In the health care investment space, more money does not always mean more success. While there’s no shortage of investors and startups looking to disrupt the health care sector, successfully navigating the different needs of payers, providers and patients can prove daunting.
That’s where strategic corporate investors come in. They work with corporate entities that invest and build up startups with the goal of improving the health care system. These investors connect corporations with fresh, new solutions from entrepreneurs, while providing startups strategic counsel in navigating red tape and understanding how different solutions will play out in the marketplace.
In this episode of HealthChangers, we talk to two strategic corporate investors:
- Matt Hermann, Senior Managing Director at Ascension Ventures, which invests on behalf of a system of hospitals and health systems
- Matt Karls, a partner with Echo Health Ventures, a strategic investing firm focused on next-generation companies that are transforming health care
You can listen to this episode with the player above, on iTunes or on Stitcher, or read the full transcript below.
Links and Resources
- HealthChangers on iTunes
- HealthChangers on Stitcher
- Episode direct download link
- Ascension Ventures website
- Echo Health Ventures website
Leslie Constans (LC): Welcome to the HealthChangers Podcast presented by Cambia Health Solutions, where we share real stories on health care transformation, from those experiencing it and those helping to make health care more personalized. I'm your host, Leslie.
For anyone tracking the health care space, it's hard not to notice a huge increase in new health care startups and investors. The space is ripe for innovation and millions of dollars have poured into fund startups hoping to change everything from the way patients receive care, to how providers track patients with chronic conditions. But more money doesn't necessarily mean more success.
To get some perspective on what works and what doesn't in health care investment and innovation, I'm joined by two strategic corporate investors. They work for organizations that invest and help build up companies aimed at improving health care. Both my guests are named Matt, as it turns out. Matt Hermann works with Ascension Ventures, which invests on behalf of a system of hospitals and health systems. Matt Karls is a partner with Echo Health Ventures, a strategic investing firm focused on next-generation companies that are transforming health care. They are both joining us today by Skype. Welcome to the HealthChangers podcast, Matt and Matt.
Matt Karls (MK): Thanks, Leslie.
Matt Hermann (MH): Hi, Leslie.
What’s Next in 2018?
“I think our job is to be able to thread the needle and find those transformative solutions that could really make a meaningful difference for our health system partners.”
LC: What do you see in the investment market, the fundraising market, for health care companies that are looking to innovate and develop new solutions?
MH: This is Matt Hermann and I'm happy to go first. On one hand, I think it's a tale of two cities. In that on one hand, this is most exciting time to be investing in health care since I've been doing this. Given the changes that are coming, given the needs we have to reduce costs in this country for health care, given the tsunami of consumerism that is about to wash over us. On that hand, it's very exciting. At the same time, there are some warning signs.
Whether it be too much money chasing too many deals at too high prices. Whether it be uncertainty about where valuations are in the broader marketplace and economy. And I think our job is to be able to thread the needle and find those transformative solutions that could really make a meaningful difference for our health system partners. While at the same time, finding those companies where we can earn an attractive investment return.
MK: I think that's really, really well articulated. I think the tale of two cities, that's exactly the way we would describe it. It's so interesting because, on one hand, we see that the barriers to starting a new company particularly in the digital health space, those barriers have come down. And they're so low now that pretty much anyone can get into the entrepreneurial game.
At the same time, there's been so much money in this low interest rate environment that there's just been a flood of cash into these markets to fund companies that many of which probably should have not have been funded, or have not had the right amount of discipline expertise vetting. And I think I can say created a ton of noise in the market.
As there's been so much hype around the digital health space, so much funding available, I think a lot of entrepreneurs have painted themselves into a corner. Orienting themselves to a scoreboard that says, "How much I can raise and at what price?" as a measure of success as opposed to building sustainable businesses, which I think is particularly hard in health care.
Consolidation in the Marketplace
“This entrepreneurship and funding environment comes at the same time that the industry itself is under such dramatic transitions.”
LC: What have you both as investors learned from this environment? I think I saw a stat that there's been $16 billion invested since 2014 and 800 companies in the digital health space. Entrepreneurs and founders, what are implications for them in this really hyped up marketplace?
MH: Yeah this is Matt H. again. I think this is a market in transition. We are passed the days of a great idea with talented team being able to raise money. And we're at the door of show me the proof of value that you are able to improve care quality, reduce costs, improve the patient experience, improve the provider experience. This a world about proof. And I think as Matt Karls was saying, there's been too many companies funded and it's going to result in some consolidation in the marketplace as we really are at this day of reckoning that you need to prove your solution works.
MK: This entrepreneurship and funding environment comes at the same time that the industry itself is under such dramatic transitions. That I think about where we are in the transition to value-based care, and what the implications are to an entrepreneur who's trying to build a solution that's geared for that, when largely the rest of the industry knows that it has to be on the roadmap but they're largely not ready.
