Navigating the Digital Health Frontier: 8 winning characteristics of a successful health tech company
In the rapidly evolving digital health landscape, staying ahead of the curve requires a keen understanding of the must-haves (how to survive) and the nice-to-haves (what will make your business stand out from countless others in this space).
Drawing on my time as a former healthcare venture capitalist and current role as Director of Investments at Remedy Product Studio, this article explores the essential elements that make digital healthcare companies thrive and what to look for when building and investing in the space.
Must Haves
1. Data on Improved Outcomes
A business’s ability to improve patient outcomes and collect data on efficacy is one of the factors most correlated with achieving success in healthcare. This means founders at the earliest stages must find creative ways to bring their product to patients to determine if their solution works before they can expect to earn trust (and contracts) from payers, employers, and large hospital systems.
To do this, savvy founders often:
- Pilot grant-funded initiatives with academic research hospitals
- Run free trials with providers (often via self-established clinical trials)
- Go to Market with a D2C cash pay model as beta
- Partner with health tech companies in adjacent/complementary spaces for increased awareness and synergistic marketing opportunities
These initiatives make it easier for founders to eventually sell their products or services to B2B buyers (payers, providers, or employers), and thus, earn more revenue, generate traction, and fundraise.
2. Demonstrate ROI in <2 Years: A Commercial Payer’s Perspective
The “two-year dilemma” refers to the timeframe that the average person switches jobs or changes their employment status, and therefore their associated insurance coverage.
Solutions that demonstrate both financial and clinical outcomes within this timeframe are more likely to garner support from commercial insurers, and by extension, the CVC (Corporate Venture Capital) funds that invest with those entities in mind.
For example, a food-as-medicine startup might not be as appealing to a commercial insurer as it would be to a government entity such as Medicaid or Medicare.
On the flip side, a company focused on reducing maternal mortality rates would greatly interest commercial insurers, since the ROI of a successful pregnancy is < 2 years. Bonus point: The pregnancy period is typically when moms are least likely to switch jobs/insurance carriers.
3. Proven KPIs and Steady Momentum
VCs invest in lines, not dots. It can be frustrating for investors when founders ask questions like, “What milestones do I need to hit for you to feel comfortable investing?” In the dynamic healthcare industry, there is no magic number, but rather a desire to demonstrate steady month-over-month momentum.
The healthcare-specific KPIs listed below all indicate that a business is headed in the right direction:
- high employee utilization
- large geographic footprint
- reduced readmission rates
- reduced emergency department visits
- improved medication adherence
Of course, key KPIs will vary depending on the desired outcome of the solution. For example, a business that aims to change patient behavior (e.g., improve medication adherence) would be better suited to highlight metrics like daily active usage (DAU), weekly active usage (WAU), and high retention — rather than simply user growth. Sign-ups only demonstrate intent to change behavior, not successful behavior change itself. In other words, just because users register for an adherence solution doesn’t mean they’ll actually use it.
4. Long(er than usual) Runway
Building relationships with hospitals, clinics, insurers, and employers is a time and capital-intensive undertaking with long approval processes and more stakeholders than you might expect. In addition, the healthcare industry is inherently unpredictable.
Whether it’s dealing with unforeseen regulatory changes, market shifts, or unexpected setbacks in product development due to HIPAA compliance or SOC 2 audits, having a financial cushion provides the flexibility to adapt to changing circumstances.
In addition, reimbursement processes in healthcare can be complex and time-consuming. Healthcare service companies may face delays in receiving payments from insurers or government healthcare programs. A long cash runway (18–24 months) can help navigate these RCM (Revenue Cycle Management) challenges without jeopardizing day-to-day operations.
Nice-to-Haves
5. Founders with Relevant Experience and Complementary Skill Sets
Typically, investors like to see digital health companies built by founders with clinical expertise or proven operator experience in healthcare. Repeat founders, armed with lessons from previous failures, also stand out as resilient leaders. That said, it’s important to understand where you hold your personal biases as an investor.
