In 2021, investors poured massive amounts of capital into the digital health space, with $57 billion invested globally and $29.1 billion invested into US-focused healthcare startups. In 2021 in the US, each month, an average of 23 digital health startups exited via M&As, and ~23 digital health companies went public via SPAC or IPO. The space was hot. 🔥
By the start of Q3 2022, while not reaching the 2021 levels, investments in the sector are still on track to outpace 2020’s funding ($14.7B).
So, what does it take to build and obtain funding for a digital health startup? Here are some key questions that you should be able to answer in order to validate (and hopefully fund) your startup in this space:
Who is your buyer and what is their willingness to pay?
The flow of funds in the healthcare space is complex and is key to building the right positioning and your Go-To-Market (GTM) strategy. You may have developed a tool to provide early detection of diabetes by screening and analyzing data from the EMR (Electronic Health Records). This could be an incredible fit from a clinical perspective, but you’d need providers to use it, and it could very well be that they aren’t willing to pay for the analysis.
🤔 Know how to answer:
- Who is receiving the most value (clinical and financial) from my product?
- Why and how much would the person getting the value be willing to pay?
- What are the alternative solutions and how much do they cost?
- What do the cash flows look like, and as a result, what would be the best way to pay for the solution (which is probably the way you’ll have to charge)?
Who is your customer?
In some businesses, the buyer is not necessarily the customer. The person who will use and benefit from the product will not always be the one approving the payment for the product. So, to find out who your “customer” is, you need to ask yourself who is receiving the most value from your product. This might not necessarily be the end-user.
If the value is financial, your customer may be the CFO, if clinical, the Chief Medical Officer, etc. or an intermediary.
🤔 Ask yourself:
- Are the buyer (the budget owner) and the customer the same person?
- If not, how do you reach the buyer?
- Do you have a “different” pitch to the customer and to the buyer?
How will your product integrate into an existing workflow?
Changing clinician and patient behavior is extremely challenging, even when you have a unique value proposition. By way of an example: you convinced the CFO to pay for your solution by demonstrating a potential cost reduction for the organization’s full-risk patients. But, with your solution, the provider and the clinical team would have to log into their core system, manually populate the patients’ data into your system, and then re-enter results into their core system. They just don’t have the time and integrating the two systems is cost-prohibitive and time-consuming. As a result, they decide not to use your product.
🤔 Can you answer the following:
- Are folks required to change their behavior to use your product?
- How does your product integrate within existing workflows and systems?
- Does your product create additional work or save time for its user? And can you quantify the benefit in $?
- Have you considered all the effects of embedding your solution into the customer’s existing infrastructure?
What is the business model and what price point makes sense?
It is safe to assume that a customer will not pay more than the financial value they receive from using your product. So, you know that your screening tool can save lives, but how many? How big is the problem and are you able to quantify the potential cost savings that would justify the cost in the eyes of your potential customer?
🤔 Things to think about:
- Is the value that you offer recurring or one-time?
- Does continuous usage (and thus charge) make sense? Is it a one-time charge and an annual support fee? Are services included?
- Can you quantify the financial savings from your solution? What’s the ROI?
- What is your (bottom-up) total addressable market (TAM)?
- Can you make money from the business model?
What are the regulatory barriers?
If your solution requires regulatory approvals and does not yet have them, there is added complexity and a lower potential for adoption. Even if your diabetes screening tool may be the best solution out there, if it is not FDA-approved while the other not-so-good ones are, providers will most likely use the approved ones. The reasoning circles back to money: providers can bill insurance companies for using the “approved” solutions.
🤔 Know how to answer:
- Does the product require FDA approval and is it worthwhile even seeking one (assuming it’s a nice to have and not must have)?
- How long will it take to get all approvals in place? Can you qualify for accelerated approval?
- Is there an existing billing code you can use?
Does your solution fit the US healthcare system?
What works for one country’s health system, doesn’t necessarily work for another. As such, validation with potential customers in the US is a must if you want to go after the world’s single biggest market. Engaging with local (non-US) players and integrating into their systems (local versions of an EMR), might not be the best use of your time and efforts due to the differences in the way healthcare systems work in different countries.
🤔 Consider the following:
- How would your solution work in the US healthcare system and what are the technological, process, and other gaps?
- Which stakeholders should you talk to in the US to validate your idea?
- What type of organization should be a design partner?
When building your startup, timing is (almost) everything. It is vital for you to understand and follow the macro trends in the healthcare space. Some recent trends that are worthwhile to keep in mind include:
From fee-for-service to value-based care: Due to the Affordable Care Act, there has been a shift from fee-for-service medicine, where doctors get paid based on procedures they perform, to value-based care or “pay for performance”, where doctors are paid based on whether their patients get better results after treatment or not doing anything at all. In October 2021, the CMS (US Centers for Medicare & Medicaid Services) set a bold goal to shift almost 100% of their Medicaid and Medicare users toward “accountable care relationships”, where the providers are accountable for the quality and the total cost of their care.
Patient data sharing: Data is changing the future of the health tech space. In the US, policies have been enacted where medical institutions are required to share data in a clear/structured way with the EHRs as well as requirements for hospitals with certain EHR capabilities to send admission, discharge, and transfer notifications to other providers. Data availability creates countless opportunities in the proactive and preventive care space.
Virtual first care: An analysis by McKinsey found that virtual care use has stabilized at levels 38x higher than before the pandemic. That same analysis showed that 40% of individuals believe that they will continue to use virtual care going forward and 40–60% of individuals expressed interest in a broader set of virtual care solutions such as virtual-first health plans. There is still a wide gap between the need and the available tools in the virtual care space.
Big tech entering the field: There is a tectonic shift of big tech players into the healthcare market with acquisitions and new products. In July, Amazon announced its intentions to buy One Medical for $3.9b, a chain of primary healthcare clinics in the US; Apple is eager to build out its health division; and Alphabet is using its dominance in data storage and analytics to solve interoperability challenges and streamline clinical research.
🤔 So ask yourself:
- Why doesn’t your product/solution exist today?
- What prevented it from existing before (tech/regulatory/clinical barriers)?
- What policy changes might have opened a window for innovative initiatives?
- How does the presence of big tech in your field impact your startup?
Healthcare is complicated, and many entrepreneurs tend to underestimate the complexity involved. It would be naive to think that you can build a single platform to solve all the problems in medicine, or that if something works in one country, it will work (with small adjustments) in the US.
If you’re building a health-tech startup and feel like you can answer most of the questions mentioned above, we’d love to hear from you.
Entrée Capital has backed companies such as PillPack, Sesame, Sweetch, Livez, NVision, Pheno.ai, Eleven Therapeutics, Sensi.ai, Omnix Medical, Elephant, Lite BC, Ianacare, and others in the space…