Bryan Roberts of Venrock, one of healthcare’s leading venture capital firms, weighs in with his view on the health tech market ‘state-of-play’ as we roar into 2020. With a track record that includes athenahealth, Illumina, Grand Rounds, Castlight, and Lyra Health, Bryan’s not a bad investor to ask when it comes to identifying the “next big thing” in healthcare innovation.
Filmed at J.P. Morgan Healthcare Conference in San Francisco, January 2020
I’ve been driven steadily nuts by a series of recent articles that are sort of describing what’s happening in health tech or (because the term won’t die) digital health, so I thought it was time for the definitive explanation. Yeah, yeah, humility ain’t my strong suit.
It won’t have escaped your attention that, after five years during which Castlight Health more or less single-handedly killed the IPO market for new health tech companies, suddenly in the middle of July 2019 we have three digital health companies going public. While Livongo, (FD-a THCB sponsor) Phreesia and Health Catalyst are all a little bit different, I’m going to use them to explain what the last decade of health tech evolution has meant.
Don’t get carried away by the precise details of the IPOs. Phressia is already out with a market cap of $845m. Yes, it’s true that none of the three are profitable yet, but they are all showing decent revenue growth at an annual run rate of $100m+ and Livongo in particular has been on a client acquisition and annual triple digit revenue growth tear. It’s also the newest of these companies, founded only in 2014, albeit by buying another company (EosHealth) founded in 2008 that had some of the tech they launched with. Going public doesn’t really mean that the health care market will swoon for them, nor that they are guaranteed to change the world. After all, as I pointed out in my recent somewhat (ok, very) cynical 12 rules for health tech startups, UnitedHealth Group has $250 Billion in revenue and doesn’t seem to be able to change the system. And anyone who remembers the eHealth bust of 2000-2002 knows that just because you get to the IPO, it’s no guarantee of success or even survival.
But just by virtue of making it this far and being around the 1/10th of 1% of health tech startups to make it to IPO, we can call all three a success. But what do they do?
They are all using new technologies to tackle longstanding health care problems.
You’ve probably heard of Bitcoin, but we doubt you’ve heard of Dentacoin, MedTokens, or Curecoin.
These are healthcare specific cryptocurrencies born from Initial Coin Offerings or ICOs. In this article, we’ll briefly recap the trend of ICOs (aka token offerings) and provide you with a summary financial analysis of how this trend has played out among 138 healthcare ICOs. The results to-date are enlightening, but disappointing. We believe there’s still potential for some projects to be successful.
What’s an ICO? Here’s a quick take from Wikipedia and we’ll point you to an Appendix that will guide you to additional resources:
An ICO is a type of funding using cryptocurrencies…In an ICO, a quantity of cryptocurrency is sold in the form of “tokens” (“coins”) to speculators or investors, in exchange for legal tender or other cryptocurrencies. The tokens sold are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project launches.
Autonomous Research found that ICOs raised over $7 billion in 2017 and are slated to raise $12 billion in 2018, with some mega projects raising billions of dollars each.
Epic reveals plans for a fifth campus, which is slated to include half a million square feet of office space and pay homage to literary classics like “Charlie and the Chocolate Factory” and “The Wizard of Oz.”
A Setback for MyMedicalRecords
A US District Court rules against MyMedicalRecords in its patent case against Walgreens, Quest Diagnostics, and others. MyMedicalRecords, a company that many label a patent troll, contends its patents covered a method of providing online PHRs in a private, secure way. However, a judge ruled that “the concept of secure record access and management, in the context of personal health records or not, is an age-old idea,” and is therefore abstract.
Despite the setback, I doubt MyMedicalRecords will stop demanding organizations to pay up or risk facing a lawsuit. I predict they’ll make some tweaks to their business plan, such as focusing only on organizations with not-quite-so-deep pockets that are willing to settle without a fight.
What Has $564 million Bought Us?
Sens. Lamar Alexander (R-TN), Richard Burr (R-NC), and Mike Enzi (R-WY) ask the General Accounting Office to review the ONC-funded health information exchanges to determine what exactly the exchanges created with the government’s $564 million in grant money.
It’s a valid concern, given the significant number of providers and regions still lacking electronic exchange capabilities and the millions that have been spent.
Physicians Reject Stage 2 Attestation
Fifty-five percent of physicians say they won’t attest for Stage 2 MU in 2015, according to a SERMO survey of about 2,000 physicians. Respondents cite several reasons for not attesting including financial concerns, difficulty engaging older patients, and lack of software usability.
