Digital Health Funding Defies Expectations

Commentary by John R. Graham

Source: Forbes

Investors have not had their fill of digital health deals, according to new fundraising reports from Rock Health and Startup Health, two outfits which have led the digital health revolution and produce complementary reports on how much capital is flowing into the sector. While other sectors have wobbled recently, digital health (which was only defined as a market five or six years ago) continues to attract venture capital.

Digital health refers to businesses that apply new information technology, especially the cloud, to health care. That being said, there is no agreement about where the boundary is. San Francisco’s Rock Health and New York’s Startup Health do not quite agree on which deals are digital health deals.

Startup Health estimates digital health ventures raised $1.8 billion last quarter, and notes the center of gravity has shifted from San Francisco to New York. However, Startup Health includes the $400 million round for NY-based Oscar, a health insurer which specializes in Obamacare exchanges, in its tally. Rock Health does not include Oscar’s financing in its total estimate of just under $1 billion raised. Perhaps Rock Health just does not categorize a health insurer as digital health, no matter how friendly its website is.

Oscar’s raise of $400 million in February increased the company’s valuation to $2.7 billion from $1.7 billion in September 2015. The latest round was led by Fidelity, which joins an extremely high quality group of venture funds which have decided to risk their capital on an insurer that focuses exclusively on Obamacare’s exchanges.

In a column written in the wake of last year’s capital raise, I expressed surprise that anyone would want to invest in an insurer that specializes in Obamacare’s exchanges – a sure way to lose money. If they expect to make it up on volume…..? Well, I just don’t get it. However, much smarter minds than mine have invested a lot of money in Oscar, so there may be a future in Obamacare’s exchanges that nobody else (including established health insurers that are running, not walking, to the exits) is seeing.

Rock Health excludes raises of less than $2 million, while Startup Health includes very small deals, which also explains why Startup Health’s estimate is almost twice as large as Rock Health’s is. Nevertheless, both agree digital health funding is not taking a breather. Rock Health figures investment has grown 13 percent over the trailing twelve months and almost 50 percent from Q1 2015. Startup Health’s Q1 2016 estimate is almost two thirds higher than its $1.1 billion estimate for Q1 2015.

Both sources agree Big Data attracted over $200 million in venture funding, of which Flatiron raised $175 million. Flatiron analyzes big oncology data in the cloud, promising to support the continuum of care. Rock Health’s category of “wearables and biosensing” also raised over $200 million. This likely overlaps Startup Health’s “medical devices” and “personalized health/quantified self” categories, which raised $360 million. These categories include the well-known sporty and wellness devices, but also very promising tools that collect vital statistics passively from patients and send them to the cloud for analysis and communication to care teams.

The diversity of investors is noteworthy. For example, Roche, a global pharmaceutical company with a significant oncology footprint, is an investor in Flatiron.  Corporate venture arms like GE Ventures feature among leading investors, as does Blue Cross Blue Shield Venture Partners, and University of Pittsburgh Medical Center.  The best pedigree of venture capital firms, such as Khosla Ventures, Founders Fund, and Tribeca Venture Partners, are well represented in last quarter’s deals.

Whether American health care can be transformed from a top-heavy, bureaucratic system dominated by government into a patient-centric, highly responsive, and energetic enterprise is still an open question. It is encouraging to see so many entrepreneurs continue to try to answer it.

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