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Digital health is dead, says this health-tech investor

Excellent article  by Rob Coppedge, CEO of Echo health Ventures, on the reality check hitting hard the overhyped digital health sector!

There are a LOT of unmet needs and opportunities to start new HealthTech companies, but it takes time, hard work and understanding of the workflows, who will pay and who will use the new product…and why!.

Monetization is key! Entrepreneurial team need to spend more time on the pain points, business model and market creation to scale up at the historical market adoption rate.. not the wishful thinking of tech entrepreneurs or unknowledgeable investors still pouring into digital health as the new Gold Rush.  

Rob Coppedge is CEO of Echo Health Ventures in Seattle and has been investing and working in health care for 20 years.

Let me be clear: I believe strongly in the need for substantive, consumer-centric transformation of the health care system and have been a long-term proponent of the power of entrepreneurs to catalyze and drive these difficult changes.

Despite this, I truly struggled to prepare for a recent presentation on the future of venture capital investing in the "digital health" space. The group I addressed expected another digital health pep rally – but, after much reflection, the best I could bring them was an explanation of why, despite the countless blog posts and questionable survey data to the contrary, I believe the digital health party is over and why those of us focused on long-term systemic transformation should be happy to put this hype cycle behind us.

Winter is coming

Since 2014, roughly $16 billion in venture funding has been invested across 800-plus companies in the digital health space. If the investors of these companies were to generate the returns they are expecting, we would need to triple the public market cap of the health IT space by 2021. These are unrealistic expectations that have created an unhealthy environment for tech-enabled health care start-ups and the entrepreneurs that lead them. Only recently have the VC unicorn watchers across the blogosphere begun to question we aren't seeing the billion-dollar success stories from other industries replicated in HCIT (health care info tech), exposing underlying concerns that threaten the return profiles of overcapitalized digital health portfolios.

The only thing that has grown faster than dollars invested in digital health has been the hype surrounding it – with conferences, blogs, incubators and Twitter handles springing up everywhere. While primarily differentiated from stodgy HCIT by the average age of its practitioners, digital health has brought two important developments to the industry: a pervasive optimism that health care services problems could be solved with better technology and a keen proficiency at venture capital fundraising.

This is not all bad. Without question, the cynical HCIT space needed optimistic visionaries and has deserved more venture investment than had been the historical norm. But when the ungrounded aspirations of well-meaning digital health entrepreneurs and venture capitalists collided, it created an explosive environment where considerable capital was burned without building truly sustainable businesses. Many of these have quietly failed and others are - or soon will be - seeking strategic alternatives.

This did not have to be the case. The macro-trends, industry challenges and consumer needs still exist – in fact most have gotten worse during the ramp up of digital health investment. And without question, innovators, entrepreneurs and investors will be critical developers of solutions to these endemic challenges. We just need a new way forward – to support the development of the next generation of great healthcare companies that our industry, and our country, needs.

What went wrong

There's no argument here that our health care system demands fixing. Digital health entrepreneurs have approached many of these challenges with robust enthusiasm, a long-term vision, and ample access to capital. However, many have lacked expertise, underappreciated health care specific workflows, misunderstood the full health care consumer journey and seriously underestimated what it takes to break through enterprise health care sales cycles. This led to numerous, expensive business lessons:

  • Better mousetraps are not enough: Considerable resources were deployed developing better technology, apps and analytics. Unfortunately, inadequate attention was paid to solving how to go to market. Better mousetraps are useless without mice – and many digital health companies ended up chasing target markets and were unable to get to scale.
  • Ill-equipped for enterprise health care: Many early-stage solutions weren't able to overcome challenges targeting large established payer and provider clients that have cultural and operational antibodies that repel risky and disruptive solutions. Even those that survived the 18-month sales cycle often found that successful piloting and implementation once inside required subject matter expertise, outcomes measurement capabilities and political savvy that is rarely necessary in start-ups targeting other industries.
  • Consumers aren't impressed (yet): Many digital health companies have declared themselves platform solutions, staking their business models on "owning the consumer" and integrating parts of their health care experience. Despite this, most digital health consumer engagement solutions still struggle with abysmally low engagement rates.
  • Overvaluing and overcapitalizing: Health care services and IT have not historically bred unicorns. Sales cycles are slow and adoption is more measured. Still, many digital health companies raised capital at exceedingly high valuations, expecting technology-like exits. With a few exceptions, realizations have lagged and many companies are facing tough decisions made even more difficult by valuation overhang from their last rounds.
  • Don't blame D.C. for killing digital health: There is a lot of talk that the uncertainty in D.C. is strangling digital health innovation. At best, this is an opportunistic explanation. While there is no lack of regulatory and policy uncertainty, we are instead at a critical point in investment life-cycles where investors are looking for their early digital health investments to demonstrate performance. With a few notable exceptions, the story isn't great.