Given the lackluster Stage 2 attestation numbers so far, the findings are not particularly surprising. It will be interesting to see what CMS and ONC intend to do in the face of the overwhelming evidence that many providers simply don’t think it is worth the effort.
On To Stage 3
The Office of Management and Budget is currently reviewing the proposed Stage 3 MU rules and will likely publish them in February. CMS states that Stage 3 will include changes to the reporting period, timelines, and structure of the program, including a single definition of Meaningful Use. CMS also adds that “these changes will provide a flexible, yet clearer, framework to ensure future sustainability of the EHR program and reduce confusion from multiple stage requirements.”
Can’t wait to see what is included. And, I can’t help but be a little amused that it’s been six years since the passage of the HITECH legislation and we are just now getting a definition for “Meaningful Use.”
Show Me the Money
Allina Health and Health Catalyst sign a $100 million definitive agreement to combine technologies, clinical content, and front-line personnel.
Rush University Medical Center will implement Merge Healthcare’s cardiology PACS.
Healthcare operating system platform provider Par80 closes $10.5 million in Series A funding led by Atlas Ventures, Founder Collective, and CHV Capital.
Health analytics provider Apervita, formerly knowns as Pervasive Health, completes an $18 million Series A round of funding led by GE Ventures and Baird Capital.
Teledermatology provider PocketDerm raises $2.85 million from an undisclosed investor.
Caremerge, developers of a care coordination platform, raises $4 million in a second round of funding. Investors include Cambia Health Solutions, GE Ventures, Arsenal Health, and Ziegler-LinkAge Longevity Fund.
I hate to give away all the punch lines from my California Healthcare Foundation report on healthcare accelerators, so you will just have to read it for yourself. However, a few extra tidbits that didn’t make it in are here below (as you can imagine, I can’t be quite as Lisa-ish in a commissioned report as in my blog). Among my many discussions with a myriad of willing report interviewees (thanks to all of you!), I started collecting some funny stories that I have begun to refer to as Tales from the Accelerator Crypt. A few of them are here below for your amusement.
From an East Coast Economic Development-Focused Accelerator: By far the worst idea pitched to us was from a company that proposed to prevent falls among the elderly with a vest containing an airbag whose deployment is triggered by EEG signals coming from a wearable computer brain interface. It’s probably obvious why this is so insane. Getting beyond who might actually wear such a thing around their home or to bed, can you imagine the number of erroneous deployments from the notoriously unpredictable, noisy EEG signal? If only they had made a video. That same week in the same city, I was amazed to be introduced to a rival company also developing a wearable airbag for accidental falls, but at least this one was triggered by an accelerometer. File under “You know wearables have jumped the shark when…”
From a University Program in CA: The most awful pitch we had was from a clinician-entrepreneur whose answer to every probing question on commercial viability was “This is going to save countless lives.” It was his answer to every question, clinical to operational to financial. The most entertaining stage moment, however, was when a CEO of a company developing a ‘next generation’ needle-free injector did a live demonstration of his product by injecting himself with saline while up on stage doing his pitch. He unbuttoned his shirt, gave himself the shot and buttoned up again, claiming how painless it was. As he continued to speak, blood pooled and spread from the injection site, down his arm and across his entire white shirt. It was a slow motion disaster. He didn’t recover very well. Needless to say they didn’t win the demo day competition.
The best way to get your startup noticed is to have your product validated by experts in the industry. As a young startup connecting with that community of experts can be quite difficult. Participating in a developer challenge can not only lead to funding and credibility but provides a valuable testing ground for products.
What is a developer challenge? These virtual competitions build on the concept of their in-person cousin the code-a-thon/hack-a-thon, prompting teams to develop technologies to address some of healthcare’s most complex issues. Over 3 – 6 months teams work on design concepts and prototypes for a variety of challenges sponsored by all types of organizations from charitable foundations to for-profit companies. Final submissions are judged by a panel of industry experts and winners are awarded cash prizes.
Health 2.0 has run over 75 challenges in the past 4 years and awarded over $6M in funding to burgeoning digital health companies. But its not only money that draws teams to these competitions, participants gain validation of their product, publicity and market access.Reflecting on the past few years, we want to share the successes of these challenges.
Now that President Obama has been re-elected and the Supreme Court has upheld the Accountable Care Act, healthcare reform is here to stay. So what does reform mean for healthcare investors? I believe it will usher in a new fertile period for innovative,venture‐backed companies that can navigate the brave new world of healthcare delivery and management.
