Rock Health’s ‘Another record-breaking first half’ in digital health funding is actually–flat. (With a Soapbox Extra!)

The Breathless Tone was the clue. “It’s déjà vu for digital health, with yet another record breaking half for venture funding.” It was déjà vu, but not of the good sort. This Editor hates to assume, so she checked the year-to-year numbers–and first half 2018 versus 2017 broke no records:

  • 2018:  $3.4 bn invested in 193 digital health deals 
  • 2017: $3.5 bn invested in 188 digital health companies [TTA 11 July 17]

But ‘flat’ doesn’t make for good headlines. Digging into it, there are trends we should be aware of — and Rock Health does a great job of parsing–but a certain wobbliness carried over from 2017 even though the $5.8 bn year finished 32 percent up over 2016, analyzed here [TTA 5 Apr 18]. Their projection for 2018 full year is $6.9 bn and 386 deals.

Let’s take a look at their trends:

  • “The future of healthcare startups is inextricably linked to the strategies of large, enterprise-scale healthcare players—as customers, partners, investors, and even potential acquirers.” It’s no mistake that the big news this week was Amazon acquiring tiny, chronic-conditions specializing prescription supplier PillPack after a bidding war with Walmart for an astounding $1bn, making its 32 year-0ld founder very rich indeed and gaining Amazon pharmacy licenses in 49 states. (Prediction: Walmart will be pleased it lost the war as it will find its own solutions and alliances.) 
    • Enterprise healthcare players are cautious, even by Rock Health’s admission, but the big money is going into deals that vertically integrate and complement, at least for a time–for example, Roche’s purchase of Flatiron Health. And when it doesn’t work, it tends to end in a whimper–this May’s quiet sale by Aetna of Medicity to Health Catalyst for an undisclosed sum. Back in 2011, Aetna bought it for $500 million. (Notably not included in the Rock Health analysis, even though they track Health Catalyst and the HIE/analytics sector.)
  • The market is dependent on big deals getting bigger. If you are well-developed, in the right sector, and mature (as early-stage companies go), you have a better shot at that $100 million B, D, E or Growth funding round. B rounds actually grew a bit, with seed and A rounds dipping below 50 percent for the first time since 2012. 
  • The Theranos Effect is real. Unvalidated, hyped up claims don’t get $900 million anymore. In fact, there’s real concern that there’s a reluctance to fund innovation versus integration. The wise part of this is that large fundings went to companies validating through clinical trial results, FDA clearance (or closing in on it), and CDC blessing.
  • The dabbling investor is rapidly disappearing. 62 percent of investors in first half had made prior investments in digital health including staying with companies in following rounds.
  • Digital health companies, like others, are staying private longer and avoiding public markets. Exits remain on par with 2017 at 60. Speculation is that Health Catalyst and Grand Rounds are the next IPOs, but there hasn’t been one since iRhythm in October 2016. The Digital Health public company index is showing a lot less pink these days as well, which may be an encouraging sign.
  • Behavioral health is finally getting its due. “Behavioral health startups received more funding this half than in any prior six-month period, with a cumulative $273M for 15 unique companies (nearly double the $137M closed in H1 2016, the previous record half for funding of behavioral health companies). Of these 15 companies, more than half have a virtual or on-demand component.”

Keep in mind that Rock Health tracks deals over $2 million in value from venture capital, excluding government and grant funding. They omit non-US deals, even if heavily US funded. 

Their projection for 2018 full year is $6.9 bn and 386 deals. Will their projection pan out? Only the full year will tell!

A Soapbox Extra!

Rock Health, like most Left Coast companies, believes that Vinod Khosla is a semi-deity. This Editor happens to not be convinced, based on predictions that won’t pan out, like machines replacing 80 percent of doctors; making statements such as VCs have less sexual harassment than other areas, and even banning surfers off his beach. He was at a Rock Health forum recently and made this eye-rolling (at least to this Editor) statement:

Is there one area in the last 30 years where the initial innovation was driven by an institution of any sort? I couldn’t think of a single area where innovation—large innovation—came from a big institution. Retailing wasn’t disrupted by Walmart, it was by Amazon. Media wasn’t changed by CBS or NBC, it was by YouTube and Twitter. Cars weren’t transformed by Volkswagen and GM—and people said you can’t do cars in startups—but then came Tesla.

