The investment pace in the digital health world seems to have stabilized in the past couple years. Startups in this space raked in nearly $6 billion during the first half of the year, and 2024’s funding total is expected to exceed last year’s total of $10.7 billion.
During a panel discussion held last week at MedCity News’ INVEST Digital Health conference in Dallas, three venture capital investors shared some of the questions they ask when getting pitched by healthcare startups.
What problem are you solving?
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It’s a major red flag when a startup can’t clearly explain the problem it is seeking to solve, pointed out Tom Hawes, partner at Sandbox Industries and Blue Venture Fund.
“The thing that signals that [a potential investment opportunity] may not be interesting is if an entrepreneur just says ‘I have a digital therapeutic’ or ‘I use blockchain’ — just using those buzzwords without filling in what problem they are solving. What job are they getting done?” he remarked.
As an investor, Hawes said he wants to hear about the problem that a startup is trying to address before they start explaining how great the technology is. He also said the startup needs to demonstrate that its team has the necessary skills, experience and network to solve that problem.
Another investor — Emily Durfee, director of corporate venture capital at Healthworx, the investment arm of CareFirst, a payer in the Mid-Atlantic region — agreed with Hawes, adding that she also wants to make sure that the startup is solving a “top five” problem.
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“I think quite a bit about not just, ‘Is this a problem that should be solved?’ but also, ‘Is this a top five problem for the customer that you’re selling to?’ As a payer, we get hundreds of companies that want to be vendors for us. And there are probably 30 problems that we should be solving as a payer at any given time, but we do not have the brain space to do that,” Durfee explained.
Because payers aren’t able to solve all of these problems, they have to prioritize the most pressing five or so, she said.
“I ask every entrepreneur, ‘Is this a top five problem? For whom? Why do you believe that?’ And if they can’t answer that question, I’m not going to be investing,” Durfee declared.
Do you have any sort of fee-for-service payment model?
Durfee believes that value-based care is the future — but she isn’t willing to invest in companies that are completely dependent on that payment structure.
“We’ve talked to a lot of companies whose entire business model pitch is that they’re going to do value-based care. It’s not just whether or not a startup is ready and prepared — but it is also whether their customers, often payers, are prepared to receive and structure those contracts with them,” she noted.
Durfee “fundamentally believes” that value-based care is the future, but she is also aware that the future has not fully arrived, she said.
She pointed out that there are a lot of payers that are not yet ready to structure value-based contracts for various patient populations and specialties.
“I don’t really invest in any company that doesn’t have a business model for regular fee-for-service. That’s not to say that I want them to stay there. That’s not to say that I don’t want us to move towards value-based care. But if value-based care is a precondition for the success of the company, it’s going to be really hard to sway my mind,” Durfee remarked.
Is AI core to your business?
AI isn’t the glorious buzzword that some startup founders may think it is. When a startup presents an AI solution, they are adding a layer of risk to their business, noted Janet Xu, senior principal at Distributed Ventures.
“First of all, is AI 100% important to your goals? Second of all, how does that increase your risk profile to the client that you’re trying to serve right now? Because your AI may be great, but then you also have to go through a whole different level of scrutiny because of the fact that there is a lot of data coming in and out,” she explained.
In order to invest in an AI-forward company, Xu would have to be convinced that the AI is integral to the product. She would also need to know that the startup is aware of the risks involved and has established the proper protections for patient data, she said.