Life Science VCs: Definitively Indefinite About Digital Health

Many of the earliest investors in digital health have been tech investors such as Vinod Khosla, who believe that, as Khosla puts it, “mobile devices, big data, and artificial intelligence will disrupt healthcare,” and who presumably hope they can leverage their expertise in these technologies to help identify potential winners.

Life-science investors – in part because they often don’t have the money to spend – have moved more cautiously, despite the fact that they arguably have the best understanding of the medical problems to be solved, as well as the most experience working with the relevant stakeholders, from payors and regulators to doctors and patients.

The ambivalence was nicely captured earlier this week by two contrasting reactions from early-stage life-science shops in Boston.  In an interview with Xconomy’s Luke Timmerman discussing Third Rock Venture’s recently closed third fund and plans for the future, partner Bob Tepper was asked about plans to explore healthcare IT and other areas besides drugs and devices.  His response?

“Healthcare IT is an area we’re looking at a lot. We’re intrigued by it. It’s a really important area, but I’d say to be fair, we still have to learn a bit more about the right strategies there, and how it’s going to evolve. The role of the government in the whole healthcare revamping will impact things significantly in that space. I’d say we’re going to do a little more homework in that area and get more expertise, but I certainly think it’s a possibility for the future.”

In other words, they’re still kicking the tires.

On the other hand, PureTech Ventures (technically not a venture fund, but an “institutional entrepreneur”) has backed at least one digital health company, Akili (profiled last year by the ever-present Luke Timmerman in Xconomy here), and announced they are seeking applications for an entrepreneur-in-residence to help them build a new digital health enterprise.

Clearly, a few life-science VC’s, such as Venrock (notably partner Bob Kocher, a driving force behind Castlight Health) seem to share PureTech’s evident enthusiasm for digital health and health services.  Fidelity Biosciences (disclosure: I spent some time there about eight years ago) and Aberdare Ventures also seem to have moved deliberately into the digital health and health services space.

Yet many others are hesitant to make the leap.  As Domain’s Nimesh Shah commented on Twitter, “most digiHC simply disease mgmt or consumer internet w/ HC twist. Few can be real business,” adding, “Hype takes you only so far; you need a real biz model 2 win,” and observing that healthcare IT “has way more sizzle than steak.”  Finally, he suggests that the current interest in digital health may be “merely a bubble. All signs r there. Cleantech anyone?”

Perhaps reflecting these concerns, a number of leading life-science VCs (from what I can discern) – including firms with plenty of cash (such as OrbiMed) and with experience successfully navigating early-stage risk (such as Atlas) have to this point generally shunned digital health.

Other firms with deep pockets, such as NEA and KPCB, seem to be cautiously dabbling, but not really jumping in feet first.  According to Misfit Wearable’s Sonny Vu, via Twitter, Kleiner is “watching” six areas: “EMR, home health monitoring, insurance models, chronic disease management, telemedicine, health big data,” an everything-but-the-kitchen-sink list that doesn’t suggest (or at least reveal) more specific insight.

While digital health is certainly enjoying its moment in the sun (e.g. Eric Topol, California’s answer to Cory Booker, on Colbert earlier this week), the ability to attract at least traditional (vs strategic – see here) venture investors will naturally depend on the exits achieved  (though even this need not limit funds that manage their PR correctly – as TheStreet’s tart-thumbed Adam Feuerstein commented on Twitter, Third Rock now has more funds than exits).

It’s not just the number or size of the digital health exits that matter, but also who drove the investment.  For example, a big exit for Castlight, say, would not only increase enthusiasm for the sector, but would highlight the value of deep healthcare experience in identifying and nurturing promising investments.  On the other hand, if Practice Fusion manages a big exit, it’s likely to be seen as a victory for the tech folks, and a testament to the power of their vision.  Of course, many worry there won’t be any significant exits at all.

I confess to being an optimist here: while I agree with Shah (and many others) who highlight the absence of clear revenue models in many digital health startups, I remain incredibly excited by the opportunity space here, by the urgent need for impact, and by the value that could be generated by the thoughtful, integrated synergy of tech and healthcare, working together both to build new digital health companies, and also to fund them.

Article source: http://www.forbes.com/sites/davidshaywitz/2013/03/28/life-science-vcs-definitively-indefinite-about-digital-health/

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