Healthcare startups still face a rocky road as market matures

Despite all the hurdles healthcare startups face along the way from concept to product launch and beyond, venture capitalists still invested $9.4 billion in 2014, a 34% increase from the year prior. No one will argue the healthcare landscape is changing and the fast moving scenery is providing gaps new technologies and business models can potentially fill. Some may even argue that, “startups are rebuilding the consumer interface for healthcare,” as Todd Hixon stated in his blog.

What sets up the healthcare sector’s steep slope for startups are several key challenges that include: regulatory issues, data security, industry expertise, and unique economics tied into reimbursement. On the flip side, health reforms are pushing value-based care, an aging population is demanding special care initiatives, and technology is being adopted into mainstream health. It would seem a perfect storm for healthcare startups. However, there’s no clear roadmap to follow and companies with huge potential (and funding) like Theranos have discovered the promise to revolutionize care needs to be backed by hard data.

Investors betting on the future of healthcare

“The healthcare industry continues to be one of the biggest opportunities for entrepreneurs and investors,” Bob Kocher, a partner at Venrock, a venture capital firm, told Fortune.

In fact, StartUp Health, a New York City-based accelerator with 90 companies in its portfolio, deemed 2014 as “The Year Digital Health Broke Out,” with $6.5 billion invested – a 125% increase from 2013. 2015 was dubbed: “The Year Digital Health Hit Its Stride” with a shift to mid- and late-stage deals focused more on consumer wellness and e-commerce.

However, investing slowed last year; digital health startups were backed by $5.8 billion in funding.  Because of regulatory issues in the U.S., CB Insights says the funding will start to move overseas to countries like India and China where that’s not as big a hurdle. Another potential problem facing digital health startups include unit economics. “This is particularly true for digital health plays in the direct-to-consumer and on-demand space, where reimbursement is still murky, distribution and marketing costs are high, and patients are not used to paying out-of-pocket,” the CB Insights stated. 

Tech giants changing healthcare via selective startups

Large companies, like Google, IBM, and Apple, are all making big investments in healthcare. Two years ago, Google invested 33% of its venture capital into healthcare and life science startups and made its biggest investment to date: $130 million in Flatiron Health, a startup cancer software company. However, Bill Maris, president and CEO of Google Ventures, announced in Dec. 2015 the company was “moving away” from seed-stage investing, and the sector was “overheated." According to the company’s website, there are 30 life science and healthcare companies in its portfolio, two have gone public, and one was acquired by BMS in 2014.

CNN Money reported in October 2015 seed-stage rounds had dropped for the fourth consecutive quarter and only comprised 28% of all deals. This was attributed to large venture capital groups shifting to mid-and later stage rounds. Anand Sanwal, CEO of CB Insights told the publication, “We’ve been noticing this decline over time. [However], it is still way above what it was four or five years ago.”

IBM Watson Health, which launched in April 2015, has been acquiring health data companies and recently spent $2.6 billion to acquire Truven Health Analytics. This marks IBM’s fourth major healthcare acquisition in the past year, raising its total investment to build cognitive healthcare capabilities to more than $4 billion. It’s also partnered with other healthcare giants like CVS Health, Medtronic, Johnson & Johnson, Teva Pharmaceuticals, and Apple. 

Many experts say one of the biggest ripples of healthcare reform is data – how to use information better to improve patient health and provider efficiency, and to lower costs. Apple’s HealthKit app, a cloud-based information platform, launched in 2014, integrates data from different providers and is open to developers. The company has several partnerships involving HealthKit with large medical centers including the Mayo Clinic, Stanford Hospitals, UCLA, and Cambridge University Hospitals.

In addition, Apple’s partnership with Epic was called a “game changer for patients” by iMedicalApps. Epic covers more than half the patients in the U.S., so the author explained, “Physicians could easily see their patient’s physical activity levels, how many carbs they are eating, and medication compliance... the potential is tremendous.”   

Dr. Leonard D’Avolio, CEO and co-founder of Cyft, a healthcare data software company, wrote in one of his recent blogs the reason healthcare is attracting so much investor attention is because “data matters like never before in healthcare.”  He also acknowledged in a value-based healthcare model, the “‘value’ in healthcare can only be achieved when healthcare’s various stakeholders work together to keep people healthy throughout their continuum of care. Data will be the engine driving these partnerships forward and new companies may be formed to meet emerging needs.” 

Rob Butler, CEO and founder of Maestro Health, a benefits administration and exchange provider, told Healthcare Dive via email there are advantages and disadvantages of having non-healthcare type investors. "Personally - I think they are good for healthcare as they are experts in consumerism and healthcare is in great need of better consumer experiences." 

Top challenges for healthcare startups

Butler also shared some of the top challenges currently facing healthcare startups with Healthcare Dive.  Finding the right investors that are of “like mind with your business model, growth strategy and method of managing capital” can be difficult, he said. He added, “you need someone who will be realistic when it comes to balancing growth, cash flow, and investing in the future.”

Additional challenges include building and investing in a proven management team before having the revenue to support it, overestimating the competition, and building a sustainable culture. “[A]ll members of the company -- from intern to CEO -- [need to] share the same core values and [be] dedicated toward a common mission.” Butler added, “early success doesn’t always mean long-term success. You will hit roadbocks…build a sustainable business that can stand the test of time."

When setting growth and investment expectations, Butler stated it’s better to predict on the low side so if growth is higher than expected, investors and management are happy. “It’s better to hit 35% growth after forecasting 30% versus hitting 40% growth after you projected 50%.”

One might add overpromising technology could be a major roadblock, as demonstrated by Theranos.  After raising $400 million based on its finger-prick blood testing technology, an investigation by the Wall Street Journal alleged the company over promised on its own technology. After Theranos' CEO Elizabeth Holmes spoke at the WSJDigital Conference last October, an article in Wired said Holmes, “still didn’t address the more fundamental concern, which isn’t just the company’s science, but how Theranos has played into the Silicon Valley myth-making machine to give the impression that its technology is more advanced than it is.”

Tips for startup success

Startup Health co-founders, Unity Stoakes and Steven Krein, recently shared some success tips for healthcare startups with Fortune. They suggested finding friendly startup sources – those who can help bring ideas or products to the market – what they refer to as “plugging into the ‘batteries included’ crowd.” Since federal regulations are not going away anytime soon, the two suggest startups “embrace regulation,” and add “rules can be an entrepreneur's friend.” Startups have to learn to work with established healthcare organizations and practice patience because healthcare runs on a long cycle, often rife with regulatory and other hurdles. Finally, the main elements that make a successful healthcare startup are being collaborative, cooperative, and coachable. “It’s impossible to know everything, and you need to be open to being coached. Be open to other experts, ideas and suggestions,” Stoakes and Krein concluded.

There's little doubt startups will continue to potentially play a big role in shaping the future of healthcare. “Startups are cool. They are fun to follow and we all cheer for them to change the world. They can also be risky without good controls, experienced managers, sound business models, and savvy investors. When you can hit on all those cylinders and the market tailwinds are in your favor, the sky’s the limit,” Maestro Health’s Butler said.  

Filed Under: Health IT Finance
Top image credit: Geograph / Eric Jones