The Path Forward

Despite all of this, solutions are needed more than ever. Entrepreneurs and investors need to take a step back and focus on how they can survive and thrive, driving the industry transformation that will play out over the coming decade. We need to rededicate ourselves to the fundamentals of building great, lasting companies in our unique industry. While we are constantly updating it, here are the First Principles for the post-digital health world we have on top of our desk at Echo Health Ventures today:

  1. In this market, distribution is more valuable than capital.
  2. Quality allies and partners are often more valuable than capital.Expect that the digital health market will rationalize over the coming 18 months – driven by consolidation and attrition. Make sure you have partnered well – and position for optimal scale while you can still drive your own destiny.
  3. Make sure you are watching the right scoreboard. Earnings and a rightsized cap table drive returns. VC mega-rounds drive press releases.
  4. Make sure you're asking the right questions. "Who pays?" and "LTV>CAC?" are probably your best leading indicators of success.
  5. No matter what race you think you are running – prepare for a marathon, not a sprint: Realistic valuations and investor expectations remove barriers for downstream fundraising or exit options. Expect the mismatch of investor return timelines vs. long sales cycles.
  6. Proactively plan for your exit (and "strategic alternatives") before you plan for your raise.
  7. "Who benefits" isn't necessarily "Who pays." Following the money – especially difficult at times in health care. Getting real about who pays you and what they value has been a shockingly overlooked step amidst the digital health hype.
  8. Know your enemy. Entrepreneurs need to understand the context for the "disruption" they plan to bring to market. Understanding the gory details of the underlying production systems, workflows, financial flows, etc. that underpin the broken system will better position them for success. Respect the complexity of your clients.
  9. "Don't believe the hype…" especially your own. A healthy dose of humility is essential. Or said differently, many companies with thousands of Twitter followers and copious name-drops in the WSJ have gone out of business for lack of revenue and margin.

10. Most importantly, if you're just launching, be realistic. Don't lose your passion or enthusiasm, but filter the noise by focusing it through the experience of your investors, partners, and board. Don't over-capitalize or over-commit.

Digital health Is dead - now the work begins

If digital health is dead, then what? I am hopeful that my venture capital and investment banking colleagues will not rush to replace it with yet another buzzword. Without question, buzzwords help us sell companies – but they certainly don't help us build, run and sustainably grow them. Instead, we need to get real, going deep to build the connections between new technologies and the legacy health care enterprises consumers work with daily and entrust with their care and finances. Disruption is sexy, but given the complexities of the market, cooperation is more likely to move the needle for transforming health care.

Most of all, I hope that entrepreneurs, technologists, designers and others drawn to health care by the allure of digital health stay in the industry. While the promise of easy, near-term transformation may have been unfulfilled, the experience you have gained is invaluable. As veterans of this hype cycle, you are well positioned to make a big impact as this work moves forward. From a social and economic perspective, it will be some of the most important work any of us can do over the next 25 years. We need you with us. No matter what hashtag we use.

Anne DeGheest | 11 September 2017

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

Anne DeGheest is voted in as one of Top Ten Finalists as Industry Leader at the Health 2.0 Global Retrospective Awards

Health 2.0's 10th Annual Fall Conference, is recognizing the accomplishments of their movement. To do this, Health 2.0 asked the community to nominate the top influencers in four categories: Patient Activists, Industry Leaders, Technology Companies, and Health Care Organizations. Through thousands of votes gathered from this past summer and in the preliminary final round the past few weeks, they have narrowed down to the top 10 Top Industry Leaders.

Read more →

Anne DeGheest | 28 September 2016

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