Christina Farr: A long response to a short question...
This morning on the Health Tech Nerds Slack Channel (you should join — it’s great), investor and healthcare luminary Christina Farr asked the question below. I started to answer in a reply, and then moved to a DM, and have since graduated to whatever this is... Apparently, I have thoughts on this topic.
Christina Farr:
Good morning digital health friends! I'm looking to get a sense of what startups at all stages are thinking about fundraising, given current market conditions. Are you thinking more about debt? Notes? Reducing burn? Slowing down hiring? Or not worried/changing strategy at all? Plz feel free to reach out to me if you have thoughts. I'm assuming this is not anonymous as I'd like to include in my newsletter, but if you'd prefer anon that's totally fine (just say so).
Well, here is my response:
Hey Christina,
This turned into a bit of a book. My apologies/thanks for offering an opportunity for catharsis. Ha!
We are a blended tech platform/service aimed at people with substance use issues in the Midwest. We just wrapped up a small angel round and are feeling pretty comfortable, despite the gloom. This correction is already creating some tremendous opportunities for companies with solid foundations. It’s unfortunate that we will likely see a culling/coalescing of the vanguard, but there will be some wild opportunities for the survivors and the investors with the guts to back some of the workhorses in the dip.
The companies that show they can thrive in whatever comes next are the ones that will be providing incredible value and building the future of healthcare. Our hope is that the larger market conditions turn into an opportunity to take a risk and continue business as usual while our competitors go into hibernation.
Our take is that there was a ton of overexuberance in the market that needed to get corrected for the long-term benefit of everyone in the space. Solid digital healthcare companies that aim to innovate in both tech and health are finding that there is less commotion and noise.
A good, simple litmus test is if you’d trust the leadership team to run a brick-and-mortar clinic to take care of a family member. That should be table stakes. If the entirety of a business model is dependent on reducing the current CAC, which is dependent on Google and Meta maintaining the status quo, which is dependent on the whims of institutions and leadership teams under siege, you might be in trouble. This brittle business strategy is subject to too much risk and the reason we are in a good position relative to some other early-stage companies in this space.
With the only-recent appetite to challenge convention in any meaningful way, companies with heft and the ability to be resilient to macroeconomic factors are going to stand out. Historically, I think this is correlated with the presence of experienced (like, actually experienced, not just people with the letters and one year of clinical work before jumping into a startup) clinical leaders on the team; a business model/GTM strategy that is innovative, (actually innovative); those with robust contracts, especially those of the old-school fee-for-service variety; and a focus on outcomes that are much, much, much more sophisticated than a GAD-7 and PHQ-9.
My hope — selfishly — is that the slowdown and pending market beatdown for overhyped companies will result in a change of behavior among healthcare investors. This is just one opinion from somebody new to the game, but I believe the unchallenged hubris among healthcare investors remains the single-greatest threat to healthcare innovation. The market has consistently rewarded those who are racing to the bottom in both cost and quality, those whose first-mover and biggest war chest advantages are mistaken for succeeding on merits, and those whose business models are familiar to investors and by definition, replicate the issues with our current systems of care and payment.
There are significant, fundamental problems with how healthcare startups communicate with potential investors, but we are seeing change.
In our experience pitching early-stage investors, the last couple months have been markedly different than the year before it. All of the sudden people actually care about the clinical outcomes beyond a slide with a line graph. All of the sudden — and to our absolute delight — the buzzwords are being challenged. Suddenly, real, actual progress with real patients is being valued more than hockey-stick-curve dreams. We will see if this continues, but we are seeing that investors are seeking teams with an actual understanding of healthcare — which are often cynical, fed up with empty leadership teams (and VCs) making it up as they go along, and obsessed with solving some of the most gruesomely boring problems known to humanity. Those with the attention span and the depth and breadth of knowledge of the space will be rewarded handsomely.
Here are the priorities for us, and what I think investors should look for in a company resilient enough to make it through what’s to come — with enough upside to be appropriate for venture funding:
Licensing, credentialing, and contracting
If the team hasn’t implemented an EHR, has never experienced the joys of payer negotiations, doesn’t have an MSO yet, or isn’t able to discuss in at least some depth how their tech/service/structure complies with HIPAA/CMS regs/Stark/etc…, be wary.
Go-to-market
If the company starts with a payer relationship to acquire patients, make sure the thing they are doing passes the bullshit test, and that the “total lives covered” isn’t being sold to you as “engaged participants.” If they are starting with consumers, make sure that what they are doing is actually a pain point for the payers. Payers don’t give a shit about half of the things your companies are telling you they care about. The sweet spot — in our eyes at least — is B2C2B. Nowhere to hide a bad product and nowhere to hide a solution without a problem.
Margin and revenue
The promise of massive gross margins from future value-based contracts have proved to be elusive, if not outright fabrications. The idea that payers will allow uncaptured profit to exist in their system is… well… optimistic might be a good word. The best predictor of future revenue and margin is current revenue and margin. Not all revenue is resilient during times of economic hardship: Fee-for-service > Value-based > Cash-pay. If your aspiring portco can make it work in a FFS environment, especially in Non-MA Medicare or in Medicaid, back up the money truck.
Built for acuity and complexity
Point solutions without connections with interdisciplinary care, brick-and-mortar care, and non-professional support systems are ineffective at best and dangerous at worst. Companies starting in the commercial market or with self-funded employers are going to struggle to move their model to address higher acuity. Companies that start off with a horrific, gnarly, dangerous, highly-regulated, complex focus can handle things getting healthier or less restricted, but not the other way around.
Accelerating decentralization
Patients and providers want a healthcare future marked by autonomous, decentralized systems working in alignment and integration, serving people in a cohesive manner in unbundled practices. The vast majority of healthcare happens outside of the corporate behemoths.
There are lots of assumptions in here, but that’s the view from our perspective. Thank you for coming to my book launch. Stop by next week for my 8,000 word treatise on the question, “How are you viewing back-to-work plans at your company?”