Health Care + VC: How Implicit Bias Shapes Funding Trends (And What Problems May Get Missed)

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 six of this series. Part one is here and has links to the others.

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

Hiring Actors?

I interviewed an entrepreneur who hires actors to pitch to potential investors. His health tech startup was just a side project, mostly an idea really. He had a full-time job that paid the bills. He had a family to care for and be with. He couldn’t be everywhere.

If the hired actors were successful enough, he’d quite his job and make the project his full time job.

Most of these hired presentations occurred within pitch events, such as those to get into incubator or accelerator programs. Some pitches were given via video chat. Others were in-person. His hired actors pitched to investors in NYC and Dallas, but also those based in Holland, Helsinki, and Lima. When pitching to VCs based in China, he hired Taiwanese actors.

Here’s his insight:

I discovered at the early state that I needed less technically competent people and more socially like-able people to make a VC or angel feel comfortable handling over money.

Which gets us to the theme of this post: That venture capitalists — including those in health care — are, it turns out, human.

Background, Implicit Bias, and Being Human

I’ve written quite a bit about the financial reasons why health-focused investors may not put their money into companies that work in upstream and community-based care, particularly in markets that address issues in lower-wealth communities.

This blog post moves beyond those market-based insights and looks at human factors.

This is a conversation about the stereotypes held deep within just about all of us. Those that are harder to see moment-by-moment but can be quite obvious when looking at the big picture.

I use throughout this piece the phrase implicit bias. And here’s a definition to use:

Also known as implicit social cognition, implicit bias refers to the attitudes or stereotypes that affect our understanding, actions, and decisions in an unconscious manner. These biases, which encompass both favorable and unfavorable assessments, are activated involuntarily and without an individual’s awareness or intentional control. Residing deep in the subconscious, these biases are different from known biases that individuals may choose to conceal for the purposes of social and/or political correctness. Rather, implicit biases are not accessible through introspection.

The implicit associations we harbor in our subconscious cause us to have feelings and attitudes about other people based on characteristics such as race, ethnicity, age, and appearance. These associations develop over the course of a lifetime beginning at a very early age through exposure to direct and indirect messages. In addition to early life experiences, the media and news programming are often-cited origins of implicit associations.

There is also, it should be noted, explicit bias out there. Sexism and racism can be appropriate labels as well.

VC Knowledge & Experience Skews Towards Acute Care

VCs (the good ones at least) invest in markets they know and have experience in. And few VCs have worked in the worlds of prevention, public health, Medicaid, or marginalized communities.

A look at the makeup of check-writing investors within the 20 largest health care VC firms backs this up: The most common professional degrees are MDs, CFAs, and PhDs, the latter almost entirely in bio/life sciences which lends itself to pharmaceutical portfolios. Needless to say, there were no MPHs, MSWs, or related degrees that lend themselves to prevention.

So this argument is fairly straight forward: The collective lack of experience in upstream and community-based care means that VCs are less likely to invest in companies operating upstream and in communities.

This does reveal a chicken-or-the-egg question: Are investment trends due to the aggregate experiential make-up of the VC community? Or is the VC community make-up due to the market which yield high rewards? Mostly the latter, I’d venture.

But the point here to emphasize is that our health care system is slowly shifting — thanks to the Affordable Care Act, states expanding Medicaid, the advancement of alternative payment models over fee for service, and a host of other federal actions — from one that focuses on acute and emergency care towards one that better rewards work in prevention. And the aggregate experience of traditional health care investors is likely holding back the shift.

The Whiteness and Maleness of Venture Capital

The Venture Capital community is infamously white male heavy. The National Venture Capital Association reports that, among all investors who have the power to write checks, 89% identify as male and 85% identify as white.

The outputs from this mostly white male community follow: Statistics from CB Insights reveal that only 8% of VC-backed entrepreneurs are female, and only 1% of funded startup founders identify as black/African-American.

I have not been able to find any studies that break down the demographics of investors focused on health care, but there’s no reason to think that health care is any different.

Indeed if you go back through the top 20 health care VC firms, you’ll see that almost everyone shown there is white and male. Notably, there don’t seem to be many — maybe even any — individuals who would self-identify as latinx or black / African-American. This point is maintained even when you look at the top 10 digital health investment firms which, because of the sub-field’s tech bent, are a bit more diverse.

Investor Bias Hurts Founders who are Women and People of Color

Investor bias against women is a widely acknowledged reality, and has been formally documented in research. One study on the issue found that:

“Both professional investors and nonprofessional evaluators preferred pitches presented by male entrepreneurs compared with pitches made by female entrepreneurs, even when the content of the pitch was the same.”

Bias against people of color has not been as formally studied. (Note: Someone should do a formal study.) However, stories of founders of color seeking but not finding VC funding due to perceived biases are well documented in articles online.

