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+ 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 startups 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 under-clubbed 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 & implementation once inside required subject matter expertise, outcomes measurement capabilities and political savvy that is rarely necessary in startups 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. Despite this, many Digital Health companies raised capital expecting technology-like exits (e.g. Raise too much of it at too high valuations). 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 underling 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 has 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. It will likely be some of the socially and economically most essential work any of us can do over the next 25 years. We need you with us. No matter what hashtag we use.