Healthcare Takes Center Stage At Mayfield Reception

From Start-U to Exit Strategy, Entrepreneurs Learn Best PracticesBy

Every startup has bookends to its story: a business plan to start things off and an exit that concludes its first chapter.

I had the privilege last week of describing how these two events might go for healthcare startups. The audience was three dozen intensely curious healthcare entrepreneurs, and the setting a digital health reception, held Wednesday evening at Alexander’s Steakhouse in San Francisco that we sponsored along with Fenwick & West.

My co-host was Peter H.W. van der Goes Jr., co-head of mergers & acquisitions for the healthcare group within Goldman Sachs’s investment banking division, and a veteran of the healthcare IPO and M&A scene.

We each talked about what we know best: me, company formation, and Peter, the kinds of liquidity events that companies, once underway, might be working towards. Considering the tremendous excitement involving healthcare startups right now, there was a lot to cover.

My remarks centered on one of my core beliefs: That while our dysfunctional healthcare system is one of the most serious social and economic challenges facing our country, it’s also one of the biggest opportunities for entrepreneurs.

Commentators always note how we’re spending more and more of our GNP on healthcare. While true, that’s not the real problem. The worrisome part is that we aren’t getting value for our money. Most people would gladly spend more on doctors and hospitals if doing so would result in longer, healthier lives. The problem in America is that our health outcomes are in many cases worse than they are in countries that spend a fraction of what we do.

The key, I explained, involves building more efficient healthcare systems. While all of the incumbent players—in theory—want things to be more efficient, most of them don’t have the incentive to undertake the kinds of innovation that would make that occur.

This opens the door, of course, for entrepreneurs. And at an especially opportune time, too: Digitization is coming to major aspects of healthcare like therapeutics and diagnostics, bringing with it the disruption that is digitization’s constant handmaiden.

That was the good news. The bad news, I was forced to tell the group, was that most healthcare startups will fail. There are any number of rocks that they can crash upon. One of the most frequently encountered involves problems with payment models, since the people using healthcare products (patients) aren’t typically the same as the ones who are writing checks for them (insurance companies, healthcare systems, etc.)

Of course, there are abundant examples of healthcare startups that I’m confident will succeed, starting with some of Mayfield’s portfolio companies. All of them have the key strategic goal of bringing precision to the system.

Zipongo works in precision health by creating a mobile app that empowers patients to make better decisions about what to eat—a hugely important healthcare issue on account of America’s widely-acknowledged obesity epidemic. Qventus uses AI and big-data techniques to guide operations in hospitals, helping coordinate the activities of hospital healthcare providers. Early studies show the system can reduce unnecessary lab tests by 40%, and increase patient satisfaction tenfold.

HealthTap is the world’s first global health network, allowing consumers to use their computer or mobile phone to make an “office visit” to any of a network of more than 100,000 physicians. So patients can get personalized attention for their pressing medical issues 24/7; HealthTap doctors can also use the system to schedule tests and to make prescriptions that can be picked up at a neighborhood pharmacy.

And then there are Mammoth Biosciences and Mission Bio, each turning cutting-edge laboratory breakthroughs into clinically useful tools. Mammoth is working with the widely heralded CRISPR gene editing technique to create a new class of diagnostic products: Simple, at home kits that can detect a huge swath of diseases, including extremely serious ones such as cancer. And Mission Bio is leveraging the dramatic cost reductions in genetic sequencing to help clinicians develop ever-more precise treatments tailored to a particular patient’s specific genome.

Peter examined many of the same issues, but from the perspective of exits. As he framed the question, the healthcare industry is looking for two things: Products and services that can be proven to be clinically effective, but which simultaneously take costs out of the system.

The IPO picture, he conceded, is currently stuck in a low gear. Digital-health companies are judged by Wall Street to have lower growth rates and gross margins than, for example, SaaS companies, and as a consequence, fewer of them make it all the way to an IPO. (Though he said that was slowly changing.)

But he described a much healthier M&A market, for reasons having to do with the changing composition of the insurance marketplace. The number of Americans with high-deductible healthcare policies has tripled in the last five years, meaning that consumers are becoming much more price-sensitive about the medical care they receive. With patients taking healthcare decisions into their own hands, rather than simply taking whatever their insurance companies provide for them, healthcare companies are finding for the first time that they need to have direct relationships with consumers. Many of the sector’s big M&A deals of the last year or two, said Peter, can be explained by this need to vertically integrate in order to get closer to consumers.

Peter’s run of keen insights continued into the question-and-answer period that followed the presentations. He was asked: Are healthcare incumbents more worried about regulatory uncertainty or anxiety about what their competitors might be planning?

The latter, he said, and by a wide margin. Five years ago, boardroom discussions might have involved Obamacare and its chances of passing. Now, he said, healthcare CEOs spend most of their time trying to second-guess what players like Jeff Bezos might do, so they can be ready with strategic responses.

Peter was also asked why companies like Apple and Google didn’t seem to be making particularly aggressive moves in healthcare. His response: When consumer companies look at healthcare, they see a gauntlet of privacy-related regulatory hurdles and all manner of potential new liabilities. His theory is that these companies are taking it slow, and letting the market come to them, rather than go charging off into it themselves.

With that, the session ended, in time for dessert and more networking.

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