Where top VCs are investing in digital health

The world of healthcare has notoriously been described as “broken” — plagued with high-friction workflows, sky-high costs and convoluted business models.

Over the past several years, a long list of innovative startups and salivating venture investors have pinned their focus on repairing the healthcare industry, but its digital transformation still appears to be in the very early innings. After a record-setting 2018, however, digital health investing continued to reach meteoric heights in 2019.

Mammoth pools of capital have flooded into various sub-verticals and business models, backing collections of new B2B and B2C companies focused on optimizing healthcare workflows, improving healthcare access and offering lower-cost distribution models. Over the past two years, digital health startups have raised well over $10 billion in funding across nearly 1,000 deals, according to data from Pitchbook and Crunchbase.

As we close out another strong year for innovation and venture investing in the sector, we asked nine leading VCs who work at firms spanning early to growth stages to share what’s exciting them most and where they see opportunity in the sector:

Participants discuss trends in digital therapeutics, telehealth, mental health and the latest in biotech and medical devices, while also diving into startups improving medical practitioner efficiency, evaluating the evolving regulatory environment and debating valuations and offering a ‘temp check’ on the market for digital health startups leveraging ML.

Annie Case, Kleiner Perkins

Although Kleiner Perkins has a long history of investing in iconic health companies, we believe it is still the early innings of digital health as a category today.

When I evaluate new opportunities in the space, I often start by thinking through how the company will move the needle on cost, quality, and access to care — the “iron triangle” of health care systems. Conventional wisdom has been that it’s impossible to improve all three dimensions simultaneously, but we are seeing companies leverage technology to shift this paradigm in meaningful ways.

It’s no longer just a promise. For example, Viz.ai is using artificial intelligence to detect and alert stroke teams to suspected large vessel occlusion strokes, enabling patients to get treatment faster. Their workflows improve access to life-saving care, deliver higher quality through reduced time to treatment (every minute counts as ‘time is brain’ in stroke care), and dramatically reduce the costs associated with long-term disability.

We are also seeing companies provide this type of tech-enabled care outside of the hospital setting. Modern Health is a mental health benefits platform that employers are making available to their employees. The platform triages individual employees to the right level of care, providing clinical care to those with diagnosable depression or anxiety, and making self-guided or preventative care available to everyone else. Their solution improves quality and access by offering mental health services to every employee and reduces the cost associated with untreated mental illness, lost productivity, or employee churn.

Heading into 2020, we’re eager to back digital health companies in new areas that leverage technology to impact cost, quality, and access. A few spaces that I’m excited about are behavioral health (mental health, substance abuse, addiction, etc), care navigation, digital therapeutics, and new models integrating telehealth, remote care and AI to better leverage medical professionals’ time.

Zavain Dar and Adam Goulburn, Lux Capital

Below are some thoughts and coming predictions on health tech broadly:

  1. Digital therapeutics continue to pick up steam — on the back of Pear and Akili, more companies push to FDA and enter the market. In addition, broader consumer platforms like Calm and Headspace look to broaden their offerings by investigating clinical approvals.
  2. At least one major pharma looks to expand its consumer surface area by acquiring one of the new digital, consumer-facing generics platform (ex Hims, Ro, NuRx).
  3. Venture funding for biotech continues to boom with at least three Series A’s of $100M or more in size.
  4. Drug discovery for neurodegeneration sees a renaissance. High-profile failings of Biogen and the beta-amyloid hypothesis sees a shift of innovation to early-stage biotech and venture creation.
  5. Big pharma has its DeepMind moment acquiring at least one machine-learning (AI) enabled drug discovery company.
  6. Clinical trial tech investments heat up; new companies and technologies emerge to make trials patients first and systems get smarter at finding the right patients at their point of care; large incumbents like IQVIA, LabCorp and PPD get acquisitive.
  7. At least three traditional Sand Hill Road tech venture firms open life science practices or raise dedicated funds.
  8. Machine learning targets chemistry driven by large advancements in transformer (NLP) models; has the time for computational chemistry finally come?
  9. HCIT sees a renaissance driven by increased CIO responsibility towards data interoperability. Companies either working on federated ML to allow systems to speak to each other or lightweight edge applications enabling rapid clinical deployment will see quick uptake and traction, until now impossible in HC.

Kristin Baker Spohn, CRV

In the last 10 years, digital health has exploded. Over $16B has been invested in the sector by VCs and we’ve seen IPOs from Livongo, Progyny and Health Catalyst, just in the last year alone. That said, there’s still a lot that mystifies people about the sector — there are spots that are overheated and models that will struggle to deliver venture scale outcomes. I’ve seen digital health evolve first hand as both an operator and investor, and I’m more excited than ever about the future of the space.

