Health IT investors share lessons learned from early investments

If you were to ask a healthcare investor what their investment strategy is, it is likely the product of some brilliant foresight, a little luck, and some lessons learned from bad experiences or near misses.

In a series of phone and email interviews, we picked the brains of health IT investors at four firms. We asked them what they learned from early investments and how those lessons and insights informed their strategy going forward. One theme that threads its way through the investment narrative of these companies is that technology is all well and good, but you need a service to support it as well.

Ann Lamont, managing partner, Oak HC/FT 

Cotiviti (originally iHealth) and athenahealth were two of the firm’s first investments made in the space, Lamont said in an email.

“They were very much about fixing broken processes through software, services, and data. That’s been our approach – addressing a broken system and improving it through the powerful combination of software, data, and services.  That’s particularly the case when behavior change is an important part of what needs to happen to improve healthcare and materially bend the cost/quality curve.  Appropriately, Aspire Health, Quartet, VillageMD and Axial Healthcare all have service as a component.”

Were there any subsectors of health tech that you have invested in that you would not do again? Why?

The provider world. Consider two perspectives: It’s difficult to sell into providers, and it’s also hard to be a provider in an environment where reimbursements are going to come under pressure. Other than inpatient psych, which has massive scarcity and unending demand, we worry about reimbursement pressure in the near future.

In a value-based reimbursement environment, we think very differently about primary care physicians. Two decades ago there was a rush to build physician practice management (PPMs) roll ups. Mostly they were specialty plays, and the idea was leverage, but also IT and infrastructure enabled you to run businesses more efficiently and profitably. The reality was, we didn’t have the systems to manage them so the model broke down.

Fast-forward 20 years and, while IT systems are still imperfect, it makes tremendous sense to aggregate primary care physicians, empower them with information and systems, and support and leverage that all to improve quality and reduce downstream costs. Older PPM models focused on leveraging up pricing power. Now, primary care is about reducing overall cost. Two very different times, places and opportunities.

Dr. Gary Kurtzman, managing director, Safeguard Scientifics 

Kurtzman said the firm’s early experiences reinforced the importance of a strong management team, which goes for all industries.

“A great product with a weak management team nearly always fails, while a great management team with an average product can become a huge success.”

Looking back on your health IT investments, were there any that prompted you to rethink or tweak your investment strategy?

Safeguard’s capital deployment strategy has always been focused on growing markets and exciting products. While these remain important factors, several companies have shown how critical it is for an IT product to fit into a user’s workflow and for the product to connect seamlessly to existing systems. Both of these elements, particularly workflow, now play central roles in the way healthcare technology teams assess potential opportunities.

Were there any subsectors of health tech that you have invested in that you would not do again? Why?

In recent years, Safeguard has distanced itself from revenue models dependent on advertising dollars from pharmaceutical brands, because brand advertising can be fickle, leaving an uncertain financial forecast.

Liam Donohue, co-founder and managing partner, .406 Ventures

“Health Dialog was my most important investment and it dates back to 1999. We were doing population health before it became sexy,” Donohue said in a phone interview.

Health Dialog based its approach on research from Dartmouth, Donohue said. Based on geography, the company could predict the likelihood that patients would have a specific procedure.

For example, populations in Santa Barbara with a herniated disc would have surgery more frequently than a similar group of patients in New York. The company combined population health and data analytics with a healthcare engagement and literacy component. Their technology-enabled services helped identify people in the population making major medical decisions, helped them make more informed decisions, (which often led to less invasive procedures), reduced costs significantly and produced better outcomes.

British private insurer BUPA, an early investor in the business acquired Health Dialog in 2007 for $775 million and then Rite Aid acquired Health Dialog two years ago.

A positive lesson Donohue said he learned is the need to not lose focus on the patient.

“Most companies focus on the arms race between payers and providers but the patient is a powerful source and engaging them in healthcare is a critical lesson. Generally speaking, companies with a genuine mission and culture of supporting the patient end up creating better results…financial and clinical.”

The same focus on patients — in fact, the needs of specific patient populations — becomes paramount for companies engaged in remotely monitoring them through technology. 

“It’s shocking to me how many deals that get funded with technology or services that are not likely to capture the sick, chronically ill, noncompliant patient population, but resonate more with the world of quantified self. When it comes to remote monitoring, technology needs to be passive to best capture the most costly patient population.”

Michael Yang, managing director, Comcast Ventures

Accolade was an early healthcare investment for Comcast, which the firm made in 2010. The move was a turning point because Accolade focused on employer wellness, an area that had not previously been of interest to the firm, Yang said.

“It was my first or second investment,” he recalled in a phone interview. “It was groundbreaking, novel and risky. We did it for a couple of different reasons and it has informed our strategy.”

First, Comcast was in the process of becoming a customer as it had embarked on a pilot with Accolade. Yang said early pilot data affirmed this model of employee engagement could work in affecting healthcare utilization and Comcast employees loved it. Second, investing in Accolade offered him a different perspective than other investors in health tech.

“A self-funded employer is an interesting channel with which to deploy innovative health tech and health services. Everyone in the health tech and digital health space was focused on direct to consumer or selling into insurers or providers. Very few entrepreneurs were thinking about employers as a channel back in 2009-2010 in start-up land. Accolade was positioned to be the general contractor of healthcare programs for employee populations and I was going to be exposed to a whole host of downstream products and services as deal flow.”

One investment Yang highlighted that offered a teachable moment for Comcast is BodyMedia, a fitness tracking wearables company, which Jawbone ultimately acquired in 2013, although Jawbone later ended support for BodyMedia Fit web and mobile applications.

“What we learned from the wearables space was competition accelerates…and some of these markets are winner-take-all. That has helped inform our investment strategy.”

He added, “When you are making a bet into a hardware vertical, you better pick the right one. One tends to dominate the category and the spoils don’t go as much to the number three or number four player.”

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