What can we learn from each other in digital health startup financing?
It seems the United States has figured it out. 2013 has been a successful year for US digital health. Successful in implementing digital health solutions, the US is the over-achiever when it comes to early stage digital health funding. Europe is lagging far behind.
According to a RockHealth report, by the close of the second quarter of 2013, the cumulative funding volume in the US for the sector had reached $849 million, already more than the figure for the whole of 2011. According to filings, Care.com, the US online marketplace for child, senior and pet care is also looking like the sector’s first big IPO of 2014. Last summer, California-based Proteus Digital Health announced that it had raised a record $62.5 million in its latest round. Practice Fusion has just added another $15 million, bringing its total up to $85 million. Consider HealthTap ($24 million), Vitals.com with $22 million, or Medivo with $15 million investment, and these players almost all exceed the number and scope of investments achieved in Europe. It suggests that scalable companies will find more money and better opportunities in the US, well beyond any argument about market size.
At the recent Health 2.0 Europe Conference in London, the European health startup community presented itself more confidently than ever. There were companies presenting solutions for healthcare professionals, care givers and patients alike. We saw care communities, telemedicine solutions, genomics propositions and plenty more. Health 2.0 Europe gave attendees no impression that there is a supply shortage in great EU digital health solutions. Nevertheless, it seems like it is a lot harder to secure growth funding in the EU.
Vishal Gulati, managing director of Radiant Capital and founder of Digitome, admits that early stage digital health companies have a hard time finding investment in the UK. “Sometimes, entrepreneurs don’t sufficiently consider the regulatory environment for their products or services”, says Gulati. He says this is non-negotiable. If investors don’t get the feeling that all the technical and clinical regulations have sufficiently been taken into account, the risk factor is just too high.
Then, EU investors may lack valuation models for digital health companies. After all, while Europe is favourably comparable in population size to the US, it has a much more fragmented system of healthcare structures. “If there are no great examples for comparison, it makes it harder to understand the ROI equation”, says Gulati.
Either way, with over a decade’s experience in investing in healthcare, Gulati says startups usually need help.
The digital health accelerator model is doing precisely that. These outfits help entrepreneurs to accelerate growth and ideally learn from the experience of others, avoiding pitfalls along the way. RockHealth, Blueprint Health and Healthbox have had significant success in the US, and 2013 has been the year for European healthtech accelerators. According to Forbes, with great fanfare, HealthXL finished its first program in Dublin this year. Chicago’s Healthbox is making waves in London, too. In 2014, the XLHealth Accelerator will launch in Germany. Healthbox EU managing director Mairi Johnson agrees that digital health companies need support and guidance, but says that EU investors need guidance too, to find the right companies and business models for their investment strategies. Supporting this supply and demand challenge, Healthbox EU recently announced that it is open up to Angel investors too.
“We have been so successful because, from the start, we delivered on everything we promised…”
Lloyd Price, Co-founder Zesty
This lack of confidence might be why Martin Kelly, an IBM venture partner who also runs the EU digital health accelerator HealthXL adds, “Much of raising external financing is about the social proof principle”. That’s marketing psychologist Robert Cialdini’s fancy way of saying: ‘Me too’. Kelly says informal recommendations are still a crucial part of the filleting process; even if it just helps time-poor investors decide who to meet and interview next.
That said, a (justly) contributory factor to any informal recommendation is how well a company can deliver on its promises. Lloyd Price is Co-founder & Chief Operating Officer at London-based online patient booking platform, Zesty. He says, “We started last year, with a clear vision of how to build the health marketplace in London. We are now about to close our second round of financing. The main reason we have been so successful in our financing strategy is because, from the start, we delivered on everything we promised we would do”. Zesty is rapidly scaling, has a clear and familiar trade and consumer model, and operates comfortably in both the UK’s public and private health systems. Price is confident his company has found the right European investors.
On an EU level, Jorge Gonzalez, organiser of the EU SME eHealth Competition and the Spanish eHealth Roadshow, has developed a strategic plan to help EU e-health companies get started, scale up and succeed. “Support from the European Commission will begin with four programs to help e-Health SMEs across the EU”, says Gonzalez. “There will be a business model support service, advice on how to secure funding in the EU, help in internationalisation and identification of medical problems that need solutions”.
Gonzalez has his work cut out. Irrespective of the spattering of good news stories, Frank Boermeester, partner at HealthStartupEU says that “for bolder moves in finding financing, it probably makes sense to look west of Europe”.
Indeed, one attraction of Zesty is that it is laying down European tracks which broadly follow in the footsteps of an existing US success: New York-based ZocDoc. ZocDoc raised $95 million in three rounds. By September 2011, it was valued at $700 million, and ZocDoc is now profitable in almost all of its 35 health categories they offer.
Europe has ample heritage in verticals from biotech to telecare; and a willing population with all the challenges (aging, first-world health etc.) faced by the US. The raw materials are there – it’s discipline and confidence that are missing.