A few areas and trends that I’ve been following recently include:

  1. Optimizing benefits: Over the past decade, health insurance premiums, deductibles and out-of-pocket costs have risen dramatically, significantly outpacing inflation. Employers (and employees) are paying more than ever for health care and are looking for ways to get more bang for their buck. One way they are doing this is by actually expanding benefits to support employees and their families and helping them navigate to the best and most cost-effective care. In addition, companies are thinking about how they leverage benefits to support employees during the big life moments that matter. We’ve seen several companies pursue this model successfully in spaces like mental health and fertility, including CRV portfolio company Carrot Fertility, as well as family support like Cleo.
  2. Evolving telehealth: Increasing out-of-pocket costs, loosening telehealth regulations and growing consumer demand for convenience is spurring a new wave of telehealth. D2C prescription companies like Hims/Hers and Ro/Rory started in cash pay markets and are expanding into areas that are traditionally covered by insurance. I am seeing this space to continue to evolve as companies move from more transactional consumer relationships towards addressing a person’s care needs more holistically and managing ongoing health conditions. There is a huge opportunity here, not only for D2C healthcare brands but for startups providing services that have been done in-person or have been available but underutilized from traditional telehealth companies, including at-home diagnostics, clinician consults (both synchronous and asynchronous), care coordination, and more.
  3. Leveraging AI: Thanks in part to increasing access to data, and specifically imaging data, it’s now possible to train AI models for medical use cases. Leveraging AI in medical decision-making can not only lower costs for providers but also improve patient outcomes. CRV portfolio company, Viz.ai, is doing this in stroke care, with technology that drives faster interventions for patients in need of immediate care. By building a business model that aligns incentives across providers, payers and patients, and a mobile-workflow, Viz’s rapidly expanded in over 300 hospitals.

No one said building digital health startups would be easy (but where’s the fun in that?). If you’re energized by these challenges and have the humility and passion to build a game-changing company, I’d love to work with you along that journey.

Raju Rishi, RRE Ventures

How much time are you spending on digital health right now? Is the market under-heated, over-heated, or just right?

Over the last 30 years, three sequential innovations (the internet, mobile devices, and cloud storage/compute) have had profound impacts across nearly every industry in the U.S.. Healthcare has been largely untouched by these innovations, due to numerous factors including regulation, privacy, and lack of standards.

We’ve seen dramatic shifts across all of these recently, and as a result, Healthcare is finally ready to reap the benefits of the three aforementioned innovations. We’ve seen a significant uptick in digital health investment in the last 5 or 6 years, but we’ve still got a long way to go in transforming this trillion-dollar industry.

We can’t jump to the endgame, however. In order to truly unlock digital health, we need innovation to take place in roughly a linear fashion. For example, data needs to be digitized first, followed by data interoperability, followed by unified data stores, followed by the application of AI/ML to these data stores to improve outcomes. The investment landscape, however, has been pretty haphazard.  As a result, I think spending is overheated in some areas like AI/ML for digital health and under-weighted in categories like interoperability & data security.

Personally, I’m very bullish about this sector and spending half of my cycles on Digital Health.

Which trends excite you the most in digital health from an investing perspective?

Long-term, I’m bullish that we’ll have an aggregate, anonymized and secure pool of healthcare data (including genetics) which will help us design personalized medicine and care plans for patients. But, that future is many years away. In the meantime, I’m looking to invest in the following categories:

  1. Platforms that reduce the waste and inefficiency in healthcare, including automated data entry and data extraction solutions, as well as broader robotic process automation.
  2. Solutions that address cybersecurity challenges across small & large clinical settings.
  3. Solutions that address the ever-increasing clinician talent shortage and burnout. This ranges from tech-enabled job placement solutions to enhancing the clinical environment with tools to help doctors gain efficiency (e.g., voice-based clinical notes).
  4. Solutions that improve the antiquated clinical trial model, including patient targeting/recruitment and overall clinical trial workflow.

Olivia Lew, General Catalyst

As an investor, I am spending the majority of my time looking at companies that run the spectrum of healthcare innovation. With a superficial look, you might see this market as over-heated given the volume of activity, but I still see an incredible amount of opportunity today.

There are several aspects in digital health innovation that have some really interesting early-stage opportunities right now. There’s a lot of work being done in optimizing workflows. Two areas of particular interest are 1) technologies that can provide physicians with a more comprehensive understanding of — and access to — patients outside of the four walls of in-person care, and 2) tools that are optimizing physician workflow, specifically those in billing and coding automation that remove those burdens from the healthcare professionals so they can do more of the job they’re trained to do.

On the patient-facing side of innovation, we are excited by teams that are leveraging data to enable increasingly personalized care, and we’re equally as excited about patient-centric companies that are working to expand access to care with an emphasis on aspects like price transparency.

