For health tech companies to achieve lasting scale, they must keep a close eye on operational, financial and clinical performance metrics. This is especially crucial now — the cost of capital is rising and investors are hesitant about putting their money in cash-flow negative companies.
A new study from Bessemer Venture Partners analyzed more than 100 venture-backed healthcare companies to determine the best strategies to scale to $100 million in annual recurring revenue (ARR). The researchers came away with a few main lessons health tech companies should know.
Remember that innovation takes time
For the median health tech business, it takes about 10-11 years to reach $100M ARR, which is three to four years longer than traditional cloud companies, according to the report.
The report pointed out that “not all revenue is created equal” for health tech companies given their differences in gross margins, so revenue growth might not be the ultimate goal.
By raising this point in its report, Bessemer is echoing what other investors said in late March at ViVE, a healthcare innovation conference in Nashville. A panel of venture capitalists from 7wireVentures, Threshold Ventures, Maverick Ventures and Northwell Holdings agreed that the market has switched its focus from growth to value.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Emily Melton, managing partner at Threshold Ventures, said that companies shouldn’t focus solely on revenue, but rather building “quality of revenue” and figuring out the “real leverage in the model where you can actually drive those better outcomes at lower cost and increase access.”
Know your margins
Investors are currently hyper-focused on health tech companies’ gross margins. These margins help investors understand companies’ long-term profitability by giving them a way to evaluate a business’ pricing power, cost management and business model scalability, according to the report.
In order to grow gross margins, the report recommended that health tech companies focus on the following three areas: charging a higher service price over time by demonstrating strong clinical outcomes and return on investment for customers, leveraging technology that helps clinicians provide better care as well as omnichannel member experiences, and increasing the number of patients per provider over time.
Prioritize customer relationships
It’s imperative for health tech companies to establish and expand strong relationships with early customers, the report said. This can be seen in the net dollar revenue retention values across the digital health sector.
The report encouraged health tech businesses to invest early in measuring both clinical and financial ROI, as these measurements will help them convince customers to stick around and scale their partnerships.
Don’t forget how important efficiency is
There are some important metrics tied to efficiency that health tech companies need to keep especially close tabs on, the report suggested.
One is the business’ cash efficiency score, which Bessemer said should be measured as the ratio between net new ARR per each dollar the company burns. Another important metric is ARR per full-time employee, which indicates how each additional hire or existing employee contributes to the company’s top line.
Picture: Feodora Chiosea, Getty Images
