Health Care + VC: Barriers, Fixes, and What Non-Profits Can Learn from Investors

I interviewed 40 VCs, health tech entrepreneurs, health care executives, and industry experts and spent hours researching the intersections between health care, public health, and venture capital. What emerged was a multi-part report that I’m calling Preventing Prevention: Barriers to Venture Capital Investments in Upstream and Community-based Care.

This is part seven (and the last!) of this blog series. Part one is here and has links to the others. They’re each about a 10-minute read.

Funding for this work came from the Robert Wood Johnson Foundation.

Summarizing the Previous 6 Posts So You Don’t Have to Read Them

The goal of these posts and my work over the last few months has been to better understand the investor mindset and the dynamics of business in the fields of disease prevention and health promotion. Generally, we sought to answer:

Why don’t traditional investors fund more work in prevention?

Prevention is a hard concept to talk about, not because it’s controversial but because it is hard to nail down what exactly is prevention.

• Is helping someone gets to their doctor’s appointment prevention? (Or would true prevention being them not needing to go to the doctor)?
• Are routine screenings for diseases preventative health care? (Or is this really about early detection of disease and thus isn’t preventing anything?)
• Is using Lyft or Uber to get people to their doctor’s appointments prevention? (Or is that really about getting them more care? Would prevention be about preventing them from needing that appointment in the first place?)
• Could the ER be considered prevention as it’s preventing death? (Death sounds like a good thing to prevent.) Or is prevention really about preventing them from needing to go the ER in the first place?
• I largely left pharma and medical devices out of my conversations, but certainly vaccines (pharma) and bacteria-resistant medical devices prevent diseases.

So by “prevention” I mean in upstream and community-based care

Given the annoyance of defining what constitutes “prevention”, I chose“upstream care” — which recognizes the range of points within which interventions can occur — and “community-based care” — which nods to the importance of working outside clinical settings to prevent the need for a clinical setting.

VC Investments in Preventative Care: The good news

The premise of this blog series is that while investments in healthcare are at an all-time high, an unfortunately small percentage of those dollars seem to be going towards the niche that we’re looking at.

But, importantly, there are positive signs to point out. A number of VC-backed companies are working in upstream and community-based care.

These include: obesity prevention programs with online coaching, apps that facilitate home-based nursing care, population health management tools to help providers look across populations, platforms to help providers connect lower-resourced families with needed social services, new health insurance plans — particularly Medicare Advantage plans — that aim to redesign the very structure of how primary care gets delivered.

These are great to see!

But: A Number of Factors Hinder VC Funding Going towards Upstream and Community-based Care

But this trend line must be compared to the larger trend line, and it’s clear that strong forces still exist that skew funding towards downstream and acute care technologies, products, and services.

Some of these barriers are human: The mostly white-male industry of Venture Capital holds implicit bias against women- and people of color-led companies, companies that — because of their leaders’ experiences — are more likely to work in prevention and community-level interventions.

Some of barriers are driven by perceived gaps in research: The evidence for upstream interventions gets thin when viewed through the lens of clinical efficacy.

Some barriers involve VC expectations of return. VCs invest in savvy, self-driven entrepreneurs who have developed business models that derive a Lifetime Value (LTV) / Customer Acquisition Costs (CAC) ratio of at least 3 within markets that have total availability (TAM) of at least $1million. Traditional Series A and B investors seek anywhere from a 5 to 20x return over 5 to 7 years.

Prevention-leaning companies typically don’t have these numbers: LTVs tend to be low. CACs tend to be high. TAMs tend to be smaller. And thus growth expectations just aren’t sufficient for traditional investors.

Point in case: Many of the barriers to further funding in these areas are simply driven by market forces shaped by policy. The biggest barrier to VC dollars going towards prevention-oriented companies is simple economics: The health care market doesn’t reward work in prevention; acute care interventions is much much more lucrative.

This is because fee-for-service financing (FFS) and its legacy still dominate. And while some groups of hospitals and physicians have shifted away from FFS towards models that better reward prevention, business challenges — including data barriers — hold these models back from truly living up to their promise. Further, health insurance churn rates remain a challenge inherent in competitive markets.

How do investors think about prevention?

That’s a question we asked and rather quickly answered: They don’t!

Investors fund markets (and they’re trends), they do not shape markets (like policy, technology, or consumer behaviors do). VCs “invest in prevention” only to the extent that a market happens to “invest in prevention”. So a lack of VC dollars going towards preventative health care says less about VCs and more about the policies that regulate heath care, the technologies changing health care, and the consumer behaviors that shift and re-normalize over time.

Addressing these barriers: Policy Fixes, Program Suggestions, and Looking in the Mirror

Understanding how both venture capital and health care work (and don’t), is an important first step for anyone interested in raising the quality of care given to individuals and improving the overall health of populations while lowering costs in our health care system.

Now what the heck do we do with this knowledge?

