The digital healthcare investment market—a market some investment banks such as Goldman Sachs say has the potential to generate $32 billion annually in as soon as five years, is overblown and over-hyped. It’s also a soon to be a “dead” market, says a leading healthcare technology investor.
In a new blog appearing on CNBC.com Rob Coppedge, CEO of Echo Health Ventures, a Seattle healthcare strategic investment firm, writes that the digital healthcare market will fail—despite the fact that consumerism is becoming part of mainstream healthcare delivery. “I believe strongly in the need for substantive, consumer-centric transformation of the healthcare system and have been a long-term proponent of the power of entrepreneurs to catalyze and drive these difficult changes,” he writes in the blog post. “Despite this, I truly struggled to prepare for a recent presentation on the future of venture capital investing in the ‘digital health’ space.
The reason digital healthcare –at least the money—investors of all sizes continue to pour into various ventures that impact digital and mobile healthcare such as e-commerce, telehealth, online patient engagement, big data, artificial intelligence, blockchain and a variety of mobile apps—is overvalued and incapable of producing the kinds of returns investors expect.
“Since 2014, roughly $16 billion in venture funding has been invested across 800-plus companies in the digital health space and if the investors of these companies were to generate the returns they are expecting, we would need to triple the public market cap of the health information technology space by 2021,” Coppedge writes. “These are unrealistic expectations that have created an unhealthy environment for tech-enabled health care start-ups and the entrepreneurs that lead them.”
Investors in digital healthcare are buying into an “unrealistic” market driven more by hype than actual technology results that will provide an adequate return on investment, he writes. “The only thing that has grown faster than dollars invested in digital health has been the hype surrounding it – with conferences, blogs, incubators and Twitter handles springing up everywhere,” Coppedge writes. “While primarily differentiated from stodgy healthcare information technology market (HCIT) by the average age of its practitioners, digital health has brought two important developments to the industry: a pervasive optimism that health careservices problems could be solved with better technology and a keen proficiency at venture capital fundraising.”
Many digital healthcare companies—including ones that received significant backing from investors—didn’t go to market with a laundry list of doing things right such as launching a product or service without a clear understanding of how the healthcare system works, Coppedge writes. “There’s no argument here that our healthcare system demands fixing, Coppedge writes in his blog posting. “Digital health entrepreneurs have approached many of these challenges with robust enthusiasm, a long-term vision, and ample access to capital. However, many have lacked expertise, underappreciated healthcare specific workflows, misunderstood the full healthcare consumer journey and seriously underestimated what it takes to break through enterprise healthcare sales cycles. This led to numerous, expensive business lessons.”
Coppedge lists multiple reasons why the digital healthcare market—at least in its current state—is unstainable. Those reasons include:
- Better mousetraps are not enough:“Considerable resources were deployed developing better technology, apps and analytics. Unfortunately, inadequate attention was paid to solving how to go to market.”
- Ill-equipped for enterprise healthcare:“Many early-stage solutions weren’t able to overcome challenges targeting large established payer and provider clients that have cultural and operational antibodies that repel risky and disruptive solutions.”
- Consumers aren’t impressed (yet): “Many digital health companies have declared themselves platform solutions, staking their business models on “owning the consumer” and integrating parts of their healthcare experience.”
- Overvaluing and overcapitalizing: “Healthcare services and information have not historically bred unicorns. “Sales cycles are slow and adoption is more measured. Still, many digital health companies raised capital at exceedingly high valuations, expecting technology-like exits. With a few exceptions, realizations have lagged and many companies are facing tough decisions made even more difficult by valuation overhang from their last rounds.”
- Don’t blame D.C. for killing digital health: “There is a lot of talk that the uncertainty in D.C. is strangling digital health innovation. At best, this is an opportunistic explanation. While there is no lack of regulatory and policy uncertainty, we are instead at a critical point in investment life-cycles where investors are looking for their early digital health investments to demonstrate performance.”
In the future, it will be integrated, universally and electronically connected healthcare organizations that will bring about digital healthcare—eventually.
“If digital health is dead, then what?” he writes. “We need to get real, going deep to build the connections between new technologies and the legacy health care enterprises consumers work with daily and entrust with their care and finances.”