The impact of the COVID-19 pandemic sent shockwaves through industries all over the world. It challenged businesses to innovate and find new ways of working. Those who weren’t agile enough to react to the pace of change suffered.
Digital health - and the health sector as a whole - felt the tremors of change more than most. Health has always been a slow-moving sector out of necessity. A poorly tested medication, treatment or piece of technology could have long-lasting consequences.
The pandemic brought with it a sense of urgency that hasn’t been seen in generations. This forced the entire health sector to mobilise akin to a war footing. It was impressive, miraculous and ultimately life-saving.
The result of this explosion of activity and innovation has been an explosion in investment. In 2020 $14.6 billion across 464 deals poured into digital health. This was almost double that of 2019 and a 72% increase compared to 2018.
By June 2021 that number had been surpassed with $14.7 billion across 372 deals, with an average of $39.6million per deal. Although 48 mega deals account for $100 million or more each. By the end of Q3 2021, investment has surpassed $21.3 billion with more deals still to be done before year-end.
It’s easy to mistake the surge in funding for a bubble but the investment trend was already there. Health tech and digital health as a whole are part of a multiyear opportunity for venture capitalists.
Much in the same way the pandemic accelerated innovation, it’s reasonable to assume that COVID-19 accelerated the trend that was already forming.
However, this ‘mega momentum’ as Rock Health describes it, brings its challenges.
The biggest challenge as a result of the investment glut in digital health is the ability of the industry to scale fast enough to meet its investor’s demands. Especially for startups who are struggling to sell or businesses getting ready to scale.
High valuations and the large amounts of money being invested can make it impossible for businesses to generate the return their investors are expecting. Purely because they don’t have the infrastructure, the sales pipeline or the resources to deliver on the work.
This is compounded by the fact that the rate of growth - and the subsequent investment - brings into question whether the industry has the capacity, now or in the future, to deliver that many digital health solutions to market.
What the investment is creating is rather than one big bubble, but lots of smaller ones that will pop over the coming months and years, resulting in some parts of the digital health industry collapsing.
In other words, some businesses will fail because the market will be saturated with similar products. This is, of course, the way a free economy works - there are always winners and losers. However, the boom in investment is going to accelerate this natural process and could result in good products dropping out of the market rather than being acquired over time by a more successful business.
The pandemic has accelerated a growing demand for digital health solutions. Apps to help patients with mental health, eating disorders, fitness and weight loss and monitoring tools for pacemakers were all in active circulation.
However, the pandemic forced health providers to adopt new technologies faster than they expected.
While the global shift towards digital health is generally good for business, startups and scaling businesses are in a potentially precarious position. Not only do they have to meet aggressive sales targets to appease investors, but they’re also trying to sell to prospects who have an incumbent solution already in place.
This is made harder still by the fact that the existing solution has barely had time to bed in and bureaucracy within healthcare can make it near impossible to introduce a replacement that quickly.
When you also consider the fact that healthcare in the US isn’t a single entity, rather dozens of providers scattered across each state, gaining market share can be difficult.
For the time being, however, the scale of investment suggests there is still plenty of opportunity within the digital health space. Not least where some States or countries outside of the US have been slower than others to modernise their healthcare offering.
However, other factors could derail investment and sink more businesses than an inability to scale...
While the last two years have seen unprecedented investment in digital health, the fact is not every business will be a success.
This has less to do with the business’s ability to scale or produce a quality product rather than the demand for certain health tech solutions.
With the pandemic not yet over, healthcare providers are spending their budgets on treatments and other technologies that either improve patient outcomes or that can support them post-COVID.
So companies that have developed highly innovative technologies in the diagnosis and treatment of cancer or altimeters aren’t necessarily going to grab the attention of healthcare providers. That’s not to say what they’ve created isn’t impressive, it’s just not where health providers are looking to put their money.