Policy, by shaping the market, will continue to be the most powerful way to shape investment trends. If we want VC funding to go towards efforts that lean prevention, we should recognize the following policy paradigms:

• Policies which nudge systems towards value-based and prospective payment models, such as the models being tested by the Center for Medicare & Medicaid Innovation, nudge market incentives towards prevention.
• Policies that help overcome the problems of churn can provide incentive for payers to think of longer-term health outcomes. (One person I spoke to suggested using policy to incentivize the creation of “prevention funds” within which insurers within a particular market area would contribute.)
• Policies which integrate funding streams, such as California’s Whole Person Pilots, can bring together the work of brick-and-mortar health care with community-level work and provide great incentives for these typically disconnected providers to work together and address care issues upstream.

Beyond policy, building the evidence for more upstream interventions, through more rigorous evaluations and leveraging the explosion of data availability, can help crystalize the health and business arguments needed by payers and providers who are monitoring their populations. This evidence would strengthen the pull, and thus investments, of this part of the market.

There are also opportunities to educate VCs. As the financial incentives continue to shift away from FFS, the business opportunities for companies working upstream or within communities will increase. But until the community of VCs better gains the aggregate experience more reflective of these new markets, including a growing Medicaid market, there’s room to educate people about the business opportunities. (A program with deeper insights may look at how to give community-health experience to individuals that may eventually become investors so that re-education isn’t as needed.)

VC requirements and expectations may also leave room for new investment models. VC seek TAMs of at least $1 billion with LTV/CAC ratios of at least 3. However, there may be problems worth solving that have TAMs of less than $1 billion and/or a LTV/CAC ratio below 3 (but greater than 1, the bare minimum metric indicating sustainability).

Educating funders on their own implicit biases would also be a worthy effort. Though what may be easier than educating existing VCs is simply bringing new perspectives into the field. Investors interested in upstream and community-based companies can intentionally bias their funding towards companies led by women and people of color.

Following the money even further (ahem) upstream points to an even more foundational issue: Large funders who operate as LPs should ensure they hire women and people of color to manage their funds.

And just as the makeup of VCs is influenced by the makeup of LPs, large non-profit funding organizations acting as LPs would do well to look at their own diversity makeup.

How do prevention experts think about investing?

In closing, here’s a thought experiment for public health professionals that flips the premise of this paper on its head. Let’s ask: How do prevention experts think about investing?

In short, and to put it crassly: We don’t.

There are general messages of “investing in prevention pays off” or “an ounce of prevention is worth a pound of cure” that public health-oriented professionals use. However, these are marketing slogans. Messages meant to convince

In practice the typical way non-profits go about funding projects misses the rigor and approach of making real (inherently risk-bearing) investments.

What Non-profits, Foundations, and Other Grant-giving Organizations Can Learn from Venture Capital

While the VC world and non-profits inherently operate on different different values, there are bits of wisdom that can be pulled from the VC world and adopted by others.

For example:

• VCs (the good ones at least) develop a narrow thesis that shapes everything else. There’s a concrete statement, backed by research, that maps their understanding of how a market is changing to a specific growth strategy. On the other hand, Non-profits, governments, and foundations, those that would fund more prevention-oriented work, tend to be looser with their theories of change and see their work as transactional rather than transformative.
• VC firms give check-writing powers to multiple people within the firm and then let each person make (mostly) independent decisions. Public health funders tend to have boards that vote on what gets funded. This not only slows down the process but also decreases the chance of a more “risky” venture getting funded while hiding bad judgement within process.
• VCs know that who does the work and how that work gets done matters. They talk to hundreds of people that they could invest in; they’re always meeting new people and new companies. They then fund only a handful of individuals. Non-profit funders, on the other hand, tend to either scatter their investments widely, especially if they’re a large foundation. And in the name of “fairness” and “impartial evaluations of proposals” (which do have their benefits) grant-making organizations build the human elements out of the equation fairly quickly. Funding goes to the organization and typically to the proposal that best meets requirements at the lowest price.
• VCs develop deep relationships with who they’re funding, they are interested in learning with their entrepreneur along the way and in helping navigate issues that may occur. Grant-makers, in contrast, often stay an arms length. There is typically little collective struggle. Rather, it’s simply on the grantee to figure everything out. (That’s why they got the grant, right?)
• VCs deliberately invest across a risk spectrum, noting that some companies are bigger (riskier) bets than others. Public health funders rarely think about the spectrum of risk in their investments. Further, they tend to require evidence that something works before it gets funded. This keeps all investments at about the same risk level.
• VCs invest in different stages of company development to help both manage risk but also to help an idea grow in deliberate stages. Non-profits should think more about stages of project and company maturation, similar to the A through C+ investment Series, to cultivate a more mature and constantly regenerative pipeline of ideas to solve social problems.

The rise of Impact Investing and Pay for Success Financing are approaches that attempt to address some of these issues. These are in their early days and it’s unclear how much rigor is being applied by many impact investors and how applicable pay for success financing is beyond certain areas. But they’re worth watching and learning more about.

Thanks for reading all of this! I don’t know how to close this blog series formally, so I’m just going to stop typing. Reach out if you found this at all interesting. Find me and more of my stuff at readgeoffrey.com and on Twitter and LinkedIn.