The Longevity

Echo Health Ventures Aims to Fix Today’s “Broken” Digital Health Venture Model

The data is in: digital health funding saw its highest levels ever in 2016. The question is–what does it indicate? One possible interpretation is that 2016 marks the turning point when generalist tech investors see enough signs that consumers are ready for the digital health revolution that they are in turn ready and willing to put capital behind good–or potentially good–ideas.

But there’s another theory that lies behind the recent launch of Echo Health Ventures, formed in November 2016, as a strategic collaboration between Cambia Health Solutions and Mosaic Health Solutions.  Erica Garvin at HIT Consultant Media argues that, although the raw dollar numbers in digital health are indeed ramping up, the high failure rate of startups in this sector indicates that there is a fundamental flaw in the investment model.  

Today’s digital health venture model is broken. That statement seems bold and contradictory to the fervor and flourish of funding that has poured into the space recently. However, most health-tech startups are predicted to fail within the first two years of operation—why?

In 2014, venture funding in digital health smashed records surpassing $4.1 billion; equally impressive was 2015’s total of $4.5 billion. As the ball dropped on 2016, so did those numbers; however, the space still saw $4.3 billion by the year’s end. Even more telling is the $6.5 billion in investments projected for stand-out digital health organizations by 2017. It’s clear there is at least enthusiasm for digital tech in healthcare, so what’s tripping up the promising startup?

Startups in general are certainly risky–90 fail, according to Fortune. But Matthew Karls of Echo Health Ventures believes digital health is unique in that the real problem lies in the lack of long-term commitment and collaboration from investors. It’s a flaw EHV hopes to solve.  

The top reason for [startup failure in general], according to 42 percent of startups polled by CB Insights, is a lack of market need for their product—but is that what’s happening in digital health?

“In healthcare, we often see early-stage companies struggle to convert pilots to commercial contracts and grow their top line, despite having secured an impressive base of early pilot partners and clients,” Karls said. “Many companies see rapid early growth, only to suddenly see the momentum stall and growth plateau, and it isn’t clear why…[At least part of the reason is that] this wave of funding has been driven by a herd of generalist and tech investors drawn by the extreme dysfunction in the healthcare system”.

The mantra for many of these generalist tech investors is quick return on investment, which can work in other sectors, but often fails in healthcare according to Karls, because of the complex “layers of process, regulations, and policies”.

Startups are stalling out before building their momentum because they need deeper insights from investors, which they don’t have—not when it comes to doing business in healthcare.

“Enthusiasm and optimism are always necessary for success, in all venture sectors,” said Karls. “What’s lacking is that kind of excitement with an accompanied appreciation for the complexity and magnitude of the current forces in digital health. To put it bluntly, healthcare is harder.”

Given this understanding of the market, Echo Health Ventures has adopted what it calls a “Stage-Agnostic Strategy”. 

Building new companies that leverage technological innovation to transform the health care system requires much more than sufficient capital. Over the years, specialized healthcare venture managers have brought patient risk capital and thoughtful, long-term strategic partnership with their portfolio companies. However, these venture capitalists are harder and harder to find.

Enter Echo Health Ventures, hoping to leverage the extensive resources from Cambia Health Solutions and Mosaic Health Solutions in order to magnify the impact it can create for new companies.

The company manages both companies’ existing portfolios as well as pursues new, stage-agnostic investments in healthcare innovation. 

“The Echo model is fundamentally a deeper, more engaging experience than most [accelerators] can provide given the level of long-term, not cohort-based, capital and resource commitment.”

Matthew Karls closes with some advice to startup entrepreneurs.

[Do] not be discouraged considerate and conscious about the importance of [your] moves. “Figure out what problems you can solve, understand everything that touches it, and build on your strengths. Find partners that will accelerate your growth or can provide the network and resources you need to succeed. Then, you can relentlessly focus on delivery,” he said.

What will separate the successful startups from those destined to fail is the willingness to disrupt healthcare; as we’ve heard before, creating solutions to fix broken processes is pointless. “Incumbents preach innovation but sit with dead weight to resist change,” said Karls. “Radically altering the system requires an understanding of it. Innovators must know how the gears work and build solutions that are far more than window dressing. Disruption in health care must happen from the inside out.”

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