Rising healthcare costs, an aging population, stifling regulations and the complexity of present-day technological offerings make the trillion-dollar healthcare industry ripe for disruption.
Not only are we finding new and innovative ways to get medical help, this global pandemic has led to explosive growth in telemedicine, digital devices and health-tracking apps — much of which needs a digital overhaul for doctors’ offices, insurance and the cumbersome HIPAA compliance.
While an infrastructure focus might not seem exciting, it is necessary to fix a broken, profit-driven system of paperwork and delays while the sick and suffering are saddled with mountains of debt.
Our current climate is the perfect illustration of just how critical new and innovative investments in the space truly are. It’s also a lucrative opportunity. According to Deloitte, healthcare infrastructure is expected to continue growing above pace into 2023.
But finding those disruptive technologies is the tricky part. In a recent survey, we asked VCs to evaluate the digital health sector; for today, we reached out to active investors to find out what they are seeing within the healthcare infrastructure landscape, what they are most interested in right now and where they think the industry is headed.
In this survey, we hear from:
- Carl Byers, F-Prime Capital
- Arvind Gupta, SOSV
- Matt Brennan, General Catalyst
- Bilal Zuberi, Lux Capital
- Sundeep Peechu, Felicis Ventures
- Bryan Roberts, Venrock
Carl Byers, F-Prime Capital
Data and automation are the most interesting themes to me right now. We are only beginning to see the efficiencies and new capabilities opened up by getting the data organized and applying modern techniques. I’m more excited about the practical impact of robotic process automation (RPA) than I am enamored with AI, though both are exciting. I’d point to Notable Health in San Mateo as a company that has a great use of both technologies. I think we are about to embark on a new era of open data in healthcare where we finally solve the longstanding quest for interoperability with privacy mediated by patients. This will require a new developer ecosystem to come about built on new protocols rather than tired, legacy models. The key is for there to be demand pull from new services like virtual primary care (e.g. Firefly) or at-home solutions (like Ro or LetsGetChecked), instead of just a regulatory push (though that also will be important).
I’m spending time on RPA and open data, which is the key to improving healthcare B2B/infrastructure (see above). I think all markets have been overheated from a valuation standpoint, but if you find the right company, the opportunity is vast. If healthcare today is roughly 2x too expensive, getting data flowing is key to eliminating most of that waste. RPA can attack the administrative bloat while data exchange will allow doctors and patients to finally shop for the best value without the worry that something will be lost clinically in the translation.
As always, I’m looking for investments that go WAY UP in value. More seriously, I’m fascinated by the use of AI (e.g. Buoy) to enable a much more distributed, diverse and decentralized system of keeping people healthy. I also think wearables will move from being a nice-to-have luxury to more of a requirement for safety for certain vulnerable populations (and then more broadly). Technology is evolving such that wearables will not need to be a luxury device, but rather a foundational component of remote patient monitoring.
We need to move away from the idea that each provider has a separate island of information that is exchanged with other islands, but instead have one record per person that all providers read from and write to. I’d love to see someone create a universal patient ID that people want to use and that avoids the Orwellian fears that have held us back to date. The Apple-Google solution for COVID contact tracing might be an indicator of the types of architecture that can solve that riddle (i.e. public key cryptography applied to health data privacy/exchange).
COVID-19 has highlighted the risks of in-person, centralized care and made everyone from regulators to consumers much more open to care at home, enabled by technology. I think COVID-19 also has shone a bright light on the vast inequities in our health system where miracle cures stand side-by-side with public health disasters that are preventable. I think eventually we will view basic healthcare more like a utility: it needs to be regulated for quality and there are public goods that can be funded cheaply, so people are less fearful and so we can spend our creative energy on far higher value aspects of medicine and health.
How has COVID-19 impacted healthcare B2B/infrastructure startups operationally? Operationally, everyone sees now that data and automation are not just nice-to-have aspects of a well-run health system but actually essential to achieving the same levels of speed, reliability and cost that we have come to expect from technology-driven consumer-centric industries.
What advice do you have for your portfolio companies facing unprecedented surges right now?
Most startups spend huge amounts of time and money trying to find their market; once the market is found, it’s all about scaling up. So the surges driven by COVID are accelerating the time frame for management teams to get serious about scaling.
The biggest cracks in the infrastructure are basic things that don’t scale because they were never built well in the first place: patient and provider identification; data integration; price transparency; regulatory barriers; and removing as much as possible from the realm of the mystery of medicine (toward open, scalable knowledge bases).
