Why Today’s Digital Health Venture Model Is Broken
Echo Health Ventures’ Matthew Karls explains how his new healthcare investment company is breaking the mold and why that’s a good thing for startups.
Today’s digital health venture model is broken. That statement seems bold and contradictory to the fervor and flourish of funding that has poured into the space recently. However, most health-tech startups are predicted to fail within the first two years of operation—why?
In 2014, venture funding in digital health smashed records surpassing $4.1 billion; equally impressive was 2015’s total of $4.5 billion. As the ball dropped on 2016, so did those numbers; however, the space still saw $4.3 billion by the year’s end. Even more telling is the $6.5 billion in investments projected for stand-out digital health organizations by 2017. It’s clear there is at least enthusiasm for digital tech in healthcare, so what’s tripping up the promising startup?
If we step back from healthcare and look at startups across industry, 90 percent do inevitably fail, according to Fortune. The top reason for their demise, according to 42 percent of startups polled by CB Insights, is a lack of market need for their product—but is that what’s happening in digital health?
Need for product can be a problem in digital health but it may not be the most prolific; there are plenty of good startups slipping through funding cracks or fumbling with other aspects of the process, according to Echo Health Ventures’ Matthew Karls, Partner of Strategic Investment at the newly formed investment company.
“In healthcare, we often see early-stage companies struggle to convert pilots to commercial contracts and grow their top line, despite having secured an impressive base of early pilot partners and clients,” Karls said. “Many companies see rapid early growth, only to suddenly see the momentum stall and growth plateau, and it isn’t clear why.”
One thing that’s lacking, beneath all the fanfare for software and the inertia from initial investments, is long-term collaboration and commitment from investors. “This wave of funding has been driven by a herd of generalist and tech investors drawn by the extreme dysfunction in the health care system,” said Karls.
Whether it’s ignorance or just plain audacity, many investors are merely looking for quick returns in an area that’s notably slow on startup growth. Massive layers of process, regulations, and policies that protect the status quo are making otherwise replicable investment models dysfunctional in digital health. Startups are stalling out before building their momentum because they need deeper insights from investors, which they don’t have—not when it comes to doing business in healthcare.
“Enthusiasm and optimism are always necessary for success, in all venture sectors,” said Karls. “What’s lacking is that kind of excitement with an accompanied appreciation for the complexity and magnitude of the current forces in digital health. To put it bluntly, healthcare is harder.”
Despite the significant need and huge market size, experienced healthcare investors know that change does not come easily or quickly to this industry. Building new companies that leverage technological innovation to transform the health care system requires much more than sufficient capital. Over the years, specialized healthcare venture managers have brought patient risk capital and thoughtful, long-term strategic partnership with their portfolio companies. However, these venture capitalists are harder and harder to find.
That’s why Karls hopes corporate investors, like Echo Health Ventures, can step up and fill the void. Formed in November 2016, Echo is a new strategic collaboration between Cambia Health Solutions and Mosaic Health Solutions. The company manages both companies’ existing portfolios as well as pursues new, stage-agnostic investments in healthcare innovation. This joint venture will allow Echo to leverage the extensive resources from both organizations and magnify the impact it can create for new companies.
Echo’s stage-agnostic approach means it’s not tied to a stage of startup growth, allowing it to assist aggressively and over longer periods. This method sets the investment company apart, and offers more than what other investors can or may be willing to provide currently, said Karls. Perhaps, that kind of flexibility and longevity may make the difference for struggling startups.
But what about accelerator programs? “There are a lot of well-meaning accelerator programs and strategic investors with token-seed investments that can provide advisory, mentorship, and networking assistance to early stage companies,” said Karls. “The Echo model is fundamentally a deeper, more engaging experience than most of them can provide given the level of long-term, not cohort-based, capital and resource commitment.”
Times may be challenging for those looking to innovate in digital health, especially as we head into the new year full of unknowns and possible changes from the incoming administration. While it’s important to note how those changes will impact spending and market behavior, Karls said Echo expects to see select companies grow and mature despite the challenges ahead. “We’re overdue for some of the well-funded, or even underfunded, healthcare companies to develop into platforms in their own right,” he said.
His advice to startups is not to be discouraged but to be considerate and conscious about the importance of their moves. “Figure out what problems you can solve, understand everything that touches it, and build on your strengths. Find partners that will accelerate your growth or can provide the network and resources you need to succeed. Then, you can relentlessly focus on delivery,” he said.
What will separate the successful startups from those destined to fail is the willingness to disrupt healthcare; as we’ve heard before, creating solutions to fix broken processes is pointless. “Incumbents preach innovation but sit with dead weight to resist change,” said Karls. “Radically altering the system requires an understanding of it. Innovators must know how the gears work and build solutions that are far more than window dressing. Disruption in health care must happen from the inside out.
It seems Echo is creating a disruption of its own as it tries to recreate the mold on digital health investment. It looks like it’s worth a shot, considering the digital health venture model is broken. But will investment companies like Echo be the fix startups need to succeed in 2017 and beyond? It looks like we will just have to wait and see.