The Accountable Care Act impact on healthcare IT investing is already being felt.Venture investment in 2013 is showing significant growth from last year. In 2012,according to PWC, a global accounting firm,the life sciences sector which includes healthcare IT accounted for 25 percent of all venture capital dollars invested which totaled nearly $1.2 billion in 163 deals,more than double the $480 million in 49 deals in 2011 and almost six‐times the $211 million in 22 deals in 2010.
Now is the time to make order out of chaos and to set the stage for a next‐generation healthcare system that can effectively service our nation. At Psilos Group, we have just released our fifth Healthcare Economics and Innovation Outlook and identified the following four areas as the most promising opportunities for healthcare investors in 2013 and beyond: Private health exchanges, consumer‐focused insurance programs, 21st century healthcare technologies, and innovations that reduce error and waste.
Investing In Exchanges
The healthcare insurance marketplace—and the way insurance is bought and sold—is facing massive change.Healthcare insurance exchanges, both public and private,promise to create a more organized and competitive market for buying healthcare insurance, which could moderate price increases that are currently spiraling out of control.
From our perspective, exchanges are an intelligent place to invest. Software and services will power the exchanges. Psilos envisions massive opportunities for technologies that enable operators of both public and private exchanges to build high functioning platforms, including the shopping software and back‐end administrative technology and service products needed to serve tens of millions of people efficiently.
Last year was a banner year for digital health, as the market saw significant growth in funding, bigger deals and new investors entering the space. So what’s in store for 2013? According to a survey of nearly 140 digital health entrepreneurs and over 50 health care information technology venture investors, conducted by my venture capital firm InterWest Partners, we are in for another exciting ride this year. In the survey, we asked which sectors will see the most love from investors in 2013; which companies (if any) will see a $1 billion valuation; where they are having trouble recruiting; and which digital health entrepreneur would win “Survivor: HCIT Island” The answers? Well, it all depends who you ask.
Everyone is always asking me what it is like being an EIR and why I decided to do it after my 5+ years working on Google Health. First of all, for those of you who are not familiar with the term – an EIR stands for either Entrepreneur in Residence or Executive in Residence. In the case of Morgenthaler Ventures, they were looking for a person with extensive experience in the Health IT sector at an executive level. This differs from a more traditional EIR title (entrepreneur in residence) where you are asked to incubate a startup from scratch with some support and resources. As an Executive in Residence, I work hand in hand with the firm’s partners to author the current health IT investing thesis, map out the industry, source companies that match our areas of interest, and help with diligence. The goal of my EIR term is to find a company that Morgenthaler can invest in and then join that company as part of the executive team. I picked Morgenthaler Ventures because of their track record in health IT (invested in Practice Fusion before Health IT was in vogue) and their leadership in the industry with the creation of the first DC to VC conference.
In its 3rd year, DC to VC was initially started by Rebecca Lynn, IT Partner at Morgenthaler Ventures to bring the venture capital community together with Washington D.C. policymakers. This year, I am proud to say that I am co-directing the DC to VC event and the health IT startup contest along with Matthew Holt and Indu Subaiya from Health 2.0. The contest will take place on the last day of the 2012 Health 2.0 Annual Fall conference in San Francisco on October 10, 2012. Online applications open today, June 4, 2012 and stay open until August 3, 2012.
Venture capitalists like to use the word “traction.” It sounds all glamorous, like an ad showing a Range Rover toughing it out up some impossible incline. But when I hear a company talk about ‘early traction’ in its pitch, I’m always leery of the “First and Worst” effect.
My first customer at my first company was a grandfatherly CIO at a big hospital. Of course I wanted to please him, and was enthusiastic about doing so. But I was also very focused on taking over the world with our software. I told him, “We’ll change anything you want about the product, as long as it’ll be good for all our future [gazillion] customers.”
Of course, The Grandfather wanted lots of one-off customizations that would really only be good for him. I told him that all the time we spent doing custom work for him was going to make us less profitable, and less likely to be able to sell the product to other people. And to survive long enough to do any improvements to the product at all, we needed to be profitable. He seemed to think that made sense, and begrudgingly agreed.
In the end this arrangement was a win for both of us. Our product was a home run for his hospital. We got an evangelical reference customer, and his hospital helped make our product better. The precedent we’d set with The Grandfather gave us the courage to refuse other customers who wanted one-off changes. Sure, we could have done this for one or two hospitals, but by the time we got to hospital 300, it would have been a mess.