The reason for this is simple. For everything we know about COVID, there is still much yet to be discovered. Plus its highly contagious nature means it’s more likely to mutate, undermining the vaccination effort and limiting the effectiveness of other treatments.
To put it in psychological terms - cancer is a known quantity. We know how to identify it and treat it. Treatments are improving at a consistent pace to improve patient outcomes and reduce the risk of cancer returning.
So, while an AI capable of diagnosing cancer has significant advantages, it’s not a high priority. Moreover, because COVID is so dangerous to anyone with weak or suppressed immune systems, most hospitals are trying to keep cancer patients away as much as possible.
On the other hand, firmware that makes respirators more efficient and life support machines more sensitive is where the money’s going to go.
Equally, apps that can help children cope with long COVID, or family members cope with bereavement will be of greater immediate interest to healthcare providers.
While it may seem cold, in reality, its pragmatism is based on the immediate threat, the level of understanding around that threat and the immediate need. Essentially, it’s about survival.
The question is whether those health tech companies with currently low-demand, but highly significant innovations can survive until the demands of the market change.
The investment trend shouldn’t come as a shock to anyone tracking investments between 2018-2021. Platform-driven business models have received considerable investment with the direct-to-consumer and virtual care markets showing considerable growth.
This falls in line with the direction health providers and social services are pushing towards in other parts of the world, like the UK and EU. Specifically, a hybrid care system that blends in-person and virtual care.
The data suggest that patients don’t yet want a fully virtual experience. Nor would one work currently based on the level of technology and the cost to deploy something comprehensive for every patient within a healthcare provider’s network.
However, patients don’t want an all-in-person experience either. The pandemic helped them to see the value in augmenting their healthcare provision with video and portable technology whether that’s telemedicine, smartphone apps, wearable devices or smart fabrics. Although we’re a little ways off the latter.
Regardless, the opportunity for the digital health sector as a whole is to work out how to effectively integrate health tech solutions and in-person care in a practical and useful way.
Currently, patients use disparate health technologies to supplement their healthcare. Whether it’s a meditation app or a dietary monitoring app for diabetics, everything works in isolation.
Considering these solutions are recommended by health providers or medical professionals, there is both a colossal disconnect and a missed opportunity.
It’s not about replacing one form of healthcare with another, rather it is about reimagining healthcare.
Creating solutions that deliver the enhanced, customizable care of a healthcare app that provides a patient’s doctor with the data is immensely powerful.
Telemedicine can help connect patients with their doctors, which for the elderly or the infirm is invaluable. But the problem is that a doctor can’t take a patient’s vitals through a screen.
A smartwatch or smartphone application that can capture that information and share it with the doctor in real-time would be game-changing.
Digital health is one of the fast-growing sectors in health. The really big returns rest with the health tech companies that can blend the various facets of patient care in an integrated and meaningful way - bringing together all those scattered solutions - that improve patient outcomes.
Investor: New Enterprise Associates
Number of Investments: 98
Total USD Invested: 3,710,197,245
Investor: 500 Startups
Number of Investments: 43
Total USD Invested: 232,790,000
Number of Investments: 10
Total USD Invested: 139,560,591
Number of Investments: 83
Total USD Invested: 41,897,321
Number of Investments: 56
Total USD Invested: 21,568,000
The billions of dollars in investments across the digital health sector presents another major challenge. A demand for skilled developers when there’s already a skills gap.
Worldwide there is a shortage of around 40 million developers. In less than a decade that number will increase to 85 million.
So if you’re the founder of a health tech business that has just gone through a round of funding there’s every chance you’re wondering about where you’re going to find the developers to do the work.
Assuming you can find them, you then need to figure out how to pay them. Research suggests salaries have increased by over $20,000 a year in a decade.
On average, a developer living and working in the US will earn just over $100,000 a year. The top 25% will earn over $136,000.
Putting together a team of developers will put your business under significant financial strain and burn through the investment you’ve just received within a year.
Which is fine providing you have something to show for it when the money’s all gone.
