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How Is Digital Health Investing Different From Traditional Tech?

Ask An Investor: Anne DeGheest, HealthTech Capital

Anne DeGheest, founder and managing director of HealthTech Capital


Meet Anne Degheest, founder & managing director of HealthTech Capital. In this edition of Ask An Investor, DeGheest shares the origins of HealthTech Capital, explains how digital health investing is different from traditional tech, and describes how she evaluates startup founders.

Why did you form HealthTech Capital?

Previous to HealthTech, I spent 20+ years in traditional healthcare — medtech, life sciences, and biotech — and I gradually became interested in leveraging technology from the burgeoning computer telecommunication industry to transform healthcare.

Previously, traditional life science investments dominated healthcare investment and focused on things such as clinical outcomes and developing new products. However, I sought opportunities in areas of healthcare that lacked significant regulatory risk — and even product risk to an extent — to create new markets and disrupt existing markets.

HealthTech Capital was started in 2010 before the term “digital health” existed.

The central idea behind HealthTech was to create an ecosystem of accredited angel investors, venture investors, and healthcare stakeholders, and to maintain a 20% physician membership — a wide spectrum of people who are committed to changing healthcare delivery. In addition to seed capital, we provide direct mentorship and guidance around clinical workflow integration, and expose portfolio companies to our network of industry partnerships.

We wanted to identify the people who understand healthcare technology, engage them with one another, and work closely with the entrepreneurs to provide them with a combination of money, mentorship, board advisory, and industry partnerships.

How does an early-stage health-tech investment approach compare to traditional tech?

First, let’s consider two different valuation curves in traditional tech versus med-device and biotech.

An early-stage tech investor will do a lot of “spray and pray,” because if they miss at the seed stage they may never get in. And if they do, it’s at a really high price. So, their strategy is to write a bunch of $250–500K checks that may not get very active. One of these will explode and pay for the entire portfolio. So, a typical curve for a breakout from Seed to Series A to Series B is an exponential curve.

In medical devices and biotech, you have a very flat curve since it takes a long time before you can get the necessary clinical work, the animal work, the FDA hurdles, etc. So it’s more steady until after the Series C, D, and E, where you start seeing a major increase in valuation.

In health tech — where you have both traditional tech and traditional healthcare investors now overlapping — the valuation curve is longer than traditional tech as far as a Seed and Series A. There are many issues in health tech but typically the economic buyers need a lot of data to substantiate adoption, and as an entrepreneur in this space you may not have enough metrics, or the right ones, to be able to identify where the true risk exists. You end up with a two to three year selling cycle, to get to the $2–5M of revenue that gets you the attention of serious VC.

So, the valuation curve in health tech — 50% of the money in health tech was invested at the Seed and Series A stages — is somewhere in between the traditional tech curve and medtech/biotech.

The fundamentals around health tech investment are skewed right now because traditional tech investors new to this space have a tendency to not understand the challenges of selling to buyers like hospitals and payors, which distorts actual growth opportunities. Therefore we see valuations that have become too high.

Many of these companies end up in a “Series B Crunch” because their revenue is not catching up to their valuation and the selling cycle is longer than their investors expected.

HealthTech Capital is a group of private investors dedicated to funding and mentoring new health-tech startups.

What advice would you give to an early-stage entrepreneur?

My advice to the entrepreneur is that at the end of the day, it’s not your valuation or how much money that you’ve raised that is important but instead it is how much revenue you create over time. From there you can develop a sustainable business model where there is a roadmap to profitability. And so, it all goes back to what is the unmet need of all the different stakeholders.

If you spend time understanding the complexity of all the different stakeholders in healthcare, and discerning the conflict of interest there is between each, you’ll understand what their respective needs are. If you successfully navigate that and come up with a value proposition that works with a business model that someone is willing to pay for, and the way to validate that doesn’t take years of data collection there, that is really where you need to focus.

It’s all about market creation and de-risking market risk. Companies that raise hundreds of millions of dollars and fail couldn’t come up with a sustainable market creation model.

How do you evaluate the people behind these companies?

