Readers Write: Why Do Digital Health Startups Need So Much VC Investment?

Why Do Digital Health Startups Need So Much VC Investment?
By Tom Furr

It is projected that by the end of 2015, $4.3 billion in funds will have been raised to bolster digital health startups. The first half of 2015 saw $2.1 billion invested in this area.

To clarify, a digital health company is one that could not exist without broadly available digital technology (like the Internet) and serves the healthcare market exclusively — pure plays. A company that publishes software and happens to have a health application in its portfolio is not considered a digital health company. Providers and partners are also not in this area – they are service organizations.

It’s been reported that digital health represents eight percent of all venture funding. However, there are many companies that have been in business for nearly 10 years that have raised more than $50 million but are not experiencing anything approaching “Google-like growth.”

Even someone who reads business news occasionally understands that mega-startups like Uber are raising huge amounts of money to build a legal war chest to contend with suits and regulatory pressures around the world. There must be an obvious reason for the continued big raises for the Ubers out there as well as digital health companies.

So why are we seeing such a robust funding for digital health outfits? Is it that digital health companies require large capital requirements to contend with regulatory challenges akin to what Uber faces? Is it that digital health companies are started by people from healthcare who don’t really understand how to build scalable technology solutions that have great usability? Is healthcare continuing to be an industry that lags in the adoption of new technology? Are consumers, when they’re the ultimate end-user, unaware or unimpressed with the new offerings?

What’s going on? Companies may be bulking up with funds so they can last through a long, slow adoption cycle or the twisted path to regulatory acceptance. However, here’s my take on these important questions.

Is it that digital health companies require large capital requirements to contend with regulatory challenges in the healthcare?

I suggest that most established, large healthcare IT companies have been built on government subsidies and regulations that force providers to purchase their products. In some cases, this is the only way some companies will be successful, in stark contrast to software companies that build a product that adds value to the customer instead of it being a requirement.

The ability to transition from being forced to purchase to wanting to purchase (based on recognized value) has clearly built up lots of apathy in the industry against change or innovative products. That is why healthcare is the last major industry to send so many paper statements as compared to all other sectors, including banking and financial services.

Is it that digital health companies are started by people from healthcare who don’t really understand how to build scalable technology solutions that have great usability?

In my examination of currently available products, none strike me as being user-friendly or innovative. Even Athenahealth – arguably one of the top established healthcare IT innovators in digital health history — says it’s time for an upgrade to usability for all products, including their own.

I come from the payments space, which has similar characteristics to healthcare with regards to its established companies. However, it has seen massive amounts of innovation from companies like Square that is shaking up the status quo by building a solution that is easy to get up and running, even by my young son, validating the importance of usability.

3. Is healthcare continuing to be an industry that always lags in the adoption of new technology?

I think most will agree that healthcare is at the back of the line when it comes to applying innovative technology to operations versus clinical settings like the latest heart procedure. I challenge any of the established players to say they’ve kept back-end systems or user interfaces fresh. At least Athenahealth’s Jonathan Bush is willing to call a spade a spade, which I respect.

No established player wants to see their company become a Yahoo (they did not value contextual ads like those served by Google) or an IBM (which did not value a PC operating system as Microsoft did) when life gets comfortable and profits are healthy, so they crush innovation.

4. Are consumers, when they’re the ultimate end user, unaware or unimpressed with the new offerings?

If you look at any number of healthcare-related portals, it appears that usability was the last thing in mind when they were created. In fact, if it were not for Meaningful Use, would any of those vendors have even created portals? This gets back to my second point — that any new company is going to have to spend substantial amounts of money to educate patients on the value of their offering. In all likelihood, the same thing has to do be done with provider solutions.

So we’re clear, I am not advancing a radical change in the way the healthcare market behaves. It is an industry whose product is positive outcomes for people with, or prone to health issues. That must remain its focus. But it needs to realize that there are ways to do things better, faster, cheaper, and designed to be easy to use for providers and patients.

Let me restate my central question. Why is this happening? Let me ask you to join the conversation with your thoughts. Getting to the core reason will not only help healthcare investors, but more importantly, anyone providing or getting healthcare.

Tom Furr is founder and CEO of PatientPay of Durham, NC.