(A Version of this Health Alert was published by Forbes.)
A trio of new reports shows the fundraising landscape for new digital health ventures remains promising. New York’s Startup Health, an investor and accelerator, has released its report on the digital health venture market for the third quarter. Startup Health estimates $6.5 billion has been invested in digital health deals in the first three quarters of 2016, more than the $6.1 billion invested in all of 2015.
San Francisco’s Rock Health, also an investor, estimates $3.3 billion in new digital health funding through Q3. Startup Health’s figures are likely larger because Startup Health includes deals outside the United States (including a $500 million investment in a Chinses mobile medical service). Startup Health also includes deals as small as $52,000, while Rock Health has previously specified it only includes deals worth at least $2 million.
With respect to U.S.-based companies, both reports note the San Francisco Bay area continues to attract the most capital. According to Startup Health, the total is $1.2 billion – almost twice as much as New York or Boston. However, the pool is getting wider and deeper. Businesses in Philadelphia, Chicago, Minneapolis/St. Paul, Los Angeles, San Diego, Dallas, and Washington, DC, all saw good deal flow.
The national capital area attracted $91 million in eight deals. With its proximity to the regulatory bureaucracies, National Institutes of Health, and Department of Defense, Washington, DC and environs should be a welcoming ecosystem for digital health entrepreneurs. (However, I am surprised Seattle did not make the top ten. I know a few veterans of Microsoft who are making a mark in this space.)
Although over five years into digital health as an investable space, new businesses still dominate the financing, with almost two thirds of deals at seed or series A stages. With respect to subsectors, Startup Health reports businesses focused on improving consumer experience attracted $2.5 billion, far more than any other subsector.
Consumer digital health is the focus of another insightful report by Silicon Valley Bank, which notes 55 percent of all digital investments since 2011 have been in companies that face consumers directly. SVB estimates about $4.6 billion invested in 2015 and an expected $4 billion this year. SVB also distinguishes strategic investors from venture capitalists. About 40 percent of investments are made by a diverse group of strategic investors, including Qualcomm Ventures, Merck Global Health Innovation Fund, GV (formerly known as Google Ventures), GE Ventures, BlueCross Blue Shield Venture Partners, Cambia, and GE Ventures.
Why do these investors care about the consumer experience? In its half-year report published in July, Rock Health noted:
Over one-third of adults are now covered under high deductible health plans (HDHPs) and are required to spend out of pocket for a majority of their healthcare services. This shift in coverage also transfers more of the burden to the consumer, making consumerization an area still ripe for disruption by digital health startups. Tools that focus on transparency in price, quality, or experience or that allow consumers to guide their own healthcare journey (choosing their own treatment or provider) will continue to grow in popularity.
While I agree more of us have higher deductibles, I suspect businesses that focus too much on making prices transparent to consumers or making the health system more responsive to consumers’ needs might be trying to disrupt that which may not (yet) be disruptable.
It is one thing to say you are going to take on the vast insurance, hospital, and government bureaucracies, but who will pay for it? SVB suggests the best opportunities for consumer digital health lie in connecting the patient experience with real-world data or clinical-grade data.
Then there are the companies outside the health “system,” which promise fitness or wellness. SVB reports valuations for these companies have declined, especially for series B: Median pre-money valuation has dropped from about $33 million in 2015 to $20 million this year, and median investment capital from $12 million to just under $4 million. These consumer-focused companies are becoming more clinically focused. One way is to partner with academic institutions for clinical trials, like Fitbit has done by partnering with Dana Farber Cancer Center to investigate the effect of losing weight on recurrence of breast cancer.
Consolidation among fitness and wellness apps has taken an interesting path. Under Armour, the sports apparel company, has acquired at least three of them in three years. After rolling them up, Under Armour launched Health Box, a system which promises to integrate diet, exercise, and clinical data from wearable and other devices so well its promotional video could be mistaken for a trailer for the next Iron Man movie. Under Armour has also entered a strategic partnership with IBM to use Watson to analyze the data collected from its wearable devices. Even your running shoes will be connected to a vast system of machine learning and artificial intelligence.
This is a significant part of the VC landscape. In the first three quarters of 2016, $56 billion has been invested in U.S. venture capital, according to the PitchBook-NVCA Venture Monitor. Rock Health’s $3.3 billion is almost six percent of that figure.