Even more than usual, fragmented and redundant digital healthcare innovation threatens to frustrate the innovation ecosystem. Dave Francis of RBC Securities put it well: “There are a lot of zombie digital health start-ups that get $1.5 million and a customer from a regional health system, and go no further.” He spoke at the October, 2015 Health 2.0 Conference.
The start-ups whose pitches I attended at Health 2.0 illustrate this point well. Out of about 35 pitches that I attended, close to half were pursuing markets that I know several other companies are also pursuing, including a dozen or so that overlapped with other companies presenting at the conference, e.g.:
- Four companies were helping providers monitor patients with chronic diseases: Medtep, SensorTrend, Conversa, Vida.
- CirrusMD is yet another telemedicine company (on top of a half-dozen well known competitors) in a market that is growing fast now but whose long term separate existence is questionable. Heal, which offers an Uber-like MD house call service, aims to satisfy the same need in many cases.
- Several different companies were offering some form of tele-mental health services: e.g., SilverCloud Health, Eco-Fusion, Heimo.
- Several more were addressing the well-known gap in prescription drug compliance (the volume of drugs that people consume is about half the volume of drugs that doctors prescribe). Examples: MediSafe and Play-It Health.
This problem is normal in the start-up world: different people in different places often have similar insights. Recent advances in cloud infrastructure, application development tools, and app stores have increased start-up duplication: they make it easier to start a software based business, and an enthusiastic angel community is able to fund many start-ups to a certain point. Speaking on NPR this week, AngelList CEO Naval Ravikant observed that the number of new start-ups has increased ten-fold in recent years.
The institutional structure of healthcare amplifies this problem. Healthcare is an inherently local/regional industry and it is huge, which means that every region of the developed world has big healthcare institutions with substantial innovation budgets and smart people who see similar problems to a large extent. The local hospitals, payers, and provider groups are often helpful first customers. And the innovators are not watching each other in a few hotspots globally, the way much of the internet economy is. So the incidence of overlapping innovation in healthcare is an order of magnitude higher.
Biology teaches that diversity is a good thing: from many random starts and Darwinian winnowing, a stronger organism will emerge. This has obvious parallels in start-ups: many are called and relatively few are chosen for large, later-stage funding rounds and ultimate success.
But entrepreneurs and investors are not lab rats, and hence too much duplication and resulting fratricide creates problems. Investing is driven to a large extent by confidence and momentum; too much carnage can cause venture investors to pull back, slowing innovation. We saw this is the 1980s when many me-too disk drive companies were formed and funded, most failed quickly, and almost none exist now. This contributed to a pronounced down-cycle in venture returns and start-up activity that lasted into the early 1990s, when the internet arrived.
There is great enthusiasm for digital healthcare now, but institutional investors are proceeding cautiously. Some of this is the inherent difficulty of creating change in the healthcare market (quoting Dave Francis again): “Healthcare has been Afghanistan for tech companies, much tougher than it seems.”
The challenge for investors is picking winners in such a fragmented market: it’s very easy to be wrong and miss a company with a better approach or stronger backing coming from an unexpected place. So institutional investors tend to hold back and wait for more proof, and then pile in and attempt a “game over” financing that anoints a winner. This game is risky and frustrating for most of the participants.
The start-ups I enjoyed meeting most were those with unique solutions to big problems, often incorporating real technology versus assembly of web/mobile lego blocks. This is a tall order, but it’s very impressive to see it done.
