Causalities of the Digital Health Investment Boom and the Savvy Survivors

Author: Lucian Iancovici, Sr. Investment Manager, Qualcomm Ventures (the investment arm of Qualcomm Incorporated)

The investment euphoria of the late 90’s was fueled by both the conviction that the internet would change the world, and by the uncertainty as to how. This tension led to massive investments in many market segments, which in turn yielded a few transcendent companies, some good exits, and a lot of lost capital. Despite inefficiency, the sheer volume of capital deployed compressed the time required to advance the sector, enabling the market to identify a few successful business models and many failed approaches in just a few years. While not nearly at the same scale, this trend seems to be happening in digital health.

As a former practicing physician and consultant for McKinsey & Co., I saw how the healthcare system actually worked first-hand. As a doctor, I participated in, and as a consultant I was exposed to, the administrative side of healthcare and the immense challenges in effecting change. Costs are soaring to unprecedented levels, and traditional fee-for-service models for paying for clinical services are not sustainable; public and private payers alike are motivated to push risk to providers under novel models, with the goals of limiting spending while preserving quality; recognition that the only way healthcare can implement efficient, modern business practices is by leveraging technology. These “macro” pressures have led entrepreneurs to leap into action — launching digital health apps, new healthcare-focused software, enterprise tech companies focused on health, etc. — and digital health has become a white-hot area, attracting competition at the startup and investor levels. Over the last several years, health tech startups have benefitted from unprecedented access to funding, with a cumulative $19 billion from 2012 through the first half of ’16, according to CB Insights.

Like the tech boom of the ’90s, the opportunities for disruption of conventional healthcare felt palpable, but specific clarity regarding how was wanting. We are starting to see hints of the end of this cycle, signaled by the emergence of some winners and their validated business models, and we believe the field will soon witness an Amazon or EBay of digital health for the following reasons:

First, we are increasingly tracking startups that are struggling to make it through to the next level, unable to demonstrate the metrics needed to garner another round of funding. The healthcare industry is challenging, as it remains highly regulated and slow to change, large institutions are complex with elaborate decision-making schema pushing sales cycle timeframes to as long as two years, and the primary communication tools remains pen, paper and the fax machine.

Second, these struggles are contrasted by a small group of companies that have demonstrated the potential of their business model and are shifting towards a growth stage, such as Veeva, iRhythm, Omada Health and Clover. Perhaps counter-intuitive to the technology sector, it is becoming clearer to healthcare investors that the technology hurdle is low (hospitals are using 1990s tech) and that addressing the adoption is really a business model problem. Thus, many early winners are taking advantage of the current payment models or building tech-enabled service models to compete with traditional service business (more on this next time).

Finally, we also see potential in a new wave of entrepreneurs who have learned the lessons of earlier entrepreneurs and changed their approaches or business models, such as Science 37.

While, I believe wholeheartedly in the potential of digital health, in any boom and bust cycle, the key to success is timing. We are coming off of an initial boom of startups founded at the start of the decade and we are starting to see a culling of projects whose business model is poorly fit to the realities of the healthcare economy. As a result, opportunity will be ripe to fund later-stage companies that have overcome the chasm and are in position to build great companies. But there will also be opportunity for early-stage, companies that can learn from the past few years and test novel, often more sophisticated, healthcare business models. I’m most excited by the potential of this new crop of startups working hard to be the next generation of winners. Net, this is boom and bust cycle will prove to be a good thing for the industry as a whole.

Lucian Iancovici, MD, is the Senior Investment Manager of the Qualcomm Life Fund at Qualcomm Ventures, the investment arm of Qualcomm Incorporated and a General Partner at dRx Capital AG, a Novartis and Qualcomm joint venture company. Lucian’s investments include Edico Genome, Practice Fusion, Science 37 (dRx), Cala Health (dRx), and Predilytics (acquired). Lucian previously worked at McKinsey & Co. and was a board certified internal medicine doctor practicing in New York. Learn more about Lucian