Digital Healthcare Venture Funding: Hopeless Hype or the Slope of Enlightenment?

Digital healthcare funding has steadily risen over the past few years, and is a highly desirable startup investment opportunity.  Why?  Because demand for healthcare is inelastic, and healthcare systems face problems that absolutely need to be resolved.

In 2006, Thierry Zylberberg, an enterprising Orange executive with big ideas and a keen sense of things to come, convinced the company’s board of directors that the digital transformation of the healthcare industry was a major opportunity the telecoms operator couldn’t afford to miss out on.  A few months later, in early 2007, Thierry led the creation Orange Healthcare, a strategic initiative with a remit to evaluate the potential of the emerging digital healthcare market for the Orange group.

Nine years later and following the successful deployment of several innovative e-health solutions and concepts that proved Orange’s mettle in the digital healthcare space, Orange Healthcare, under the leadership of Elie Lobel, officially became the first dedicated vertical market business unit within Orange Business.

The digital healthcare landscape has evolved significantly in the ten years since Thierry led Orange into this terra incognita. As a measure of market development and progress, I did a quick review of venture capital funding and deal flow for digital healthcare. As they say, just follow the money.

Investment trends: digital health technologies are on their way up, up, up….

According to CB Insights, venture capital investments in digital healthcare in 2009 weighed in at USD$1.2billion, grew to USD$4.5 billion in 2015 and rose to $6.1B in 2016 (1). StartUp Health, who uses different research parameters, assessed 2016 digital health deal flow at a whopping $7.9B (2) while Rock Health, whose reports only include U.S. companies, funding rounds over $2million, and employs a narrower definition of a digital health company, reported $4.2B for 2016, up from $1.1B in 2011 (3).

As industry observer Rick Bieberman points out, the disparity in year-end results for the digital health industry comes down to a chronic lack of standard definitions, which inhibits our ability to evaluate year-to-year progress of the sector.  What, in fact, is a digital healthcare company?  What constitutes an investment (year-end results are skewed by the inclusion debt deals, for example)?  Finally, data for non-U.S. based transactions is “inconsistent at best”, so establishing progress reports about the digital healthcare industry, especially outside of the U.S., is a real challenge.

Despite data inconsistencies and differences in research methodology, the analysis of available data all points in the same direction:  digital healthcare is a highly desirable startup investment opportunity.  Why?  Because demand for healthcare is inelastic, and healthcare systems face problems that absolutely need to be resolved.  While the market is still maturing, and ROI is yet a foregone conclusion (the story around exits and deal funding deserves an entire blog unto itself), the digital disruption of the sector remains an enormous opportunity that innovative startups and high-profile industrial groups alike will not forego.(“Silicon’s New Darling” Accenture Strategy, 2016)

“Healthtech startups enjoyed a considerable uptick in venture investors’ interest amid the general VC boom over the past few years. With aging demographics across multiple developed countries, a strong need for advanced analytics (as government healthcare systems moved to empower healthcare consumers further) and general costs rising, many firms are looking to back companies that can expedite back-end logistics, provide easy-to-use digital health offerings and more.” (Venture Pulse Q4 2016: Global analysis of venture funding, KPMG Enterprise, January 2017)

Let’s take a closer look at these numbers to get an idea of what is happening.

KPMG reported total, global deal funding for all sectors at $127 billion in 2016, down from $141B in 2015, but still high relative to previous years confirming the trend of strong investor appetite by venture capital firms. Software is the indisputable champion in terms of deal flow, representing roughly 50 % of total venture capital investments.  According to the same KPMG report, digital healthcare VC funding represented around 6% of total deal flow in 2016. (Venture Pulse Q4 2016: Global analysis of venture funding, KPMG Enterprise, January 2017)

So, where is deal flow flowing?

“No more free yoga apps! Wellness in general, I’m not convinced you can be that profitable. Direct to consumer products have to have a lot of money in the beginning and you have to be very close to the people who you are offering your product to. We want to see more business to business.” Sven Lingiaerde, Managing Partner at Endeavour Vision. (7)

Investors are becoming increasingly selective, favoring startups with highly specialized healthcare market knowledge and who are proposing B2B (or B2B2C) solutions that leverage advanced technologies such as big data analytics, machine learning and/or artificial intelligence.

According to Rock Health’s end-of-the-year funding report for 2016, investments were concentrated in the following top six categories: 

1. "Genomics and Sequencing" $410 million
2. Analytics/big data  $341 million (Flatiron at $175 million);
3. Wearables and biosensing at $312 million (Jawbone at $165);
4. Telemedecine at $287 million
5. Digital medical devices $268 million
6. Population health management at $198 million.

Conversely, according to the CB Insights mid-year report for 2016,  these top six categories received 54 percent of all funding to end of 2Q 2016:

1. Analytics/big data over $300 million in funding;
2. Wearables and biosensing - $217 million;
3. Population health and management - $184 million;
4. Personal health tools - $132 million;
5. EHR/clinical workflow - $127 million;
6. Digital health devices - $122 million.

“….[in 2016] healthtech and biotech stood out as an investor priority in all regions of the world –a trend expected to continue into the next year. The reality is that many jurisdictions are faced with major inefficiencies across their healthcare systems. Companies that have strong solutions to a myriad of healthcare issues, from back-office scheduling to patient record-keeping and diagnosis, will likely be able to obtain funding. Other areas expected to continue to attract significant interest over the next year include artificial intelligence, virtual reality and data analytics.(6)

A market in the making....

While those of us who are working in this space are wont to say that things aren’t progressing fast enough (because of ill-adapted regulatory frameworks, interoperability stasis, lack of reimbursement models, usage and adoption inertia, to name a few), it is important to remind ourselves that, from the investor’s point of view, the digital healthcare industry is robust and attractive because of the potential to ‘disrupt’ old ways of doing things and to open up major, new opportunities. Our ability to track with better precision the progress of digital healthcare investing is, perhaps, a weakness to overcome, especially for non-U.S. based transactions.  Nevertheless, each year, there are more (new) investors, more companies receiving funding, and rising average deal values.  In all these respects, Thierry Zylberberg’s instincts back in the summer of 2006 about the potential of digital healthcare were right on the money!

1. https://www.cbinsights.com/blog/digital-health-startup-funding
2. (http://medcitynews.com/2016/12/startup-health-digital-health-investment-reaches-7-9b-across-585-companies-2016/?rf=1)
3. https://rockhealth.com/reports/2016-year-end-funding-report-a-reality-check-for-digital-health/
4. How Seriously Should We Take Year-End Digital Health Funding Reports?, Rick Bieberman  https://www.linkedin.com/pulse/how-seriously-should-we-take-year-end-digital-health-funding-rick

“Silicon’s New Darling” Accenture Strategy, 2016 https://www.accenture.com/t20160406T225834__w__/us-en/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Strategy_7/Accenture-Strategy-Silicon-Valley-Darling-Healthcare-PDF.pdf#zoom=50