Riding the Digital Healthcare Train to Huge Profits
Written by Spring DigitalDx Venture Fellow Andy Chen
Venture funding in digital health started out a strong start in 2020 with $3.1 billion invested in Q1, 1.5X the total funding in Q1 of any previous year.
According to Rock Health’s research, digital health venture funding has grown from $4.6B in 2016 to $7.4B in 2019. More significantly, six digital health companies (Livongo, Phreesia, Change Healthcare, Peloton, Progyny, Health Catalyst) went IPO in 2019.
Excluding Change Healthcare since McKesson had previously acquired it and spun it out as an IPO, these five companies increased investor’s capital 7x.
Due to Covid-19, demand for mental health tech is soaring, and telemedicine may be the new standard of care.
According to CB Insights’s research, telehealth deals reached a record high in Q1'20 and double the amount seen in Q4’19. And mental health tech startups raised a record $576M — surpassing the prior quarterly record by over 60%.
One of the highlights of telehealth deals this year is Alto Pharmacy. It provides free same-day delivery 7 days a week for prescriptions. It also offers in-app and phone support, as well as coordination with doctors and insurance companies. Alto Pharmacy closed a $250M Series D mega-round led by SoftBank Group on 1/30/2020.
For mental health tech, Lyra Health closed its $75M series C on 3/11/2020. Lyra’s platform connects employees to therapists, mental health coaches, and personalized digital therapy programs.
Startups are also attracting venture capital like Trayt.io, backed by DigitalDx Ventures, whose longitudinal data platform incorporating complex comorbidity data helps inform and guide mental health care providers, and was recently chosen by the State of Texas as their official mental health platform for teens and adolescents.
Healthcare industry highlight — AI in Healthcare
For the purpose of this white paper, AI in healthcare is defined as companies selling AI SaaS to healthcare clients or using AI to develop products for the healthcare market. According to the CB Insights: State Of Healthcare Q1'20 Report: Investment & Sector Trends To Watch, healthcare AI startups raised $984M in equity funding across 80 deals in Q1’20. Funding rose by 37% from Q4’19 but stood well below Q3’19’s peak of $1.6B. Deals rose by 3% from Q4’19 but were still down 34% compared to Q3’19’s peak of 122 deals. This sector is getting lots of attention since AI and automation have the potential to transform how care is delivered — addressing both the need for better and more cost-efficient care and replace the need for more staff, which is often in short supply.
The most advanced areas for AI/ML in the current healthcare marketplace include medical imaging and business operations. However, the underlying ML models will need to train on much larger data sets for relevance in clinical care.
One Venture Capital Fund Focused Squarely on Digital Health
New venture funds are cropping up to take advantage of this opportunity created by AI and machine learning. Larger funds look to these smaller niche experts to find these game-changing technology companies. One such fund is DigitalDx Ventures, a fund focused on the intersection of diagnostics and artificial intelligence. Michele Colucci, the Managing Partner, is passionate about the opportunity artificial intelligence brings to healthcare investing: “There’s no reason, with all the data our body gives off, that we should go into a doctor and come out not knowing what’s wrong with us.” Partner Emeritus Ted Driscoll, Michele’s mentor, was arguably the most successful investor in digital diagnostics, as the first investor in Natera, GeneWeave, AssureX, and many others. Collectively, the DigitalDx Ventures team has invested (directly or through previously managed funds) in over a dozen companies, which today have a combined value of well over $3 billion. The fund partners have had six exits (at 3x to 14x multiples) and have close to 200 patents to their credit.
With deep ties to leading medical and educational institutions, the startup community, and the female entrepreneurial network, the Partners source and support founders creating earlier, less invasive, less expensive, and more accurate diagnosing of illness with artificial intelligence and data overlays.
These niche funds are also developing novel ways to approach investing and deal flow. For instance, with a world-renowned expert on Artificial and Decision Intelligence, the DigitalDx team has internally developed an investment decision-making model called the Investment Tool for Expert Diagnostics (“iTED”) to capture relevant factors in evaluating potential investments, encourage greater adherence to key principles of successful outlier companies, and create the discipline to aid in the consistency and scalability of analysis.
With investments in early diagnosis of Alzheimer’s with an eye scan, kidney health and transplant rejection in urine, breast cancer in saliva, mental health incorporating comorbidity data, cardiac health and arrest with radio waves, and a multi cancer screening in blood, DigitalDx has invested heavily in the future of digital health and in this economy, has also hit the mark on a recession-proof investment vertical. Says the team, “no matter what happens in the world, people still get sick.”
About the author:
Andy Chen, MD. is an MBA/MEng (Bioengineering) student at UC Berkeley. He currently works as an Investment Partner at Dorm Room Fund, a Fellow at DigitalDx Ventures, and is a Venture Fellow at Berkeley SkyDeck. Andy previously co-founded a medical device company in Taiwan and worked as an Associate at Health Tech VC.
Sources:
- Rock Health Report: In 2019, digital health celebrated six IPOs as venture investment edged off record highs (https://rockhealth.com/reports/in-2019-digital-health-celebrated-six-ipos-as-venture-investment-edged-off-record-highs/)
- CB Insights: State Of Healthcare Q1'20 Report: Investment & Sector Trends To Watch (https://www.cbinsights.com/research/report/healthcare-trends-q1-2020/)
- Circle Square Digital Health Trend March 2020 (https://www.circlesquareinc.com/trends)
- McKinsey & Company: Transforming healthcare with AI: The impact on the workforce and organizations(https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/transforming-healthcare-with-ai)
