Digital health market in ‘correction’, rebound may take time | HLTH Conference

Founders of health tech companies can find success, but they’ll need sound business plans. Investors are doing more homework before putting money into new companies.

Las Vegas - Moderator Christina Farr, a health tech investor, kicked off the discussion by calling it possibly “the most depressing panel at HLTH.”

In a discussion at the HLTH Conference Tuesday, investors talked about the much tougher environment for founders building digital health companies and young companies looking to find money to grow. Startups are finding it much harder to get money than a year or two ago.

Cheri Mowrey, head of U.S. healthcare investment banking for Morgan Stanley, said, “This is a pendulum that swings. It will swing back again.”

Investors “are going to do much more diligence” before putting money into digital health companies, Mowrey said. They are going to look not just at the technology solution but the business plan, which didn’t always happen a year or two ago.

“There was so much coming to market that no one was able to do due diligence on these companies,” Mowrey said.

Jonathan Bush, founder and CEO of Zus Health, likened the current environment to tourists visiting Las Vegas. “When you go to Vegas, you have to cleanse afterward,” he said.

For digital health companies earlier in the COVID-19 pandemic, “it was exciting and manic.”

But he said a backswing of the pendulum is needed to clean out the market and allow the stronger, more innovative companies to find a way. And he acknowledged the cleanse would be “painful.”

Missy Krasner, venture chair for Redesign Health, which is in the business of creating companies, said founders aren’t going to find investors to put their money on a concept or a team unless they’re able to show profitability. The trick is to “de-risk” so investors will feel comfortable writing a check, she said.

“I feel we are in a market correction. It is a good correction,” Krasner said.

Michael Yang, managing partner of OMERS Ventures, said the pendulum has swung too far in digital health.

“We’ve overcorrected,” Yang said. “Now it’s nuts on the other side.”

The market isn’t insurmountable for founders, Yang said, but it’s going to require more work.

“If you as a founder believe in your mission, you’ve got to do whatever it takes to get to the other side,” Yang said.

Founders may have to get financing on less-than-desirable terms, or possibly take the painful step of letting workers go. “You’re going to have to recalibrate in order to play the long game,” Yang said.

The panelists agreed that the correction may last a while, meaning young companies may find it difficult for some time. Yang, whose firm invests in companies inside and outside healthcare, said some SaaS (software as a service) companies are “just entering the pain we have been in with digital health.”

“I think most people think It’s going to get worse before it gets better,” Yang said.

But he said he didn’t see hope coming in the last quarter of 2022, or the first quarter of 2023.

Mowery said she expected to see better news, with more companies going public, in 2024.

However, Krasner said she’s “a little bit more helpful.” Redesign Health, founded in 2018, has helped launch over two dozen companies, and she said the firm is on track to launch 100 companies by 2025.

“We’re not slowing down,” Krasner said.

She said much of her optimism is driven by the fact that hospitals need more help with digital solutions.

“I think providers and health systems are really in trouble right now,” she said.

“They need to transform. Health systems and hospitals are not going to be able to compete with retailers who are trying to remodel consumer-centric care.”

Bush said what he described as the cleanse in the market is beneficial both at the macro-level and for the companies themselves. While companies are touting new ideas, he said, they need to focus on how to become self-sustaining. He also said the healthcare industry is hampered by the inability to let go of technology that’s outlived its usefulness.

“The enemy of healthcare innovation is oligarchy,” Bush said. “We don't make things obsolete fast enough in the healthcare industry. We need more new entrants and new deaths to get any innovation.”

Small companies need to focus more on profitability than simply rapid growth, Yang said.

“You can grow a profitable services business on very little capital,” he said

For emerging companies, Yang said, “Twenty percent growth is fine, right now, especially if you’re profitable.”

Modest growth with profitability is much more appealing to investors than a company that is seeing 100% growth but is burning cash. “That’s not what people are looking for today,” Yang said.

In a recession, small companies also should focus on what they do well and let go of other areas, he said. “Anything you’re not world class, get it off the plate,” he said.

When asked where founders and small companies should be targeting, Krasner said, “It’s big tech and retailers, baby.”

Retailers such as Amazon, CVS Health, and Walmart have entered the healthcare industry. Whether or not retailers find success will be seen, but they are forcing health systems and hospitals to change, she said.

“They’re moving the incumbents forward at a much more rapid pace,” she said.

Panelists also offered some suggestions for founders looking to provide digital solutions.

Mowrey said she sees a need for a platform for the coordination of care with the family, patient and all the clinicians involved in patient care. “We just don’t have that,” she said.

Yang said he thinks there’s openings for those with ideas to improve benefits communications.

“I think benefits communication is a problem that has yet to be solved,” Yang said. “There’s got to be a complete rethink of benefits communications.”

Krasner said she’d love to see some start-ups try to think about reinventing insurance.

“It would be interesting to think about how to keep innovating insurance,” she said.