This is a very important question — we [investors] spend too much time on the market need, the technology, and how cool the product is, and not enough time on evaluating the ability of the team to scale up. Of course we look for integrity, good communication abilities, and skill.

Every time I look backwards on successes and failures there is a common theme: mental agility.

Mental agility is the ability to adjust when you have a setback and also be able to listen to people’s opinions. The entrepreneur doesn’t necessarily need to always do what they’re told but they need to at least be able to receive input, process it, and then be able to implement. That’s what it takes to be a market leader or to create entirely new markets.

Founders must understand their limitations and surround themselves with people who can complement them, so that the team as a whole has a comprehensive skill set. That includes sales and marketing, regulatory, and an understanding of the complexity of clinical workflows and misaligned interests in healthcare.

An entrepreneur needs to have the vision of what he wants to create and see that during the seed stage, but then also have the ability to execute. However, there is no road map.You must make your best educated guess — then learn, adjust, and correct — and pass that information to the rest of your team so that the whole team is able to conquer the mountain.

So, it’s that mental agility — the ability of taking, what looks like small setbacks, and correct. That’s kind of the key to success.

As an investor, how do you turn moments of crisis into moments of value creation?

One of the interesting things from a psychology point of view is that the definition of stubbornness and persistence is only very often defined after the fact.

And so, very often a young entrepreneur, when he or she faces a crisis, usually goes back to their strength. For instance, it’s common for a technical founder to over-engineer the product. So, then you figure it’s a product problem when in reality it’s a distorted perception of your market value for the consumer.

The entrepreneur may not have sufficiently understood the customer viewpoint — and in healthcare there are always multiple customers and users — and asked what is important to them. Customers don’t care about your features; they don’t care about your black box technology; they just care that you solved their pain points. It’s the ability to understand that and then being able to create a market even when people didn’t even explicitly express their pain point.

It’s all about understanding the dynamics of the mindset of your customers.

And in order to do that you have to go dig it up.

How do you define digital health?

We use the term “health tech” because we believe it specifically addresses health care delivery. That could be a technology enabled service that changes healthcare delivery, which is the fundamental benefit you’re trying to get to.

The challenge I have with the word digital health is it feels like the dot-com world. It’s focusing on using digital technology for healthcare, which for me is just enabling technology. There are some really cool companies in the health-tech world that are not wholly using digital software but are changing healthcare delivery. Omada Health, for example, is more than digital health in my mind. They are not just a software company — rather, they provide a technology-enabled service that is changing people’s mindset from a combination of technologies and some of them are not necessarily pure software.

Health tech is comprised of a combination of technologies that allows you to improve healthcare workflow.

And that could be all the way from the hospital’s urgent care to the home. As a result of that, you change the dynamics which decrease cost, improve quality of care, empower the patients, and have long-term results that someone’s willing to pay for. So, for me, health tech is the solution that I’m changing healthcare delivery for a combination of technologies. And some could be technology-enabled services but there’s something that’s scalable in the process, it’s not just, physician’s providing services.

What is your personal moonshot?

Interestingly, I recently did a back-end calculation of the impact I have had on society with the companies I was lucky to be a part of — I calculated that they have probably saved 6 million lives worldwide right now over the last 40 years. And, obviously, I had never made that calculation while we were in the daily crisis, monthly crisis, and were too busy trying to conquer a mountain.

At times we’re so busy looking for the Moon, we don’t realize we are already on planet Mars.

In VC, I have the potential for huge impact on saving lives yet I don’t even know who these people are. I realized that that is a big part of my legacy and I want to continue to do that so that the company I’m involved with has an impact, not only improving the quality of care but at times saving lives.

And that makes you appreciate why you’re working so hard, why you tear your hair out at four in the morning, and why you’re doing it.

Anne DeGheest | 22 August 2017

TiEcon 2014: Interview with Anne DeGheest, July 7, 2014

Anne DeGheest | 08 July 2014

Anne DeGheest on Metrics for Success for Health Tech Start-ups, June 25, 2014

Anne DeGheest | 26 June 2014

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