Health tech investments have been red hot the last few years, but Rob Coppedge, the CEO of Echo Health Ventures says while the industry isn’t going to pop, it is a slowly deflating bubble.
Echo Health is the recent creation of Cambia Health and Mosaic Health, the investment arm of Blue Cross Blue Shield and has a long-term strategy in the health investment space. Coppedge has been in and around the health tech finance scene for more than 20 years as well so he might know something abut the industry.
He says what we were seeing in the last couple of years was a ramp-up of “tourist investors” in the space — eager Silicon Valley VC’s hoping to cash in on the trend.
But, “There’s a reckoning coming,” says Coppedge. “If you look at the amount of capital that’s been invested there and the implied market value that has to be created by these companies to get the sorts of exits that would be needed, you know there’s going to be some losers.”
The coming deflation may also have to do with an uncertain startup ecosystem under Trump. At least a few investors have also told us on background they are on edge about investing in health tech due to Trump’s plan to repeal the Affordable Care Act.
Oscar Health, for instance, is a health insurance company that shot right to the top under Obama’s health care plan but may get shot in the foot with Trump’s insistence for “repeal and replace” in the coming weeks.
Oscar, ironically, was co-founded by the brother of Trump’s son-in-law Jared Kushner. Will it survive under Trump? It will likely need to change tack.
But Coppedge says much of the decline has less to do with policy and more to do with investors realizing there isn’t as much disruption in the space as they thought.
“I haven’t seen the sales cycles change that much and I haven’t seen consumer adoption rates fundamentally change for many of the apps and point solutions brought to market through digital health funding,” Coppedge said.
What he’s seeing now is it’s harder to raise the follow-on rounds and there are more bridge rounds, indicating startups aren’t able to get the valuations they wanted.
Rock Health’s 2016 study showed much of the same activity and that investments were down in health tech for Q4 2016 compared to Q4 2015. But founder Halle Tecco cautioned that could be because it takes months sometimes to close the round and make an announcement about it.
We should also note Silicon Valley Bank’s 2016 report on healthcare investments and exits indicated the slowness of 2016 was just a set up for a more robust 2017, with the expectation of “a significant number of M&A transactions and a continued IPO window.”
But Coppedge believes the overall lack of performance in some of health tech’s unicorns may scare off potential outside investment.
“Many of the tourist investors who’ve been dabbling in health care may say ‘this may be harder than we thought and we may not be able to use the same skills that we use in consumer internet.'”
But he does believe there’s hope if you can change the structure from enterprise to consumer — something his firm is squarely focused on.
“If you are capital efficient you can actually pivot fast enough to build great companies,” Coppedge said.