A defining moment in digital health
Digital healthcare innovation in the U.S has reached a critical inflection point. Disenchanted investors are grappling with a tough reception from the public market, while Covid-focused startups are struggling. All the while, the fundamental challenges plaguing the healthcare system persist.
Overall U.S. life expectancy is down, rates of preventable chronic diseases are up, and 43% of the nurses who are on the front lines of this crisis report they are “burnt out”. Add to that the list of racial and social inequities in health care, which is as long as it is persistent.
The system is in dire need of change, but the digital transformation witnessed in the banking and retail sectors has yet to fully materialize in the health care sector.
Insiders are well aware of the challenges that lie ahead. The constant stream of news about promising companies filing for bankruptcy and being sold for parts and a decline 0f 48% in venture capital investments – from $29.3 billion in 2021 to $15.3 billion in 2022. We have also seen a series of digital health companies that tumbled after going public, leading to a frozen IPO market, with 2023 seeing digital health stocks trading for nearly 50% lower than they did two years ago.
Companies that relied solely on Covid testing discovered that government funding moved on when the crisis ended. Those relying on a quick and easy consumer adoption after the Covid pandemic were unprepared for the sticky inflation and rising costs that weakened the direct-to-consumer business model.
In healthcare, nothing is quick or easy. While we secured our Series D, one investor told me, “Today the rules have changed. In the past, when we examined companies, we tested their projections at 50% uptake. Today, their business needs to make sense and be profitable at 5%.”
This is why entrepreneurs interested in building their companies in the post-Covid period should keep in mind the following points.
1. Solve health practitioners’ problems
The real leaders in our field are not VC investors, CEOs, or generative AI code developers. They are doctors, nurses, and scientists. Digital health solutions are merely one step in the care chain that they manage. We can’t and won’t replace them. A humble approach is always healthy for entrepreneurs, but for the first time in a decade, selling the “unicorn dream” is officially out of fashion. As one recent funding analysis shows, digital health investors identify areas with more clinical value for doctors as those with higher returns on investment. Delivery and navigation tech companies received 44% of all funding in the first quarter of 2023, diagnostic tech received 20%, and wellness tech received the lowest—only 5%.
2. Deliver FDA-cleared technology or be replaced by AI
A recent study shows that most digital health companies have a low level of “clinical robustness,” i.e., they haven’t gone through clinical trials or regulatory processes. The fact that nearly half of digital health companies lack clinical validation is unfortunate to health systems, as the clinical needs are immense. It is also risky to the business model because the rise of AI in healthcare will eventually replace, and cause the extinction of, many of the analytical technologies we use today. Attaining FDA clearance is by far the hardest route to manage, but it’s the most valuable for doctors, and the technologies that have it are the hardest to replace.
3. Build tech that saves money
The healthcare expenditures in the United States are unsustainable. CMS recently published predictions that in less than a decade, it will climb up to 20% of the nation’s GDP. In this reality, to succeed in getting potential partners’ attention, you will need to demonstrate that your technology creates real, tangible cost-saving benefits.
4. Maintain focus and discipline
Working in a complex and fragmented environment, such as health systems, there is a persistent temptation—and you will most likely be asked—to fix more than one problem. That may seem smart at first; after all, you are trying to grow your business. But this also leads many companies to total failure. Before branching out beyond your core mission, make sure your tech solves what you committed to. The implementation complications in healthcare are always unknown at first, but when you find them, you don’t want to be at the end of your runway. Embrace that “no.” Most times, creative partnerships can take you further than if you had done it alone.
5. Always prioritize trust-building
Establishing trust is paramount. There is no need to look solely at the Theranos scandal, which left scars on so many of us who built our companies back then. Digital health is not like any other industry, and over-promising in health outcomes or clinical trials will always have consequences. Be open and honest with your clinical partners and early-day investors to sustain your innovation journey and navigate the early failures that will come along the way. This will help you iterate and grow in a field guarded strongly by ethics and science.
We are entering a defining moment in digital health. It is up to us to deliver on the promise that so many patients are waiting for. Building companies and products that can both serve the population and adapt to turbulent times is the first step.
