The money is flowing in digital health like never before.
Just this week, Lyra Health completed a $200 million funding round and is now valued at $4.6 billion. LifeStance Health, a virtual mental health provider, is valued at $7 billion after its initial public offering. And last week, Valo Health, a machine learning drug development company, went public via a Special Purpose Acquisition Company (SPAC) backed by famed venture capitalist Vinod Khosla.
After wandering the desert for many years, digital health companies have reached the promise land. And deals are coming fast and furious. Valo Health was founded by venture capital firm Flagship Pioneering in 2019. Two years later, it’s going public.
According to Rock Health, the first financial quarter of 2021 featured more $100 million-plus “mega deals” for digital health companies than all of 2018 and 2019 combined. About halfway through, 2021 is on track to be even more lucrative for digital health than 2020. The same can be said for AI, which according to Accenture, will grow more than 10x in the next five years.
Does that mean the “get rich quick” scheme of the day for potential investors and entrepreneurs is simply to start a digital health company, pitch it to a few health systems, payers and employers, and profit? Not quite. The market is quite crowded and it’s increasingly hard for potential digital health companies to get to the top of the pile or even a foot in the door.
One study, published last year in Nature, found there were 1,200+ companies focused exclusively on digital health. There are many others who have digital health solutions as part of an overall offering, such as tech giants like Amazon. There are also likely many more companies that have emerged in the time since the Nature study was completed, with COVID rapidly increasing the adoption of digital health.
“I was just speaking to one company that was wondering why it was so hard to get a reply even from folks within the hospital—not ours in this case—but really within any hospital to give them feedback on a demo,” says Garrett Vygantas, MD, managing director of OSF Ventures, the venture fund arm of OSF Healthcare in Peoria, Illinois.
Our series on digital health funding:
Part 1: What’s driving the surge in digital health funding?
Part 2: Will digital health funding boom or bust? 5 experts weigh in
In this third part of Health Evolution’s series on digital health funding, experts at payer, provider and digital health organizations discuss how emerging companies can stand out. While every organization takes a different approach, there were a few common themes among executives when assessing potential digital health solutions.
Considerations in digital health assessment
- Does it lineup with strategy?
Sukanya Soderland, Chief Strategy Officer and Senior Vice President for Blue Cross Blue Shield of Massachusetts, says the number of pitches she has seen over the last years has been pretty high. Moreover, in the 16 months since COVID first emerged in the U.S., there are more companies who have preliminary results to show, she notes.
Soderland shares her thought process when assessing companies, spanning strategic fit, operational fit, economics and risk. “From a strategic standpoint, there are a host of considerations, starting with the question: does the offering materially help advance our mission and strategic goals? Does it address our members’ needs in a meaningful way to improve affordability, outcomes, experience and/or equity? Is there demonstrated customer demand and interest? Is the expected engagement level and adoption rate by providers and customers credible based on our experience?”
In his role at OSF, Vygantas, who is based in the Bay Area, is responsible for sourcing investment opportunities and conducting due diligence in the digital health ecosystem. In other words, he sees a lot of pitches from digital health companies. Like Soderland, he says it’s critical that the digital health solution line up with the strategic needs of the organization and addressing an unmet need already recognized by the organization is critical.
“That will bring the offering from the startup company to the top of our list,” Vygantas says. He acknowledges that the organization probably doesn’t do a good enough job of publicizing that list, mainly because priorities keep changing.
- Has the data been validated? Is there ROI?
Several organizations value if the tech vendor has the evidence to back up its claims. “Has the company validated, not just theoretically but in real-world terms, the ROI on what they’ve built? That’s a critical question that we look at early in our evaluation,” Vygantas says.
Soderland agrees that the economic considerations are critical. The company asks certain questions in this regard, she says: “What is the expected ROI of the offering? Is the expected value offered commensurate with the revenue model and investment required? Will our customers view the offering as worthwhile added value? Would our customers support the price point given our need to deliver greater healthcare affordability? Is the company willing to consider outcomes-based payment models as necessary?
Mark Ziemianski, Senior Vice President and Chief Data Officer, Children’s Health in Dallas, advises companies to make sure they have great validation of their results. In particular, this is crucial for organizations who are assessing and implementing AI and machine learning solutions, he says.
“These things, when they start to learn, they can go off in a direction that you may have not planned on. Some of the times it’s because your data is up to snuff, and other times you just didn’t understand the data to the extent you needed to,” Ziemianski says.
