Table manners set to change as digital health market evolves
Over the past few years, the digital health field has exploded and new entrants in the market have had few problems attracting investors. But as the space becomes more crowded and with the recent downturn in global markets, that could be changing.
During the recent J.P. Morgan Healthcare Conference, analysts and investors predicted digital health firms find a bleaker funding landscape in 2016, in part because the field is so young and also because some startups, like telehealth developer Teladoc, that looked like sure winners in the early stages turned out lackluster results when they went public, according to Modern Healthcare.
Anand Sanwal, CEO of CB Insights, shares those concerns. “Investors will start to ask harder questions in 2016 because of headwinds that they’re seeing,” he said. These include macro-economic concerns, less-than-remarkable Wall Street debuts and mergers and acquisitions, and overvaluation of so-called unicorn firms — startups whose valuation shot up to $1 billion or more based largely on fundraising.
Last year, digital health firms raked in $4.5 billion in venture money, a slight increase over 2014’s $4.3 billion total, according to a report by Rock Health. Deal size and the total number of deals were essentially flat from 2014, compared with the 2013 to 2014 cycle when deal volume and deal size grew 56% and 35%, respectively. But overall performance — digital health accounted for 7% of all venture funding — “should calm any concerns of a bubble,” the report says.
Six categories accounted for half of all digital health funding last year:
- Healthcare consumer engagement;
- Wearables and biosensing;
- Personal health tools and tracking;
- Care coordination; and
- Payer administration.
These high-growth categories “reflect the shifting industry needs to cut costs, engage with the end-user, and improve communication and coordination,” the report says.
The year’s largest deal went to Culver City, CA-based NantHealth, which landed $200 million in new funding, bringing total venture investment in the firm to $680 million, according to the report.
The climate for digital health in recent years can be likened to the e-commerce segment a decade ago, Steve Weiler, senior practice director at T2C, a healthcare management consulting firm based in Woodland Hills, CA, told Healthcare Dive. “Throw up any idea and get money.” But that’s changing as the field becomes more crowded and firms begin to focus on connecting consumers with payers and providers, rather than just counting calories and steps.
Just coming up with an app will no longer cut it for investors; you have to be solving some problems for the healthcare folks, too, said Weiler. Digital health firms need products or services that are interoperable with both the consumer and the healthcare environment, particularly with today’s emphasis on population health management — an industry he sees growing to $45 billion by 2023.
When it comes to providing seed money, investors are looking for companies that have moved beyond the Power Point phase and have begun to develop real solutions for health professionals, payers and consumers, Weiler said. Such products, like a bandaid-like heart monitor, bridge the gap to the clinical setting to really make it more effective to deliver care.
During the Health 2.0 conference earlier this month, Jeff Tangney, CEO of Doximity, a network and recruitment site for physicians, said there’s a growing debate [in digital health]: Do I want tech investors or do I want healthcare investors? And the answer is, you want both.”
Tangney advises entrepreneurs not to chase valuations, because they could end up with bad terms, explains spokeswoman Lauren Lloyd. “You want people around the table with the same incentives.”
To date, Doximity has raised a total of $81 million, most recently in April 2014 when it closed a $54 million Series C fundraising round co-led by DFJ and T. Rowe Price. The company now claims to have more than 60% of U.S. doctors as members.
“What I keep hearing in board meetings and board calls is that there might be this ‘drying up’ of venture money,” said Henry Cha, CEO and co-founder of Heathcare Interactive in Glenwood, MD. While there might be some tightening of funds, Cha attributes that more to general market jitters — the stock market, futures, even the current pains in the Chinese economy — than to a lack of interest or enthusiasm for digital health.
Healthcare Interactive, which built a platform to allow employers to directly contract with providers for their healthcare benefits, garnered an initial round of $8 million in funding from Grotech and Harbert Management and is gearing up for another round of funding as early as the end of this year.
Cha believes the challenge for funding going forward will be for late-comers because investors are going to be looking for firms that already have some traction and are starting to hit their points. Healthcare Interactive — which has grown from a $3 million to $4 million company just a couple of years ago to a projected $9 million to $10 million this year — counts itself among that group of startups. “It’s not that the money is drying up. It’s more that the opportunities are drying up because you’re competing against companies that have such a huge head start,” Cha said.
Chuck Cullen, general partner and chief financial officer of Grotech, predicts funding for digital health companies “will remain strong given the massive changes affecting the core business models for providers/payers. Moreover, healthcare businesses tend to lag behind the broader market in terms of adopting new technologies, which can be a plus when the market is shaky."
“Lower cost and improved quality remain major opportunities for improvement. In addition, data privacy and security are top of mind for buyers,” Cullen said. “Some segments of the digital health market that are already overcrowded will see consolidation," he added, noting some buyers are overwhelmed by too many point solutions. Overall, investors will focus on revenue traction for first-generation mobile solutions, Cullen said.
iHealth Labs is doing just that. The firm recently got regulatory clearance to market a wearable ECG monitor that will be provided by medical professionals to their patients, said Steve Monnier, vice president of sales and marketing at the Mountain View, CA-based firm.
iHealth got $25 million in funding in September 2014 from Xiaomi Ventures, Ltd. While the firm isn’t looking for any new funding this year, Monnier said he’s seeing more interest in digital health as early startups and their products or services come to fruition. “A lot people are jumping into the game, albeit a little late,” he said.
Weiler agrees. “I think there’s two halves. There are the tried and tried and true companies, the EHRs that have been in the marketplace and the healthcare IT product companies that will continue to see growth even though some of the regulatory drivers are coming to a close … and there are the new entrants. It will be interesting to see how quickly they become perceived as being winners.” The big winners, though, will be those companies that offer integrated healthcare solutions.
While he has yet to see signs of it, Weiler also anticipates an eventual shift away from a focus on U.S.-based solutions to a more global focus where digital health can be used to manage health and share data across borders. “That would also be an amplifier for digital health growth prospects in the coming year,” he said.
- Rock Health Digital Health Funding: 2015 Year in Review
- Modern Healthcare Digital health firms, say goodbye to easy venture capital