The obvious solution is to outsource development although this can understandably make health tech companies nervous. Not least because you’re handing over your product to a third party.
Despite the considerable show of trust involved, there are clear advantages to outsourcing. Not least the fact that you’re not footing the bill for the developers.
This reduction in your overheads significantly extends your cash horizon and gives you options, one of which could be to develop a second app or piece of software in parallel to the first.
Nearshore development is a popular option as the development partner is both geographically close but the time difference is manageable. This should - theoretically - make it easier to manage the relationship.
While technology has made it easier for us to communicate with businesses anywhere in the world, relative proximity means that face to face meetings are possible.
Regulations are often similar or at least the outsourced developers are familiar with them as their clients will be from the same region. Common nearshore partners to the US include Mexico and Colombia.
However, there are problems with nearshore development. The first is lack of choice. There simply aren’t that many nearshore developers who can deliver big projects.
The other is the proximity and familiarity with US regulations can count against you. While nearshore partners may know they need to use dummy data to avoid a HIPAA violation, they may not know data handling requirements for international legislation like GDPR.
The compliance component of outsourcing is a major consideration as data protection legislation can be crippling if violated.
Offshore developers have a bad reputation and usually conjures images of sweatshop style conditions in countries like India. While a lot of outsourced developers are based in India and countries like it, where labour is cheap, this isn’t always the case.
Some externalized development partners operate on a global scale to take advantage of the talent pool that brings.
Developers like these prioritise talent over cheap labor meaning you get a highly skilled and experienced team working on your projects.
These kinds of developers also operate a globally distributed development model which essentially allows three teams, working in different time zones, to develop in a single 24 hour period.
So you get to move three times faster than your competitors. And because these teams have to hand off to each other, the quality of the code is clean. This means long after the project has been delivered, any one of your developers will be able to look at the code and make changes.
Rather than code that’s been written to a budget and is all but unusable by anyone other than the person who wrote it.
If you’ve just been given $35 million and some steep targets, being able to deliver a project in a third of the time could transform your business.
The pace of innovation within digital health is such that, as a sector, it’s expanding rapidly in all directions. The wave of investment will only make that expansion go further, and faster.
The advantage of the interest venture capital is we are likely to see the next generation of health tech sooner than expected.
It could also have a destabilizing effect on parts of the industry where the innovation is strong but the demand is poor.
It will also exacerbate the worsening skills shortage which will drive salaries even higher and make it harder for smaller developers to compete. This could lead to a lot of those smaller investment bubbles bursting sooner than predicted.
Regardless of the area of digital health, you’re in if you’ve had a successful round of funding - or you’re about to go through one, planning is the key.
The investment comes with some sobering strings attached so you need to be ready to deliver.
Building a robust team across business analysis, DevOps, compliance and development will allow you to ship your product and hit your targets.
The onerous to succeed isn’t just to please investors. Although this should be a consideration. Rather digital health as an industry is maturing and the rate of investment is an indication of that.
The level of investment coming from venture capital allows developers to go beyond pilot programs or proof of concepts. It’s a test to prove the market opportunities are there and the market can sustain the growth.
It’s serious money for a serious scale.
The other side of this growing up process is for the opportunity for digital health to get a grip on regulation and compliance.
Data and privacy are hot button topics in every industry but none more so than in healthcare. Despite this, apps and digital health software have questionable security features. This is in part due to sloppy third-party coding delivered by developers who don’t understand or care about compliance.
In the business of app development, the emphasis is on user experience and delivering on time. How the data is handled is almost incidental.
For a development house trying to scale with $35 million in the bank and aggressive sales targets, that’s not going to wash. It certainly won’t wash with investors who don’t want to be tied to a GDPR violation and the associated fines.
Digital health is believed to be a trillion-dollar opportunity. The foundations are there and work has begun. However, it remains to be seen if the industry as a whole can capitalise on the investment and take the industry to the next stage of its evolution.