stage 1 Meaningful Use requirements (PDF) have spurred providers into action. By and large, that has meant an infusion of customers to EHR vendors. Legacy healthIT has had very, very little focus on the patient because financial incentives motivated the development of systems designed to get as big a bill out as fast as possible — i.e., there has been no incentive to involve the patient.
When I first entered the venture capital business 10 years ago after being an entrepereneur, my partners warned me that “my bar” for new investments would get higher over time. In other words, the criteria to make a new investment – clearing “the bar” – would get more strict with time as I developed more experience and saw more things. I found this to be very true, and the notion that investors get wiser and more selective over time has become common wisdom in the industry.
But there’s something very new going on in the last few years – something very striking. Simply put, the collective bar of the investment community to fund young companies has recently gotten higher – much higher.
The entrepreneurs I speak to are feeling it every day. When they pitch their new idea to investors, they are told to build a prototype first. When they build the prototype, they go get customers. When they get customers, they are told to show engagement metrics. When they show engagement metrics, they are told to run some monetization experiments. When they run monetization experiments, they are challenged to prove scalability. Maybe I have Passover on the brain this week, but it’s like investors are putting entrepreneurs through a nightmarish version of Dayeinu, where no matter what they achieve, it’s never enough (speaking of Passover, if you haven’t seen this Jon Stewart clip of Passover vs. Easter, it’s a must. I’ll wait.).
Why is the new investment bar so high today? Isn’t there plenty of euphoria and “animal spirits” to go around with the IPO market returning, marquee acquisitions (e.g., Instagram at $1 billion) and the impending, earth-shattering Facebook IPO?
When I was a teenager, the older women in my family taught me to cook. I learned it was traditional not to add salt when cooking lentils, because it would slow down the cooking. For some reason, perhaps the sheer pleasure of being difficult, I insisted on taking two identical pots and cooking identical quantities of lentils, one with salt and one without. That caused quite a bit of a stir, and not only because I proved that the salted lentils cooked just as fast. On the one hand, my mother, grandmother, and aunts sensed more difficulties were to come. On the other, they knew they’d participated in something different and important: a scientific experiment.
The women in my family were courageous, smart, and resourceful. They knew many things: useful wonderful things. For the most part, their knowledge was received knowledge, knowledge they’d been given, not figured out on their own. This is a common situation. The idea that anybody can be taught to figure things out, that there is a logic to discovery and invention, would have struck our ancestors as radical and strange. Until quite recently — until science education became institutionalized and widespread — the creation of new knowledge depended on either genius or luck.
There’s a lot of entrepreneurial energy in the Bay Area, but I’m always surprised at how much of it is directed towards health care. As Apothecary readers surely recognize, if we were to rank sectors where the government lies ready to crush the entrepreneurial spirit, health care and education must lead the list.
So, I was excited to have wrangled an invitation to the UC Berkeley’s Haas School of Business‘ annual Business of Health Care Conference, a day-long event held last week. This year’s conference, the sixth, titled Entrepreneurial Solutions to Health Care Challenges, assembled a high-profile group of entrepreneurs, scholars, and investors.
The most informative panel that I attended addressed “Venture Capital – Positioning Health Care Startups for Success,” moderated by Rebecca Lynn of Morgenthaler Ventures. The panel comprised Missy Krasner, also of Morgenthaler Ventures and the former Google executive who launched the now defunct Google Health; Lisa Suennen, a co-founder of the Psilos Group (perhaps the longest-standing pure-play healthcare VC); and Jeff Tangney, former president of Epocrates and founder of Doximity.
Key take-aways from the panel discussion were:
Digital health is where the opportunity lies, but both healthcare investors and IT investors bring unhelpful biases to this new sector.
Although the Bay Area crowd is loathe to hear it, some of the best new health IT businesses are in places we’d shun – like Michigan or Nashville.
Some digital-health entprenreneurs think they have a business, but they only really have a product. Nothing wrong with that, but you’ve got to sell it, not fund it.
There’s a new movement in healthcare – and it’s growing from a surprising place. Instead of emerging from government or industry, it’s budding from the grassroots –from everyday physicians. The movement is democratizing health information and giving birth to a new landscape: Interactive Health.
Interactive Health is transitioning clinical care from real-world, costly encounters to virtual, inexpensive, cloud-based care. And the view from the cloud is better. This transformation is starting with the most fundamental interaction in healthcare: patient question, physician answer.
In late April of 2011, HealthTap decided to help facilitate this movement by bringing together physicians to engage online and create a roadmap for “care in the cloud.” Nine months later, the growth of physician engagement on HealthTap and beyond proves that Interactive Health is here to stay.
I like health Web sites and tech start-ups. I think the democratization of medical information is a beautiful thing. It’s a cliche that you can find out more about a hotel than a doctor with a few Google searches. I love how that’s starting to change. I also think that electronic medical records will improve health care over the long haul.
But I am also cynical about the idea that technology is some sort of panacea all that ails the sector. I read Michael Lewis’s book The New New Thing when it came out in 1999. There’s a great anecdote in it about Netscape founder Jim Clark. He was looking for another big challenge and decided–this was 1996–that all that was missing from health care was good software. So he started Healtheon. To Clark it was just a matter of writing some really good code and all the inefficiencies and paperwork that bedeviled the industry would go away. His business plan was a flow chart showing how software cuts out paperwork. It was simple.
Flash forward and Healtheon is buried somewhere deep inside WebMD. There’s still a lot of waste and paperwork that hasn’t gone away.
Since Clark there has been a parade of other ambitious health-tech entrepreneurs. Do you remember the search engine Wondir? Or the comparison-shopping site Vimo? Or Carol.com? How about Steve Case‘s modestly named Revolution Health? What about Subimo?