And on the pharma front, ML and AI are enabling faster and more cost-efficient drug discovery, as well as opening doors to tackle diseases previously deemed too challenging to take on. We’re interested in seeing new methods to revolutionize the clinical trial, as well as the pharmaceutical go-to-market playbook.

Bill Liao, SOSV

Which trends excite you the most in digital health from an investing perspective?

There are a bunch of new non-invasive sensors coming online which is going to make for much better feedback loops for machine learning in digital health. While there are many management and machine learning systems out there it is still difficult to get the full analysis loop going. I am particularly interested in companies like Machine Medicine and Athronica that are using cheap video image analysis as their sensors to provide the feedback loop that allows their machine learning systems to be tuned and honed into something really accurate and therefore useful.

How much time are you spending on digital health right now? Is the market under-heated, over-heated, or just right?

We have less than 20% of our investments going to digital health compared to much more investing in medical devices, diagnostics and other interventions. The market appears cool in Europe and little overheated in the U.S.. There is no doubt that digital health is generating impact for patients and the jury is still out on the size, quality and volume of the investor exits.

Are there startups that you wish you would see in the industry but don’t?

I am very keen to see real-time, noninvasive insulin level measurement become a thing. We are close to getting there with blood glucose levels and blood insulin measurement would give us all much better insights into our day to day health. There is little doubt in my mind that if you could keep your blood insulin level lower through the day you would live a longer healthier life.

Plus any other thoughts you want to share with TechCrunch readers.

It is long past the time where you should be paying attention to a whole spate of medical advances. There is a new digital divide forming around those who are aware of and thereby have access to health innovations and those who stay uninformed and therefore are missing out on a bunch of innovations that are low cost with promising impact. Fitness trackers might be cool, heart rate monitors are getting better and better it is particularly interesting to wear one, such as the super unobtrusive motive ring or the under you sheets Beddit or the Kokkoon EEG headphones and see how what you eat at your last meal correlates with the quality of your sleep as measured objectively.

Jennifer Hartt and John Prendergass, Ben Franklin Technology Partners

Which trends excite you the most in digital health from an investing perspective?

Starting a software company in the healthcare sector is getting easier every day, largely due to the advent of companies focused on the backend of building a SaaS business. This includes HIPAA compliance, EMR integrations, payment processing, and product distribution, for example. With this will come an increasing number of companies started by industry experts and focused on specific, non-obvious, pain points in the healthcare system that represent huge markets. A few bets we’ve made along these lines include Bainbridge Health (infusion medication management) and Roundtrip (software layer between NEMT providers and hospital coordinators).

We believe there’s still work to be done in reducing the friction to accessing quality care. Two companies we’ve backed in this area are Triduum (screens and triages patients to mental health providers) and Repisodic (helps patients make more informed decisions for post-acute care).

How much time are you spending on Digital Health right now? Is the market under-heated, over-heated, or just right?

We focus on companies in the Philadelphia region and started investing in the digital health sector five years ago. Since then, it’s come to represent about a third of our healthcare portfolio, the other two-thirds being therapeutics and medical devices. Given the volume of healthcare professionals, scientists and students in our area, we meet with promising founders in the digital health space quite regularly.

Obviously money has been flowing into the sector, and more every year, but given the breadth of what is considered digital health nowadays, we think it’s difficult to say it’s over-heated. When the game is improving the health of our population, we want to see as many at-bats as possible. However, areas like blockchain and telemedicine, to name a few, tend to receive an outsized amount of press relative to their true impact on the health sector.

Are there startups that you wish you would see in the industry but don’t?

We should preface this by saying that there are higher-level dynamics in the healthcare sector that impede the formation of truly revolutionary companies (increasing consolidation, low margins, disparate incentives of everyone involved). That said, one area where we’d like to see more being done is helping caregivers handle end-of-life care for loved ones. The proportion of Americans dying in their homes has been rising steadily for over a decade and just recently surpassed the level of those dying in-hospital. The family members and friends of these folks in their last days, the caregivers, are exhausted and ill-equipped. They need access to quality assistance at a low price point, which is what we’d like to see done at scale.

Another area we’d like to see more activity is in the realm of building a smarter care workflow. This can take the form of moving care outside the office and into the home or community, low cost, at-home diagnostics, or even periodic visits to your local Walmart. In all cases, we want to see less utilization of expensive hospital services and a more efficient process from diagnosis to treatment.

Plus any other thoughts you want to share with TechCrunch readers.

The Philadelphia area is currently underestimated in the digital health space. There is too much talent and too many good ideas here that go under-funded because investors aren’t looking. So if you’re thinking of building a digital health company in the Philadelphia area, or curious about the local ecosystem, shoot us an email anytime.