Every year at this time the market is buzzing with predictions of how health care innovation and venture investment will shape up in the new year. As we enter 2017, the market is substantially different than a year ago when unicorns were being anointed weekly and aspirational valuations defied gravity (and company performance). Pundits were scrambling to be the first to predict the bubble bursting.
Instead, we have been surprised to see that the healthcare venture market is still open for business – with capital flowing into new investments, but with investors becoming more cautious around the edges. We are tap dancing, but with the knowledge that we’re tap dancing on increasingly thin ice – as longer sales cycles, slower consumer adoption, and a wholesale turnover of the status quo in D.C. call into question many of the assumptions that underpinned the digital health boom. In short, investment capital is there, but who gets it, what those companies will need to prove to get it, and at what price, will be different in 2017.
Given this disruption, we don’t feel there’s value in making outlandish predictions. Instead, we share below four trends we will be following over the next 12 months as we try to drive consumer-centered change in an uncertain, transforming market:
Platforms over point solutions
Digital health investment has fueled a flurry of point solutions designed to tackle discrete problems in (sometimes) novel ways. Although narrow, standalone solutions – such as disease-specific care management programs or population-specific tools – bill themselves as targeting large total addressable markets with high ROI, most rely on large payers, employers, or provider systems to fund their clients. These large organizations are increasingly challenged to manage a complex and overlapping vendor stack, creating a real advantage for platform businesses that tie together programs and capabilities in a modular approach.
Equally important to client preference are the comparable economics of selling platform solutions: It’s not much more expensive to sell high average revenue per user, or ARPU, platforms into large client organizations than lower revenue point solutions. Finally, it takes a lot of effort and time to sell solutions to large healthcare enterprises – point solutions rarely have the capital (or the investor patience) to see this sales cycle through. They will need to partner with companies with more established distribution to get to scale. We expect to see broader solutions outperform the narrow band companies, many of which should ask themselves: “Am I a product feature or a company?”
Trouble Growing into Peak Valuations
Entrepreneurs and investors have been dazzled by many of the marquee funding rounds that have seen companies raise enormous rounds of capital at dizzying valuations. The markets celebrated at the time and anointed these companies as “successful” based on post-money figures without scrutinizing other merits of actual company performance. As the dust settles, investors will be expecting these companies to have grown into their shadows, and we can expect many of these VC darlings to struggle.
Meanwhile, the healthcare companies that opted for a more conservative approach to fundraising have headroom to grow and continue to raise. As one of our CEOs recently said when considering term sheets, “Given all the uncertainty in the market, I would rather enter 2017 growing from my valuation than into my valuation”
Impact of #IvankaCare
The early year healthcare headlines will center on the incoming Trump administration and its approach to reshaping the federal government’s role in affecting health care. Stakeholders across the healthcare spectrum are anxiously waiting to understand the implications of the impending shakeout.
As the markets watch to see if we end up with “repeal and replace”, how CMS, CMMI, and MACRA are impacted, and what exchange plans will mean beyond 2018, we can expect this transitionary uncertainty to impact the companies that depend on federal intervention for reimbursement or market making. Many health care buyers – large and small – will sit on their pocketbooks in 2017 until a clear picture emerges. We expect many of those dollars to shift toward investment in data capabilities and areas that support quality and efficiency in care. The real breakout opportunity is for the consumer-oriented companies that have been building innovative solutions will continue to fuel their growth.
Consumers drive healthcare delivery offerings
The healthcare venture community has invested heavily in channel offerings like telemedicine, retail clinics, and housecall fleets to deliver healthcare more affordably and less traditionally, meeting consumers where they want healthcare and when. Although each seeks to be the preferred channel of choice, 2017 will be the first year in which consumers in numerous markets can begin to make clear decisions about site and type of service based upon transparent cost, convenience, and personal preference.
Consumer adoption of these services has not been utilized in great numbers, historically. However, we have not yet seen a shakeout where consumers are presented with multiple options and shifts between channels, basing healthcare choices on their preferences and factors mattering to them individually. These results will translate into investment shifts in the healthcare system.
While Trump and consumerism will be driving forces in 2017, we’re looking forward to the emerging stories, science, startups, and solutions that will have us looking back a year from now, realizing how much more we’ve matured and looking optimistically at the road ahead. As such, we raise our glasses to the entrepreneurs who are working tirelessly and risking it all to make our system a little better and wish you a Happy New Year!