To confront biases, the book “Super Founders” provides data-driven insights to guide investors toward more accurate founder archetypes. A notable takeaway: despite the clinician-operator duo we often see in health, there is actually no statistical disadvantage to being a solo founder or to being a non-technical CEO.
For the latter, you can always collaborate with tech partners like Remedy Product Studio!
6. Omnichannel Business Model
An omnichannel strategy in healthcare is very different from an omnichannel strategy in consumer. In healthcare, the combination is not retail + eCommerce but rather a blend of cash pay, insurance, and employer payment options through B2C, B2B, and B2B2C models.
This multifaceted approach not only widens a company’s intended user base but also acts as a risk mitigation strategy should any of your business models falter. In other words, meet your patients where they are and give your business financial optionality.
That said, creating an omnichannel offering can be challenging, particularly because payers and employers often ask for evidence of improved outcomes and cost savings before agreeing to purchase a solution for their respective populations (see Must Have #1). In addition, government insurers like Medicaid and Medicare often require health tech platforms to support multiple languages (i.e., English, Spanish, and Chinese) before agreeing to a pilot.
Due to these requirements, the journey to building tech-enabled solutions often starts with a direct-to-consumer/cash-pay model, paving the way for future collaboration with employers and insurers.
If you’re an early-stage investor in this space, do not expect a tech-enabled healthcare startup to have payer relationships on day one. This acceptance is part of the necessary risk tolerance for investing in early-stage health services. However, asking founders about their plans to secure such partnerships is always wise.
7. Value-Based Care Model
Value-based care’s (VBC) potential to drive improved outcomes is a compelling selling point for big customers like health systems, payers, and employers, therefore making it a compelling business model for VCs to back.
Further, when designed and implemented well, VBC arrangements can have a significant positive impact on EBITDA, according to McKinsey.
However, McKinsey also notes that companies building in this category are often inhibited by “poor transparency into value-based formulas and metrics, inconsistent alignment with physicians, lack of actionable insights for motivating behavioral change at the point of care, and suboptimal coordination between clinical, financial, contracting, and operational stakeholders.”
In other words, until innovation corrects the legacy processes and protocols that surround care, the realities of the broken health system make this model tough to implement.
8. Building on Market Tailwinds
Successful healthcare companies are often built on the coattails of regulation changes or address top areas of concern for the U.S. government. And, of course, the two go hand in hand.
Companies that leverage market tailwinds in this way are setting themselves up for the following benefits: 1) more buyers for the solution, 2) higher willingness to pay for the product vis-a-vis government grants awarded to hospital systems targeting innovation in specific areas, and 3) more non-dilutive funding options available to take the business to the next level.
A few examples of white spaces fueled by current market tailwinds include:
- AI tools leveraging the massive amounts of data now available with interoperability regulations and policies aimed at improving patient care through the secure exchange of data.
- Businesses working to improve maternal health outcomes under the new White House Blueprint for Addressing the Maternal Health Crisis.
- Startups focused on correcting the racial, gender, and socioeconomic disparities in healthcare through better research (read: improved clinical trial protocols and technology).
- Companies addressing physician shortage/provider burnout by alleviating the administrative hassles that burden physicians daily. Most innovations in this category will leverage ML/AI.
- Businesses transforming drug discovery and pharmaceutical R&D. In other words, using AI to design new proteins, understand viral structures, generate synthetic datasets trained on real patient data and disease history, and then designing treatment around such learnings.
As the digital health landscape continues to evolve, I hope this list of must-haves and nice-to-haves provides a roadmap for entrepreneurs, investors, and healthcare professionals attempting to make change in this space.
Have an idea you’re noodling on? Starting to fundraise? Looking for help with your product roadmap? Please don’t hesitate to reach out! Jess@remedyproduct.com