How does this fit into the scope of a discussion about disease prevention and upstream and community-based care?

This affects the amount of private capital going towards public health-oriented companies

Entrepreneurs tend to build companies in markets they have experience in. Many want to solve a problem that they themselves (or perhaps a loved one) have encountered. It’s this personal experience that allows the individual to understand the problem they’re trying to solve, to understand the system and market they’re operating in, and to understand these things better than others. It’s this personal experience that’s often the “fuel” that gets them to take on the risk of entrepreneurship, to work the long hours at little pay required for a new company that may not even become successful.

Women and people of color tend to have deeper and/or more direct exposure to issues related to prevention and public health, be they issue-based (think reproductive rights and healthy pregnancies) or populations-based (the majority of the non-elderly with Medicaid are people of color). Which suggests to me:

Women and people of color are more likely to launch health companies that work in prevention and with our public health systems.

This is not always true of course, but I raised this observation as a question to the VCs and entrepreneurs I spoke with. Some reacted slowly but agreed:

“I wouldn’t be surprised”

“Yeah… That seems right.”

Others suggested it was dumb for me even to ask:

“Ummm yes.”

“Duh.”

“Spot on.”

It’s worth saying that I can’t find anything online on this topic. But the reactions I got within my interviews support the argument enough to warrant putting it down here in writing. (Note: This could be another interesting area of follow-up study.)

I spoke with one angel investor who focuses almost exclusively on women-led companies. When I asked why, she mentioned two things:

First she pointed to the statistic that women make 80% (PDF) of a household’s health care decisions. “So when the woman is healthy, everyone else in the household is more likely to be healthy.” Her point is that investing in the health of women is the best way to operate upstream.

She then pointed to a more obvious point: Men just don’t to understand problems pertaining to women. She says she’s been in pitches with all-male VC panels. After the presentation from a female entrepreneur on a product that targets women: “Very interesting. I’ll have to go ask my wife about what you said.”

I interviewed a woman of color entrepreneur who was a bit reluctant to talk about the issue; she hadn’t fully considered the idea before. But while we were talking she realized that she was the only person in her health tech incubator who was working on a public health-oriented problem.

“It doesn’t necessarily feel like only women, or mostly women, care about prevention, public health, and other issues.” But, she said, “Individually, I am proof positive of your hypothesis.”

LP Bias Trickles Down

One investor I spoke to pointed out that it’s not sufficient to look just at the VCs. The money that VCs invest comes from LPs (Limited Partners) who hire the VCs in the first place. LPs are even less diverse than the VCs they hire.

A Fast Company article (which is worth reading in its entirety) states:

“In recent years, several black-owned or -directed VC funds and firms have opened their doors, with a focus on minority- and women-owned businesses. But as it turns out, many VCs are hitting the same obstacle as the founders they’re trying to invest in: access to capital.

To increase diversity in the startup world, some VC firms raise new funds or allocate a portion of their current funds to investing only in people of color; others hire diverse fund managers. But that’s not always a panacea.

VCs frequently have trouble convincing investors, typically in the form of limited partners (LPs), to spend their money this way.”

There aren’t any studies that focus on investor bias within the health care investment world (Note: Another area of exploration?), but there’s also no evidence to suggest that it’s any different in health care than other industries. VCs are human regardless of the markets they focus on.

Hiring Actors, Again

“Basically I wanted to start spreading my message and making bets to go after VC funding in different cities. I was attempting to franchise the business startup process.”

But did it work?

“The actors weren’t as heavily invested emotionally.” Plus: “I lost steam on the effort.”

So no, it didn’t work. Investors would likely tell you that it never would! For, one of the biggest things an investor — the good ones at least — look for is an excellent CEO who is not only deeply knowledgeable but also deeply passionate, and an actor would be hard pressed to demonstrate both.

But there’s a lot of money going into the health investment space these days, particularly in health tech. And this includes money outside the lanes of traditional venture capital. This entrepreneur, for example, was targeting semi-structured early/angel-stage funding programs that didn’t necessarily have a health tech focus.

I can’t decide whether I’m glad or bummed that his experiment didn’t work. Either way, he still sees an opportunity to leverage the humanness of the funding process.

“We made it to Round 2 in two competitions.” He said, ”I plan on doing this again.”

A Disclosure and Concluding Thoughts

I should disclose that I am a white male myself. More so: I’m a straight, cis-gendered, upper-middle class, white male. So I don’t have the best perspective on this topic.

However, we know there‘s bias (including racism and sexism) in the VC world. And there enough evidence to suggest that these biases prevent more public-health oriented startups, those that women and people of color are more likely to found, from being funded.

The good news is that these demographic problems are starting to change. Up and down the funding pipeline, more women and people of color (as well as those from other underrepresented communities) are becoming investors and supporting the growing number of entrepreneurs of similar identities.

But it’s not changing fast enough.