I started thinking about this while developing this year’s Digital Health Innovation Summit. I’m currently a partner at Abingworth, a life sciences venture fund, and have a long history of healthcare services investing so I was surprised that at least as of today my answer may be yes.
Historically, technology investors stayed away from healthcare, as compared to other large industry verticals healthcare seemed like a headache. Healthcare domain experience was thought to trump software expertise. This has changed and some of the most active investors in digital health companies are technology savvy investors like Norwest Venture Partners, Social+Capital and Khosla Ventures. I’m not just talking about investments in iPhone apps for tracking health and fitness. Some of these firms, most notably Social+Capital, are tackling health areas complicated to diagnose and expensive to manage like asthma, COPD and Alzheimer’s.
So what’s changed? The Affordable Care Act (aka ObamaCare)? No – not to diminish the significance of health policies and events unfolding on a national level at this moment. Instead, I would suggest the following three developments:
- Pervasive connectivity among all constituencies within the healthcare ecosystem. The iPhone, iPad, and new PMS/EMR’s have all helped to connect even the largest and most fragmented groups, including small provider practices and consumers.
- Consumer engagement and empowerment. Consumers need to be their own best advocate for quality of care and increasingly more responsible for health insurance and related financial decisions.
- SaaS and cloud-based platforms and business models. These provide very effective and cost-efficient ways to rethink inefficient clinical, financial and administrative processes and unwind and replace associated/dated HCIT infrastructure.
Payers and health systems have always been slow to embrace change and this made it hard for new companies to get sales traction here and investors to get money to work in HCIT. The technologies mentioned above now make it very viable to sell better and much needed new solutions into both large established markets and tap into previously hard to reach healthcare markets — small provider practices and consumers. Through connectivity, independent practitioners and consumers now have a collective voice and the ability to drive change from the ground up.
Some technology investors are drawn to healthcare through their knowledge of the consumer, believing that the ability to influence individual’s behavior is central to improving overall health. Others with more of a B2B focus, like Kevin Spain, a partner at Emergence Capital, see technology investors venturing more into distinct verticals as par for the course in technology. “Most new technologies and technology-enabled platforms start with broad horizontal market strategies, but once the big plays get tapped the next best opportunities are compelling vertical stories.” “Healthcare is one of the biggest purchasers of technology and, with government and market-driven change occurring in healthcare, why wouldn’t we want to be there?” Veeva Systems and Doximity are two great examples of vertical-specific businesses based on the success of Salesforce.com and LinkedIn, respectively.
So why would technology investors be better positioned to drive change in healthcare? Improving care and cutting costs in healthcare will involve disruptive thinking and new clinical and businesses process enabled through new platforms and tools. The three technology/market developments highlighted — connectivity, the role of the consumer and, most notably, SaaS and cloud computing — are the reasons why we can now start to fix healthcare. These are also the areas technology investors focus on every single day. Entire firms are founded and developed around knowing these technologies inside and out across all industries. It’s a big deal. They not only have tremendous product knowledge, but they also know what’s worked and what hasn’t in multiple sectors and why through massive learning through trial and error.
Most healthcare investors are more market-driven than product-driven and don’t have experience applying disruptive new business models in other industries. OpenView Venture Partners recently posted an article titled “Choosing a VC? Does sector expertise matter?” It made some good arguments as to why functional knowledge around product development, marketing, customer acquisition and retention are as valuable or more to management teams than domain experience when building SaaS companies. The fact that technology investors have such product knowledge and have had the opportunity to think about disruptive business models across multiple industry sectors does given them an advantage in many ways in healthcare today.
So should healthcare investors hang up their stethoscopes and look for different work? Not so much. I think the main takeaway for healthcare investors is that product knowledge and software experience is more important than it has ever been in terms of commercial success and investment returns. Healthcare investors might be well served to trade a few days at JPM’s Healthcare Conference for a couple days at Dreamforce, the Salesforce.com annual conference. While today I might suggest technology investors have an edge at what it takes to found and build scalable disruptive new businesses in healthcare, this will all balance out in short order.
Healthcare investors will become more product-centric and expand their advisor networks beyond traditional HCIT circles and include more current talent around this group of enabling technologies. Everyone is looking for the “next big thing” in healthcare, but the real opportunity is in novel niche businesses that will arise through “change” and the vast replacement cycle for sub-sector enterprise systems we will likely see over the next five years.
As these platforms will be market specific they will require deep healthcare domain knowledge, and experienced healthcare investors like Sequoia and Venrock will be well positioned to identify and build category leaders. Technology firms will also start to develop pockets of greater industry specific experience. As the SaaS market matures and technology investors look beyond backing “me too” platforms in horizontal markets many will start to take deeper dives into select industry verticals like healthcare. When they do some of these firms will likely start having at least some partners focusing a little more than a little less in developing deeper domain experience like growth equity and private equity firms.
About the author: David Mayer is a partner in the Waltham, Mass., office of Abingworth, which invests in life sciences and healthcare companies. Mayer’s primary responsibility is supporting Abingworth’s efforts in growth equity, which includes growth capital and growth buyouts in HCIT, technology-enabled services, and medical technology. He sits on the boards of Avedro, Magellan, MD On-Line, Secure EDI, Sientra and Sonitus Medical. He may be reached at firstname.lastname@example.org and followed on Twitter @djmventure.
Image credit: Professor Karl Oldhafer, chief physician of general and visceral surgery at the Asklepios Hospital Hamburg-Barmbek, poses during liver surgery, one of the first surgeries of its kind in Germany with the support of a tablet computer to access and visualize planning data, August 15, 2013. The tablet computer uses augmented reality, which allows the liver to be filmed with an iPad and overlaid during an operation with virtual 3D models reconstructed from the real organ. REUTERS/Fabian Bimmer