Health systems are the most likely adopters of technology because they have the balance sheets and the business models to earn a strong ROI. The most important investments, however, will allow society to disintermediate those health systems which today are largely exploitative and counterproductive in their pricing, referrals, data hoarding and regulatory influence. We need alternatives enabled by technology to break down the health system oligopolies.
Arvind Gupta, SOSV
I think it is an area that is still overlooked by investors. Diagnostics have historically low multiples but new technologies and business models are changing that. People will begin to see this soon. Therapeutics is still seen as arcane or too risky. Data-driven healthcare using AI can often lead to confusing results if input data is not directly relevant. Like a game of telephone, the result is often distorted if measuring downstream and easily available proxy data rather than the direct biomarker readout.
What trends are you most excited about in healthcare B2B/infrastructure from an investing perspective?
New diagnostics that enable precise classification of disease all the way down to the personal level. Informational drug design and development.
What are you looking for in your next investment?
Great teams working on informational drugs, gene delivery, rapid massively multiplexed point of care diagnostics, consumer healthcare delivering healthcare outside the hospital and in the home
Are there startups that you wish you would see in the industry but don’t?
Full-stack startups looking to reinvent the healthcare industry rather than sell into it.
How has COVID-19 impacted the healthcare B2B/infrastructure investing landscape?
COVID-19 has definitely made the world of investors aware of the critical needs and problems with our healthcare system. There is a lot more interest in diagnostic and disease mitigation companies. There is also just a lot more interest in biology as a technology. Investors are starting to realize that biology is a technology that will power the next generation of startups.
How has COVID-19 impacted healthcare B2B/infrastructure startups operationally?
Hasn’t really. They are deemed essential businesses so they are all working around the clock to develop COVID-19 solutions.
Clearly the lack of actual infrastructure to handle and triage a huge number of cases in the hospital and outside of the hospital. There needs to be a new system to give great quality healthcare outside the hospital.
Consumer healthcare will get bigger and bigger with à la carte and direct purchase options driving technology options.
Many VCs want to sit out investing at this time; we instead funded seven COVID-19 startups in four weeks, evaluated over 200 startups and took nonstop meetings to get it all done. I believe now is a great time to find amazing entrepreneurs and opportunities if you have a prepared mind.
Matt Brennan, General Catalyst
Innovation in healthcare infrastructure is subject to many complexities, such as the payer, provider, patient relationship; heavy regulation; privacy protections; and certainly not least, the fact that there are lives at stake. Despite those complexities, we’re optimistic that by focusing on the underlying infrastructure supporting health systems, there is potential for significant progress in making healthcare fundamentally more efficient, higher quality and affordable.
More specifically, we are interested in technologies that enable real-time interoperability and that can provide insights based on the wealth of data available across healthcare ecosystems. Unlocking that data, especially between existing data systems, could help care teams work more efficiently and deliver better outcomes. We’re also interested in areas like robotic process automation and AI/ML models that can reimagine workflows and make administrative processes more efficient.
Though telemedicine and other approaches to remote care aren’t new, the COVID-19 pandemic has certainly accelerated interest in these technologies. We may find that with this health crisis that in many cases, remote care will turn out to have been safer, less costly and more patient-centric than care provided in institutional settings. There could be an acceleration coming out of the pandemic of work to create the platforms that will support a more distributed healthcare model in the near future. With worsening shortages of healthcare professionals, chronically under-served geographies and an aging population, these are the innovations that have the potential to make significant positive impact at a societal level.
Finally, the COVID-19 crisis challenged our healthcare systems in a way that they probably haven’t been in decades. Our hospitals and healthcare professionals have done an incredible job rising to the occasion. There will likely be an opportunity that comes out of today’s situation to build platforms that better connect hospitals and their communities and can provide scalable services in the event of the next pandemic-level crisis.
Bilal Zuberi, Lux Capital
Through this stressful time we are all recognizing how our healthcare infrastructure is actually quite vulnerable. Who could have imagined the biggest healthcare system in the world would run out of not just ventilators and dialysis machines, but of masks and PPE? Outside our hospitals telemedicine is helping millions receive care under lock-down, but it is under-reported how many physicians are able to participate only because they are for now able to use consumer apps like Zoom, Hangouts etc. Why does clinical software suck?
