The conventional wisdom in Silicon Valley is that digital health is over-hyped and under-performing due to the lack of “unicorns,” meaning start-ups valued at more than $1 billion.
That argument was summed up last month by a contributor to Forbes, who shared a plethora of reasons that the digital health category had “failed” to build multibillion-dollar businesses.
This whole argument is problematic for two big reasons.
First, it’s plain wrong. There are a handful of health-technology unicorns.
In response to the article, health investor Halle Tecco spent an evening compiling a list of unicorns in the space that include Zocdoc, 23andMe, Human Longevity and Collective Health. Just one of these companies, 23andMe, is currently valued at $1.1 billion
The second reason is more nuanced and relates to the obsession with unicorns more generally. Simply put, valuation is not how digital health companies should be judged.
These companies, which sit in at the convergence between tech and health, face different challenges than their counterparts in enterprise and consumer tech. Many of them will face regulatory hurdles, which slows down growth; they’re often heavy on services, as changing health behaviors is challenging; and they are typically selling to insurance companies or employers rather than directly to consumers.
To get those lucrative contracts with payers, these companies need evidence to prove that their product or service actually works. A coaching app for people with diabetes might sit in a sexy space and garner a huge valuation — but if people only use it for a few weeks then drop it forever, the business will fail.
“We need to be looking at validation, rather than valuation,” explains Tom Cassels, executive director at The Advisory Board Company, a health research firm based in Washington, D.C.
Cassels assesses digital health start-ups based on the following factors:
- How many health providers are recommending the app or tool to patients
- How many insurers or health systems are paying for it
- How many patients are using it
- Most importantly, is it catering to sick people or just healthy ones?
Cassels believes companies need to demonstrate that people with costly chronic conditions are actively using it in the long-run — and that can take a while.
Meanwhile, some of the most valuable digital health start-ups are less than five years old.
“If companies can get to that, it means value is being created and the amount of money that can be saved by their customers is measurable,” he said. “If you can get that revenue model right, the start-up is likely to have legs.”
Many of the companies that Cassels expects to succeed in digital health are not on Tecco’s unicorn list. Conversely, many that are on that list don’t meet his criterion, particularly those that cater to the so-called “worried well.”
Among his favorite companies are Empiric Health, a start-up spun out of health system giant Intermountain Health geared to evidence-based medicine, and PeraHealth, which sells tools to hospitals to monitor at-risk patients.
“There are only a handful of companies that would pass the validation, not the valuation test,” he said.
Source : CNBC