Why Private Equity and Venture Capital Firms Struggle with Digital Health Investments

Part One: Mitigating Risk

In this three-part series, we will explore the reasons why private equity and venture capital firms struggle to accelerate return on digital health investments and scale solutions in an otherwise bullish market. This week we will address how to better mitigaterisk.

In a recent report published by Rock Health, an estimated $5.8 billion in venture funding was invested in digital health in 2017 with a record number of eight “mega deals” (over $100 million each).^[1]Examining the climbing trends of digital health investment year over year, one may assume that this bull market is ripe for growth, yet there were zero digital health IPOs in 2017 (and as of the time of this writing, no IPOs in 2018 either). This is not consistent with the related tech industry, which has seen double the number of IPOs in 2018 compared to last year.^[2]Why such a stark difference with digital health?

Digital Health is more complicated than at first glance. One may assume that success comes from adapting our ever-present consumer technology solutions for healthcare solutions. One may assume that digital health is just healthcare delivered in a wired environment. Digital health is much more complex than those starting assumptions because it comprisesthe convergence of technology, healthcare, and life science.

It is this level of complexity that creates a marketplace that requires more planning and in-depth exploration to mitigate risk effectively.

The first step is understanding the differences between digital health and health information technology. According to The Medical Futurist, if Gary the IT guy alone can solve the issue, then it’s a health IT issue. But if additional stakeholders and collaborators are required, it’s a digital health issue.^[3]

Below are some critical considerations for any firm wanting to better understand the potential of this space and/or debating whether to invest in a new venture.

Expand Your Due Diligence:This process goes beyond digging in to the business model and technology platform. Evaluating digital health technologies requires a multidisciplinary approach, involving not just business analysts and hardware and software experts but clinicians, patients, usability and design experts, behavioral scientists, informaticists, information security and HIPAA compliance specialists, and more.

Validate Workflow Integration: How does the solution complement and fit seamlessly into the clinical workflow or the patient’s “life-flow”? Has it been tried, tested and validated by clinicians and patients in real-world settings and does it solve a particular pain point for them? What are the barriers to adoption and consistent usage?

Cultural Transformation: The Medical Futurist calls digital health a “cultural transformation.”^[4]The shift from traditional, medically-driven care pathways to consumer-driven digital care pathways requires collaboration among the entire care team and their patients, and can only move forward with changes in attitudes and behaviors. Do you have the right people in leadership and in operations to achieve this cultural realignment? Are there processes in place to smooth operational risk? Do you have a plan for engaging all stakeholders in the changes that need to take place for your venture to be a success?

There is a good reason why private equity and venture capitalists are bullish on the digital health marketplace. The potential is there for digital health tools and solutions to dramatically impact the human condition and redesign how healthcare is delivered and experienced. However, private equity and venture capital firms will require the right partners to achieve the necessary cultural transformation, mitigate risk, and effectively navigate the new ocean of digital health.

Michael Levy is Co-founder and CEO of Bluedoor, – a full service digital health agency providing due diligence, strategy and execution through a diverse team of healthcare leaders with proven track records and decades of real-world experience. Bluedoor works across the healthcare ecosystem from startups to multinationals, helping businesses of all sizes transform their operating model, accelerate their product development, and amplify their presence in market, delivering value and impact.