At Lux we continue to focus a large portion of our capital on investments in the broader life sciences/healthcare space: from new drug discovery tools and platforms, to distributed clinical trials and remote health solutions, to platforms enabling data interoperability and modern clinical software development. We have seen our healthcare, and non-healthcare companies, go to extraordinary lengths to provide support for the fight against COVID-19: from Recursion Pharma releasing first open-source morphological imaging data set on SARS-COV2 virus, and Primer using ML/AI to aggregate all scientific research on the topic, to DesktopMetal and Shapeways printing testing swabs and ventilator parts, and many others.
We learnt through this crisis that availability of capital wasn’t the issue, but applicability of technology, and operationalization was hard. We need a system to rapidly test and deploy new technological solutions at scale. We need better and faster methods of drug and vaccine discovery/development/testing. We need better solutions to rapidly integrate new technologies into our healthcare system, including clinical and workflow software via open data architectures and interoperability, wearable and networked devices for individual and population health and low-cost at-home or on-site health monitoring tools. We need data interoperability to be able to provide care to a patient in any part of our country, and to mine high-quality data for better, and more useful, insights.
While a lot of our healthcare infrastructure will take a little bit of time recovering from the stress COVID placed on it, we anticipate this to provide a push to the system to adopt new technologies that enable distributed health, build resiliency in our delivery networks and deploy data-enabled healthcare. Hospital balance sheets might struggle in the short term to buy new technologies, but payers as well as large businesses might participate in infrastructure development and deployment in a bigger way. We anticipate selling to hospitals to be difficult in the short term, as they try to recover from the revenue shortfall they experienced during COVID-19, but will generally emerge more interested in adopting new technologies, digital and remote health solutions and automation in various functions. Needless to say, a wide-scale digital transformation of our healthcare industry is underway, and there is no looking back.
Sundeep Peechu, Felicis
Data infrastructure for providers/pharma and patient experience management for hospitals have been top of mind for the past year, but plenty of other areas like payments, cost transparency and claims management continue to be ripe for reinvention.
How much time are you spending on healthcare B2B/infrastructure right now? Is the market under-heated, over-heated or just right?
About a fifth of our investments in recent funds have been in healthcare, so we are quite active.
What are you looking for in your next investment?
I continue to look for teams that focus on a small critical solution, are relatively revenue-efficient and leverage that at scale into adjacent areas.
Are there startups that you wish you would see in the industry but don’t?
We wish to find more “platform” companies that shrink the time/cost of creating new applications and that applies across a wide swath of healthcare.
How has COVID-19 impacted the healthcare B2B/infrastructure investing landscape?
Some parts of the future have clearly been pulled in, like telemedicine and pharmacy delivery. Infra for early detection, contact tracing, better revenue management, etc., all seem very likely. Even basic things like healthcare logistics (ex: procuring PPE) has been found wanting, so there’s a lot to fix.
How has COVID-19 impacted healthcare B2B/infrastructure startups operationally?
Most companies have scraped through Q1 with relatively low impact. The middle of the bell curve is bracing for a 30-50% impact in Q2. Once that data comes in, we will likely see more changes to underlying operations.
What advice do you have for your portfolio companies facing unprecedented surges right now?
Accommodate demand where margin positive and build the underlying tech to make it more efficient later.
What are the biggest cracks emerging through this overnight adoption of healthcare B2B/infrastructure?
The inability to scale testing despite the demand is glaring.
Bryan Roberts, Venrock
The delivery of healthcare in the U.S. is a very large ecosystem with enormous inefficiencies, cross incentives and entrenched interests. Healthcare is the largest employer in most U.S. counties and it puts dinner on a lot tables across the country. In fact, until the recent pandemic, healthcare jobs had been added every quarter for over a decade — including during the 2008-9 recession when the rest of the workforce dropped over nine million jobs. A huge, inefficient and important sector of the economy is often fertile ground for disruption by innovative startups. The several most important trends that we are focused on, for projects in which we get involved, are (1) information availability and (2) incentive alignment. The intersection of these is very powerful and both have been, historically, in short supply in healthcare.
COVID-19 will dramatically, positively change the growth and impact of technology enabled businesses in healthcare — most importantly (1) virtual medicine, not just in urgent care but in primary care, chronic diseases and mental health (all of which will offer a more convenient, higher-quality patient experience, as well as less expensive service); and (2) value-based care, where information is available and incentives are aligned to promote dramatically more efficient healthcare, with better outcomes.
