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Digital Health – Are we in a bubble that is about to pop?

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The general market seems to be buzzing with one key question, “Are we in a bubble?”

The general market seems to be buzzing with one key question, “Are we in a bubble?” For the digital health space, this is an especially important question because the market is so new that it has never survived a crash. Basically, will there be an ironic amount of death of companies promoting health? There are competing viewpoints and this post will investigate the facts behind these opposing views.

Bubble Facts:

  • Healthcare IT/Digital Health has had a historical increase in the amount of funding. The total amount of funding has increased from $900M in 2011 to $4.1B in 2014. This market has grown even faster than the software market – a market many think is in a bubble.

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  • An increasing number of those investors are not traditionally healthcare investors. This is worrisome because healthcare companies have very different risk profiles. For example, the amount of time for to get a customer contract can easily be two years (aka the total amount of time some tech startups are around). Another factor that is very different is the fact that the regulatory risk poses a much larger part of the business model and this takes is very specialized management. The concern is that non-healthcare investors will not have the patience for this market and will leave suddenly, i.e. creating a crash.
  • Fidelity made news recently with the write-down its holdings of multiple private companies considered unicorns by the market including Zenefits, MongoDB, and Snapchat. This has spooked the market because it is seen by many as a confirmation that the market has gotten too hot and it going to begin to correct itself.

Bubble Counter-Facts:

  • Government intervention drove the creation of this market with the HITECH (Health Information Technology and Economic and Clinical Health) Act by investing $35B into the digital health market. This Act has also created a regulatory environment that requires continued investment by providers because of the Meaningful Use (MU) requirements for reimbursement.
  • Healthcare is 17% of the U.S. GDP. Not only is healthcare a large part of the U.S. economy but it is also part of the economy that is fairly recession-proof. So, continued investment in digital health seems very logical. United States has huge problems with their healthcare system and digital health is one of the areas that is providing hope for the future.
  • The increase of digital health investment is very logical considering the healthcare market has shifted from investing in medtech (devices) to more service-oriented innovations. Healthcare investing needed to shift to an area with better returns.

With points and counterpoints, it is hard to know if we are in a new steady state of digital health investing or in a bubble. My advice is to pick companies to work for and invest in with the following characteristics.

My Recommendations for Picking Survivors:

  • Clear source of revenue – not a consumer play because those companies seem too early to survive a popped bubble
  • Funded by VC’s and backers well versed in the HC timeframe and risks
  • Experienced founders with industry connections and experience
  • Solving a problem directly tied to revenue/profit for the customer
  • Large enough or well funded enough to survive (for example – Health Catalyst and Oscar)

1 thought on “Digital Health – Are we in a bubble that is about to pop?

  1. Great post on an awesome, if not concerning, space, Kate! You bring up some good points around naive investors entering this space and not understanding the timelines for digital health. I agree completely. One thing I’m curious about though is your advice to invest in companies with experienced founders. Because digital health is such a nascent space, how many founders in it are truly experienced founders? I’d be curious to see. I went to med school with some digital health founders and it is their first entrepreneurial venture ever. And they’ve raised something like $20M in multiple rounds. They fulfill the industry knowledge part of your criteria and have gotten backing from notable HC investors. I hope some investors stay willing to take a chance on new founders (like you and me!) well into the future.

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