Conducting a $59.2 million growth investment with AllianzX in one of the leading digital health platforms in the United States offered me many insights and kickstarted my thoughts about the perspective of European growth start-ups in digital health.
Having seen over 3,000 companies in this field, I concluded that being a purpose-only start-up, or saying how many lives will be saved through the product, is not enough to reach the next level of financial professionality the ecosystem needs and to be taken seriously by growth investors.
During my first due diligence in 2013, I asked a developer why he was working for mySugr (which was acquired by Roche last year). He replied that he could use his time to make an impact. Life was too short to just work on another CRM platform or another social networking app. That got me thinking about my father when he was diagnosed with cancer. I realised our lifespans are limited. As an entrepreneur, we can either work on our own economic goals or combine them with a contribution to the public wealth.
After conducting numerous other due diligence projects, a clear pattern emerged: outstanding companies are defined by purpose – one that is fostered and communicated by the founders or the management team. I realised that a company that is driven by such purpose can access and use energy, enthusiasm, and dynamics that other companies often find themselves lacking.
With mySugr marking our first notable digital health exit in Europe, I have come to believe that our ecosystem is becoming more stable and professional. In addition, it is also good to see that more serial entrepreneurs and professional investors are joining the digital health scene.
Four years ago, when I joined a venture capital fund that specialised in digital health as a partner, I saw over 3,000 relevant companies in Europe. Back then, the European digital health scene was romantic and in its baby shoes. It was mainly filled with doctors who wanted to start their own company, or self-affected patients that wanted to build a service around their own problem. Very few of them had the experience of building up tech companies and positioning a company within the money streams of the healthcare system.
Watching the ecosystem develop in Europe I noted that the first companies that went bankrupt were the ones that mainly saw building up a healthcare company as solving a technological challenge, not a business challenge where you need to align yourself with the existing interests within the healthcare system. On the other hand, there were very few VCs and investors that wanted to touch digital health start-ups. Digital health start-ups were seen as too risky, very static and undynamic.
This attitude has changed since digital health companies in the US have begun producing trade sales and IPOs. In Berlin alone, there are currently 10 venture capital funds and three company builders who raise funds for digital health investments. Founders and investors of today’s start-ups are professionalising growth channels and B2B relations. Looking at companies that have successfully surpassed the Series A stage, it is notable that most of them are about digital access to doctors, (KRY, Doctolib, DocPlanner, Babylon Health, Push Doctor and Infermedica) consumerism, (mimi, MEDIGO, Caspar, Natural Cycles and Clue), health data, (Symptoma, AdaHealth and YourMD) and monitoring/prevention (dacadoo and Kaia Health).
Despite the professional approach of these growth companies, one of the major trends I have seen with digital health founders is that they focus solely on the patient benefits and neglect the business figures behind their purpose. They believe that being close to the end consumer and serving their needs will align stakeholders behind them and disrupt healthcare. Growth companies in digital health need to understand how to embed their value proposition towards the end customers within the existing healthcare system. Understanding KPIs and money streams of healthcare stakeholders is crucial for growth companies. American Well, with its various partners (e.g. Apple, Samsung, CVS Pharmacy, Medtronic, Anthem, etc.) is a very good example of how an alignment of value proposition with stakeholders’ financial interests can result in a real shot at becoming an embedded player in a new digital health ecosystem.
As corporate growth investors, we must look deeper into the financial substance of companies. During our due diligence process, we need to assess if the company can establish itself long-term within the healthcare system. Having been an early stage VC, I understand that my colleagues need to focus more on the future potential and, more importantly, the next round’s valuation. Unfortunately, looking at a lot of Series A companies I concluded that being a purpose-only start-up, or saying how many lives will be saved through the product or service, is not enough.
During growth, investing smart money is good, but what is more important for post-Series B investments is access. Scaling in healthcare is different to most other industries. Access to customers, stakeholders and, most importantly, data is key. This element to success can be provided by deep partnerships built on mutual trust and alignment of incentives. Corporate investments are a highly effective tool for cementing partnerships between key players in the healthcare system and innovative start-ups. When strategic priorities are aligned, such corporates provide access to a range of stakeholders that start-ups would otherwise have trouble reaching.
In contrast to the holy grail of med tech (non-invasive blood sugar monitoring), I believe that in digital health the holy grail lies with algorithms. For instance, start-ups can detect and predict the onset of dementia or Alzheimer’s disease. Proactive treatment can transform the lives of patients, and the collection of data can further our research and work towards curing the disease, instead of just reactively treating or managing it. As for what is probably the biggest blind spot in medicine, Symptoma has raised the bar in this field, providing the first and only viable deep-data solution. Their search algorithms analyse millions of medical publications and empower doctors to diagnose even rare diseases, based on symptoms, age and sex.
Watching the ecosystem develop over the past five years, digital health is one of the greatest opportunities to combine making a meaningful impact and personal economic goals. The opportunities are there for those who understand that purpose alone is not enough, and that financial opportunities are one of the key drivers that attract the capital injections to undertake the company’s purpose.
Originally published at CoFounder – SLUSH Edition on December 13, 2017.
Min-Sung conducts global digital health investments for Allianz X. Prior to Allianz X, he was a partner at XLHealth, a Berlin-based venture capital fund that specialises in Digital Health Series A investments, and an adviser to mySugr, where he was its first venture capitalist investor in 2014.