How COVID-19 is Changing Digital Health
Earlier this month, Adam Dakin, Managing Director of Dreamit Healthtech, joined Phase2 Health to share his insight on how the pandemic is changing healthcare. Dakin joined Dan Baker (Managing Partner, Phase2 Health) and a panel of early-stage healthtech investors that included Neta Amidi (Global Head of Health, Plug and Play) and Matty Francis (Principal, Healthbox).
The group discussed different healthtech topics including venture investment, trends, reducing burn, enterprise sales, and market performance, highlighted below.
Trends | Polarization in healthtech: what’s trending and advice for those on the sidelines?
Venture Investing | How will VCs adjust to the pandemic over the next two quarters?
Enterprise Sales | Are health systems engaging with innovation right now?
Enterprise Sales | Why are healthtech startups with Covid-19 solutions struggling to sell to enterprise health systems?
Reducing Burn | How are healthtech startups managing staffing during the pandemic?
Market Performance | Is the market ripe for healthtech acquisition?
Market Performance | Have different regions in the US experienced different healthtech outcomes?
Market Performance | How will public market valuations compare to private market valuations
Trends | What lasting trends will this pandemic create in healthtech?
Trends | Polarization in healthtech: what’s trending and advice for those on the sidelines?
If startups don’t have a direct application to help fight or stop the spread of COVID-19, they’re going to have a hard time selling in today’s climate. You can’t build a nice-to-have product when budgets are tight; you’ve got to solve a core problem for your customers. Subsets of healthtech like PPE, point of care, remote patient monitoring, patient safety, and patient communication are seeing increased demand since the pandemic.
However, there are many ‘Covid contortionists’, or healthtech companies trying to reposition to capture newfound Covid-19 demand. The companies that are able to cut through the noise are healthtech startups with immediate and compelling Covid-19 use cases that can be deployed system-wide with no IT integration.
“For companies that don’t have compelling Covid-19 use cases, you just need to ride it out, stay with your core value proposition, but realize you’re not going to get the attention of enterprise healthcare systems right now.”
Venture Investing | How will VCs adjust to the pandemic over the next two quarters?
Venture investors are hunkering down and supporting their existing portfolio because they want to make sure what they’ve already invested in is going to survive. With this in mind, there isn’t much bandwidth to look at new deals right now. However, deals are still getting done and VCs still have a mandate to deploy capital.
“Since the pandemic, we’ve had several portfolio companies where the process was moving along well and the term sheet got pulled due to the pandemic. Terms are changing. Venture investors are getting away with more draconian terms.”
Liquidation preferences are starting to reemerge in later-stage deals, something Dakin hasn’t, “seen since the recession post-9/11.” Perhaps this is fair or simply opportunistic if healthcare as a sector continues to experience compression. Paul Martino, General Partner at Bullpen Capital, gave founders good advice on this during a recent discussion with Dreamit. According to Martino, “Any firms that are asking early-stage founders for liquidation preferences are so out of alignment with founders that it would probably not even make sense for them to be investing at that stage.” Founders should be cautious to accept high liquidation preferences at the early stage because all subsequent investors are going to demand those same terms. It’s not a good position to be in for founders entering into a recession.
Enterprise Sales | Are health systems engaging with innovation right now?
In short, health systems are very distracted right now. They are putting investments on innovation on hold to prioritize patient and workforce survival and stabilization. As context on the current mindset of innovation departments at health systems, Dakin recalls showing one healthcare system five solutions directly-related to Covid-19. The response was, “these are five really great companies, but I’m spending all my time trying to source ventilators right now.” These market dynamics will persist until regular processes normalize and systems begin generating needed service revenue. However, if you’re already an incumbent at a large health system with a compelling Covid-19 use case, then you’re in a really good spot.
Enterprise Sales | Why are healthtech startups with Covid-19 solutions struggling to sell to enterprise health systems?
Startups with direct Covid-19 solutions are still experiencing sales challenges due to friction around technology integration, physician workflow, and culture adoption.
“Even if you have the pathway to deploy, your users are focused on everything else and trying to figure out how they perform their jobs in a new world.”
This is a watershed moment for digital health collectively and it still needs time to play out. By the time the pandemic subsides, Phase2 Health’s Dan Baker predicts it will be a forcing function for digital transformation in healthcare.
“Health systems will have been forced to get comfortable with technology that we all know is the right medicine for the system.”
Reducing Burn | How are healthtech startups managing staffing during the pandemic?
Healthtech startups are aggressively cutting staff to reduce burn and extend runway. The pandemic has also created new openness to distributed and remote workforces. The goal of these cost-saving measures is to survive on your current money for the next 12 months. In addition to reducing personnel expenses, Dakin encourages, “talking to your vendors, suppliers, or landlord right now - try getting concessions from all of them.” In the aftermath following this pandemic, venture investors will ask founders how they adapted to Covid-19. Investors want to see founders exhausting all avenues to ensure survival.
Market Performance | Is the market ripe for healthtech acquisition?
Big corporates haven’t shown an increased appetite for acquisition. Dakin dispels the myth, “among entrepreneurs that big companies just want to go out, get bargains, and be opportunistic - that is very rarely the case”. Corporate strategics still treat the price of a deal/acquisition as a secondary concern. Primary to this evaluation, acquirers must first determine whether the company is scaling, delivers real value, has alignment with strategic plans, and is accretive to earnings in the near-term.
“Acquirers would much rather overpay for a company that is outperforming expectations than go on a shopping spree for underperforming solutions that are underpriced.”
This is not true of private equity groups, who are opportunistically seeking bargains now to get the right puzzle pieces at the right price and roll them up into larger companies.
Market Performance | Have different regions experienced different healthtech outcomes?
Differences between regions vary based on time since first exposure. Within the US, regions aren’t experiencing dramatically different outcomes. However, the differences between East and West coast investment styles still persist. China and other international areas exposed early have seen an uptick in normalization since the initial shutdown.
“Our China and Japan offices were one of the first ones to feel this back in December. Things slowed down there as well but we’ve already seen things pick back up in China. That hasn’t been the case in Japan, which is still sheltering in place.”
Market Performance | How will public market valuations compare to private market valuations?
Private market valuations need time to adjust to the public markets. Private market valuations will adjust relative to the public markets over months and quarters. Venture investors will not likely adjust a valuation, “week-by-week based on the stock market”, according to Health Box’s Matty Francis. The further away you are from commercialization, the less your valuation is going to be impacted. Companies at the Series B stage or later will take an immediate hit, while Series A and earlier companies will be less affected. Bearing this in mind, in some cases, new pre-seed and seed deals have experienced lower valuations and down rounds.
Trends | What lasting trends will this pandemic create in healthtech?
It remains to be seen whether this pandemic will create a paradigm shift in healthcare. Investors, in general, agree that certain subsets of healthtech are poised for near-term growth. These in-demand subsets include consumer-driven healthcare, patient choice, waiting room innovation, telehealth, staffing augmentation and efficiency, patient communication, and point of care training.
By Elliot Levy, Healthtech Associate at Dreamit Ventures
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