Indicators for Digital Health

Rock Health released its most recent funding report this week. Lt. Dan summarized it well here. The main take home message from the report and from the blog post announcing it is that digital health funding continues to grow year after year, with growth in the first half of 2014 outpacing what most — including Rock Health — expected.

This is very much in line with what others have been saying and writing, including those outside of health tech like Mary Meeker, who found close to 10 percent of VC funding going into digital health, and Fred Wilson, who is predicting healthcare is at an inflection point.

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More money is flowing into digital health than ever before and the average deal size is larger than before. But, if you read the report, you realize that eight deals contributed to a large chunk of the $2.3 billion in funding, and are a large part of why the average deal size increased from $10M to $15M. Those eight mega-deals were all worth over $50 million, and four of them were above $100 million. There were 143 total funding deals that Rock Health included in its analysis and these eight likely skewed things a bit.

That being said, it’s still a great sign for heath IT (or digital health, whatever you want to call it), that so much is being invested. Obviously most of this investment and most of these ventures will not be successful, but more companies, approaches, business models, and technologies will teach us about what works and what doesn’t work.

As part of the report, there were six categories identified that accounted for the majority of money invested. These are broad buckets, but areas that investors seem to trust or "get" enough to invest in. The areas are Payer Administration, Digital Medical Devices, Analytics and Big Data, Healthcare Consumer Engagement., Population Health Management, and Personalized Medicine.

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A couple of companies included in the list of eight with very large rounds could fit across multiple categories, so I’d be curious to see how they were broken up. As an example, I imagine Nant could fit until three categories.

What’s funny about looking at the list is that EHRs aren’t a category. It’s expected, as the rush to EHR has largely already occurred. EHRs like Practice Fusion, CareCloud, and Modernizing Medicine are still raising large amounts of money, but I think the rush of new companies to try to build an EHR is not happening in the same way as these other categories. I am waiting for a new, large enterprise EHR to emerge, but it’s going to take gobs of money and time because of the same cycles in large organizations. It will happen, but I’m not holding my breath.

bubble

Is all of this funding potentially leading to a bubble like the dot com bubble we saw 14 years ago? That’s another question getting batted around. Looking at the report from Rock, it seems investment is still in line with the overall market, and we’re not in a bubble. That’s a good thing for startups looking to raise money over the next few years, as funding will continue to flow.

Does all of this investment activity, both deal size and number of deals, mean healthcare is at an inflection point, as the links above from Mary Meeker and Fred Wilson imply? Everybody has been asking that question for the last few years. I think it started 6-7 years ago when we started to see more investors pay attention to healthcare. As investor activity has increased, and more aspects of HITECH and ACA have gone into place, more people tend to ask about the tipping point for health IT.

We’re definitely past the tipping point in digital health, but that it’s not an overnight success or overnight disruption kind of industry. It’s slow moving, almost always requires pilots and multi-year rollouts of new systems and tools, and is risk averse because lives are at stake. We’ve been passed the tipping point for a while. As more and more investors and groups from outside of healthcare come into healthcare, they realize it as well. This leads to more investment and more ventures.

In addition to those outside of healthcare finally taking notice, payers and systems, as well as employers and even pharma and biotech, are investing heavily or looking to work closely with young companies. Systems are buying or piloting new tools for bundled payments and intelligent follow-up. Not just follow-up to prevent readmission penalties, they are investing in analytics, they are doing remote care (even convincing state medical boards to make exceptions for certain forms of telemedicine). Academic centers and larger systems are forming innovation centers, looking to create tools from internal knowledge of problems in the system. It’s exciting to watch, but frustrating at times because the pace is never as fast as you’d want it to be.

And beyond investors and large organizations, individuals (consumers or patients) are changing what they expect from their healthcare experience. They’ve seen banking change and education start to change, along with pretty much every other industry, and they are beginning to expect the same convenience and ownership from healthcare.

The investment dollars are great because they are a quantifiable indicator for the digital health industry. But what’s driving those investment dollars is a lot more interesting and sustainable. Investors can be fickle, but changing behavior individuals and organizations is a more powerful sign for the industry.

TGphoto

Travis Good is an MD/MBA and co-founder of Catalyze. More about me.

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