Other than making a point that Clayton Christensen made a decade or more ago, the real nugget to be gained here is that formerly innovative companies that get big don’t grow innovation (though 3M tends to be an exception, and Motorola didn’t do too badly with the cell phone). They can buy it–and always have. 

Go back a few more decades and all of these companies were disrupters–and bought out (or bankrupted) other disrupters. CBS and NBC transformed entertainment through popularizing radio and then TV. VW created the small car market in the US and saved the German auto industry. GM innovated both horizontally (acquiring car companies, starting other brands) and integrated vertically (buying DELCO which created the first truly workable self-starting ignition system in 1912).

YouTube? Bought by innovator Google. Twitter? Waiting, wanting to be bought. Innovation? Khosla is off the beam again. Without Walmart, there would be no Amazon–and Amazon’s total lifetime profit fits nicely into one year of Walmart’s. Tesla is not innovative–it is a hyped up version of electric car technology in a styled package that occasionally blows up and remains on the borderline of financial disaster. (Model 3, where art thou?)

I’d argue that Geisinger, Mayo Clinic, and Intermountain Healthcare have been pretty innovative over the last 30 years. Mr. Khosla, read Mr. Christensen again!

More reflections on, significance of the Theranos quagmire (updated)

click to enlargeTheranos’ spin towards the Auger In continues. Truth or Consequences are apparent. So are setbacks.

Wired has put together a timeline of the key events in The 9 Events That Have Pretty Much Doomed Theranos, most of which our Readers in following our coverage (index here from 2013) are already familiar with. One interesting point is #7, which touches on another gift to the legal profession–the class action lawsuit. Eight lawsuits are already in process, and at least one names former partner Walgreens Boots.

SEC and DOJ’s interest. The SEC, limited in its action because Theranos got big without going public (see below for more), is likely seeking misrepresentation of technology to investors–as in, ‘it really didn’t work’. Penalties may include repayment or settlements to investors and barring principals from ever leading a public company. The DOJ will likely focus on consumer impact. Knowing that your blood tests are inaccurate but continuing to sell them violates all sorts of Federal health regulations, and can earn the principals orange mock turtlenecks and a long stay in a place with iron bars, pesky regulations and no choice of wardrobe. Sadly, Theranos’ legal counsel and board member David Boies won’t have a chance to unleash one of his favorite intimidation weapons, the libel lawsuit. Instead, he’ll be uncomfortably playing defense (but for how long?) Give the man a crying towel, and remind him to bill in advance. Wired (from April)

*Updated: Here’s the CMS letter, courtesy of the WSJ. (If John Carreyrou doesn’t receive a Pulitzer Prize, the fix is in!–Ed.)

The market demonstrated inefficiency in allowing companies like Theranos to get big without going public. You cannot short or sell the stock (a negative ‘opinion’) which demonstrates that investor-backed Unicorns represent ‘incomplete markets,’ according to Robert Shiller’s Efficient Markets Hypothesis. Of course, before going public, the SEC would have demanded disclosure–another reason why Theranos (and possibly other Unicorns) aren’t. Forbes.

‘Theranos has probably set back the tremendously promising field of microfluidics by a decade.’ An investor who was rooting for Theranos (but didn’t invest) recounts the dodgy behavior of entrepreneurs from eToys.com to Tesla. ‘Hype is what entrepreneurs do best’; fabbed-up PowerPoint decks are par for the course. “Sadly, the journey from charisma to coercion to lying is quick and often complete.” Ms Holmes, you have a lot of company. When Startups Put The Fab in Fabricate. (WSJ; if paywalled, PDF attached)

Where do we go from here? We’ll close with advice to startups in biotech and medical innovation: pace thyself, know thyself. What’s needed: an internal culture amenable to science–and external regulation–and knowing when to apply the brakes to prevent slamming into The Wall Marked Failure. (Mentioned is a useful tool called a pre-mortem) Wired