Chasing unicorns: How healthcare VCs can use data to identify the next big thing
In my past role as an early-stage venture investor focused on the India market, I was always on the lookout for the next unicorn company.
When I evaluated opportunities, analyzing their global “equivalents” was a valuable exercise that helped me understand potential outcomes of the investment. After all, consumer needs — whether convenience, access, efficiency, incentives or entertainment — are universal, and hence most solutions are cross-pollinated across markets. (With the exception of businesses that are altogether better suited for emerging markets, like banking services to the under-banked through micro-finance, or Internet access to the under-connected).
But beyond analyzing a global precedent, an investor needs to understand the dynamics of the local market to test the feasibility and scalability of an idea. For example, in India, Uber and its local competitor Ola Cabs employ different business models than Uber uses in the U.S. — even though Ola was inspired by Uber in the U.S.
Similarly, many successful technologies and disruptive business models in developed markets like the U.S. have eventually found a home in emerging markets like India and China. Still, emerging markets can lag in adopting these technologies because of certain market conditions, such as: lower internet connectivity, slower technological adoption, low debit/credit card penetration, or differences in the regulatory environment.
The question becomes, how should venture investors make good decisions in emerging markets?
The answer: by following a reverse approach. First, by closely monitoring successful trends in developed markets, and then by pairing that with an understanding of local market trends to identify promising themes in advance.
Using data to look for patterns
While evaluating the quality of a corporate management team is a skill, identifying the next big theme in less-developed countries should be a data-driven process.
To test this, I used Quid to analyze more than 8,000 companies globally, which have been focused on digital health and venture-backed since 2009. Of the most relevant* 3,000 companies, more than 15 distinct themes emerged.
*Relevancy measures the strength of the correlation between search terms and the product or work description of the company.
Tools for consuming healthcare products & services are huge
In digital health across the world, ‘tools for consuming healthcare products & services’ (e.g. health information and content, healthcare networks & health, wellness & beauty e-commerce) was the biggest category in terms of total capital received, followed by genomics and molecular diagnostics, and medical device technologies.
In emerging markets — countries like India, China and others — digital health innovations account for 13% by volume (number of companies) and 11% by value (dollar value) of the global market. Unlike developed markets, the theme of health, wellness and beauty e-commerce emerged as the biggest, with 18% by volume, followed by health networks (appointments, networks etc.), and consumer health content.
Volume and value are important factors because the themes differ in terms of size, but also — take a look at adoption timelines. There is a lag in terms of median founding years across emerging vs. developed markets. For example, in the image below, we see that the first wave of innovation in health management tools for providers (basic business process management software) happened in 2004 in developed markets but did not follow in emerging markets until a few years later, closer to 2008.
It might be common sense to think that patterns in developed markets will eventually take hold in developing markets, but that is not always the case. There can be a deviation. Health management tools for providers as a theme never fully carried over to the emerging markets. It is much smaller in terms of value.
The area of health, wellness and beauty e-commerce follows its own pattern. Though this theme lags across markets in terms of median founding year (2009 in developed vs. 2011 in emerging), the extent of the lag and difference in traction isn’t as much as it is for health management tools for providers.
Why did this happen?
Having spent time in other parts of the world has helped me understand and appreciate the differences between consumers in developed and emerging markets.
For instance, health management tools for providers rolled out in both markets but did not scale in emerging markets due to different local trends:
(1) Organized vs. unorganized nature of providers, like clinics and hospitals, across developed and emerging markets.
(2) Maturity and affordability of providers. In developed markets like the U.S., providers know that efficiency in business processes result in better customer gratification and satisfaction, leading to higher revenue potential. In emerging markets, however, local providers focus on incremental revenue and don’t correlate efficiency in business processes with lower costs or potentially higher revenue in the longer term.
Health, wellness, and beauty e-commerce solutions worked well in emerging markets for a couple of reasons:
(1) Chronic patients, fitness freaks (fitness- and wellness-conscious), and beauty-conscious consumers share a similar sticky value proposition across markets.
(2) Access to brands was a key issue in Tier II-III cities in emerging markets (like Indore in India or Hangzhou in China).
Using this framework — traction in developed markets, paired with knowledge of local market trends — we need to ask, what appears to be the next big theme that emerging markets will try to follow?
Several signs point to caregiver networks being a potentially promising theme in the short to long term.
What are caregiver networks, and why are they important?
A caregiver network is a group of caregivers (family, support groups, nurses, physicians, etc.) that leverage technology to manage patients’ chronic and emergency issues.
In Quid, if we zoom in on the cluster of caregiver networks, we can see three sub-themes:
- Chronic or post-operative or emergency care. — Platforms that enable chronic patients or caregivers to receive and organize medical information, understand and stay informed about care, and track health by partnering with doctors and healthcare professionals. For example, Landmark Health, Navigating Cancer, Patientslikeme, Portea Health, etc.
- Aging parents or senior care — Platforms, sensors or wearables for coordinating the care of an aging adult among family and friends while also discovering integrated products and local services. For example, GreatCall, Healthsense, Honor Technology. etc.
- Neurological care (e.g., mental illness) — Web-based cognitive behavior therapies and platforms connecting with mental health professionals or wearable devices to help with mental disorders. For example, BioBehavioral Diagnostics Company, eNeura, etc.
- Caregiver networks may prove promising for the following reasons
- Traction in developed markets in terms of investment size and maturity: The theme has received north of $1.5 billion in investments in developed markets and is a relatively recent phenomenon (median founding year: 2010) — a proxy for traction. Moreover, this theme is under the radar in emerging markets.
- Insights obtained by using Quid depict the trends in emerging markets (for instance China and India, etc.) and strengthen the thesis around adoption cycles. Analyzing conversations in caregiver forums, as well top published and shared conversations in the media, helps uncover top market needs and key trends.
First, the target customer is the caregiver, who is the younger demographic family member. The caregiver worries about medication adherence and wants to effectively manage the condition of his/her loved ones (chronic patients, aging seniors or neurological care).
Second, senior care is top of mind for both providers and local governments, especially in China, where the government is allocating resources and capital for senior care services.
Third, digital healthcare tools and wearables in senior care emerge is another area that is not only top of mind but also exudes positive sentiment.
Fourth, understanding negative sentiments and sudden spikes in conversations linked to events such as an Ebola outbreak or the Zika virus helps identify the gap in the market due to lack of emergency care.
To be sure, some themes gain traction in all markets and some do not. And while no bet is perfect, a data-driven approach like the one Quid provides not only makes the outcome more predictable for a venture investor, but it also instills confidence in limited partners (investors in venture funds). This is ultimately invaluable in completing the cycle of successful investments from initial fundraising to reaping healthy returns, and then starting the process again with more assurance.