Ask a Healthcare VC: Shiny new toys vs potential game changers

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Less than ten years ago, digital health – called “Health Care IT” at the time – was barely a blip on the entrepreneurial radar. But the sector is maturing, and the amount of money invested and the number of deals made is mounting. The first half of 2017 was record setting, with $3.5B invested in 188 digital health companies. In 2017, total venture funding hit nearly $6B, with more mega deals (those with $100M+ invested) than ever. But not all of them are going to make it, says Dan Galles, partner at Providence Ventures.

“Too much capital is flowing, creating more vendors than there are hospital systems and payers, and there’s not enough room,” Galles says. “There will be great companies built, but there’s going to be a lot of money lost as well.”

How do you separate the wildly successful companies from the ones who stumble?

The shiny new toy syndrome

When the opportunity to produce a fancy, bells-and-whistles tech gadget looms large, sometimes the important questions get overshadowed.

In the early days, Galles says, a lot of entrepreneurs came at health care with a savior mindset, tackling what they saw as broken health care processes with obvious solutions. But they didn’t necessarily take into account who the real paying customer could and should be – who was getting the economic benefit from the solution they were delivering? They also didn’t consider whether or not the problem they were trying to solve would even make the top 10 or 20 issues with which the health system was grappling.

“Folks would come into the space and say, we’ll start with a consumer pay model and then everyone will think it’s great and they’ll pay for it,” he says. “But now what separates the shiny new toy versus a more thoughtful game changer is how they’re targeting big, high-priority problems for health systems or health plans.”

Fitness wearables are a good example. Despite Jawbone going out of business and Fitbit stock coming down, it’s been a wildly successful new consumer category. But leveraging wearable remote monitoring technology for medical purposes and selling them into enterprises was overplayed and overinvested, without a lot of fruit being produced, Galles says.

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On the wearables side, the biggest problem is that the data isn’t that meaningful from a medical perspective – how many steps a patient has taken isn’t impactful to how their patients are being treated or need to be treated. Remotely collecting more relevant health vitals has shown to be too expensive, or too complex. And providers just aren’t seeing much economic benefit from these kinds of solutions because entrepreneurs aren’t understanding who the customer is and who the economic beneficiary is – or they have even overestimated the impact of it as a health care problem. For instance, remote technology solutions that claim to reduce readmits largely still benefit the health plans more than the provider systems, yet many companies targeted provider systems as their customers.

Know your target inside and out

The companies that have the best chance of being successful are ones that are not only tackling big, high priority problems, but are going after the issues that health systems and health plans – the paying stakeholders – are encountering.

“That’s an important concept, understanding who the customer is – knowing who is at risk or is going to be the beneficiary of whatever solution you’re providing,” Galles explains. A solution needs to improve clinical outcomes while also offering cost savings or increased revenue, thereby producing a strong economic benefit.

Finding opportunities

Healthcare is undergoing massive structural changes, driven by the ACA and what Galles notes is an unsustainable overall cost of health care to the economy, which is forcing changes in how providers and payers are operating. And that’s offering a lot of opportunity for true transformational change, because the big stakeholders have to change.

Galles points to the telehealth marketplace as an example, which seemed to spring out of nowhere less than a decade ago, and was driven by structural changes as supply and demand in terms of patient access to physicians or clinicians was becoming a crisis. Add to that the way on-demand services like Amazon next-day delivery and so on were changing customer expectations – why couldn’t information about a health issue be delivered as quickly as a meal from an online delivery service?

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Supply issues created their own pressures with the paying customers, health plans and the large self-insured employers, demanding the most cost-efficient visits for their members or employees.

The demand on both of those fronts, both from the consumer perspective as well as the stakeholders who were paying for their health care, was well aligned. Companies like TelaDoc, with an almost $4 billion market cap, MD Live, and Doctor on Demand sprung up and have grown exponentially over the past several years.

“Understanding structural changes and targeting the new issues that will have big economic consequence to your customers are the key things that I’ve seen in terms of building really successful companies, and the opportunity to build big companies,” Galles says. “There are so many screwed-up things with respect to our health care industry that seem straightforward and should be fixed, but you really need to focus on who the stakeholders are who can be beneficiaries of your solution and who would be willing to pay for your solution.”

Last words: Go big or go home

Galles’ final words of advice: Go after big, high-priority problems, and understand your customer and the impact your solution can have on them. Don’t build a solution in a vacuum – work closely with health system and payer customer partners. Be cautious about over-building the team or over-capitalizing the business. Healthcare sales cycles are notoriously long and complex, so scale your operations in line with the true revenue growth.

“You can waste a lot of time developing to what you think the market needs are,” he explains. “If you do it in tandem with your beta customers and do co-development along the way, it’s a much smarter way to get to the right kind of product, and create some data along the way to help support your value proposition and whether or not you’re able to deliver for that customer base, much earlier in the company’s maturity. Then, you can go ahead and continue to enhance your solution to further meet customers’ needs.”

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Source: VentureBeat

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