And I also just think back to if you had told me 10 years ago when I started, you'd have two guys: one representing hospitals and health systems and one guy representing payers, talking about the oncoming tsunami of consumerism…I would have thought that you were crazy. It really goes to show just how dramatically different we are today in what we care about and where we think things are headed.
MH: What are you advising your own companies? The ones you've invested in or what are you looking for in the companies that you're evaluating?
MK: I think when we started to hear people last year talking about winter is coming, potentially, in the funding environment, we started advising or companies to really get well capitalized so that they had runway through whatever uncertainty was to come. And I think that was good advice and we haven't seen the slow down I think we may have expected.
But at the same time the other piece of advice that I think is good for any of the companies out there is take your medicine now. Take it early so that you don't end up distracted by fundraising and by trying to avoid a catastrophic day of reckoning later on because you've raised too much, because you've not hit your proof points, et cetera. Get yourself simplified so that you can really just focus on sales and growth.
MH: Those are great points ,Matt. The ones I would add are there's this delicate balancing act between focus and vision. It gets balanced by how much capital you have on your balance sheet and what your burn rate is. And I think the Rubik's Cube of solving that problem is becoming more important. And we tend to invite our portfolio companies to be surrounded by a board and independent board members who have had serial success. Because that serial success has a dramatic impact and increases the odds of future success. We've had great results in surrounding our entrepreneurs with previously successful entrepreneurs.
What are we looking for? We're living in a world of looking for revolutionary advancements, not evolutionary advancements. I think we are living in a day and age where the opportunities to change the world are as great as they've ever been. And those are the kinds of things we're looking to finance and looking to find. And if you can do that capital efficiently at a reasonable price, all the better.
Lessons Learned from Entrepreneurs
“When ACA passed, I think that's when the realization hit that health systems need to be more open. Need to be more willing to partner. Because the path to a transformative journey was much more readily in sight.”
LC: Yeah it's interesting. Obviously from both of your vantage points, your perspective has changed over the years as strategic investors. What do you think health care entrepreneurs have learned? Can you give some examples of those you think are doing the right things versus the wrong things? Hype versus what's real? Whose getting it right out there?
MH: I think the world has changed dramatically. If I go back to when I joined Ascension Ventures, the end of 2001, the reaction from health systems was we could build this ourselves, or that company is not going to be around in a year. And when ACA passed, I think that's when the realization hit that health systems need to be more open. Need to be more willing to partner. Because the path to a transformative journey was much more readily in sight.
And what we saw is a much greater willingness to consider external companies like the ones we talked to. A much greater willingness to partner with the people and ideas. And I think that just creates a very different environment, one where it is easier to thrive, but you've got to have the business savvy and sophistication to be able to work with large health systems.
The relationship between a large health system and an entrepreneurial company can be viewed depending on which side of the table you're on. The entrepreneurs thought that they signed a customer. The health system believes they've entered a pilot phase to test out if this is going to work in scale. That gulf is one of the biggest gulfs I think the market and the industry have seen. And I think a lot of times it falls on the entrepreneur's lap to make sure that they've built the right relationship with the right people, and they're managing those expectations.
We've got many great examples of our portfolio companies who've worked through that transition with our health system partners. We've also got examples where it doesn't always work, and that's okay, but you just have to manage expectations and make sure you've got the right people at the table. And that you've got the right people who have access and can help get these things processed. Because it's getting much harder to sell to health systems as well.
MK: Building off what Matt said. It's getting hard to sell to health systems and peers. I think what entrepreneurs have been getting wrong, but I think are starting to get right, is I think that because the health care system is so broken, because the member patient consumer experience journey has been traditionally and still remains so bad, entrepreneurs are seeing pain points and they assume that they have the right solution that they can engineer. And they are drawing on lessons learned from consumer, internet, and all these other industries, without traditionally an appreciation for how the gears work in the background.
And they don't end up designing solutions that adequately address basic questions like, "Is this really what the organization that I expect to pay for this is going to ... is this really what they would identify as a pain point? Is this who actually will end up paying for this?" Unless they bring in health care expertise from elsewhere, don't know how to sell into these organizations, don't know how to navigate them, serve them.
It can be really daunting to work with these large enterprise clients, keep them happy and figure out how to convert conversations into pilots. Or more importantly pilots into contracts. And I think that they're starting to get this right and I think at the same time health plans and health systems are each making changes in the way that they interact with entrepreneurs and earlier stage companies to get access to innovative solutions and make the path a lot easier, which is no small undertaking.
Balancing Health Care Perspectives with Other Industries
“I would be very wary of backing a management team of all members of a health system or health plan with no outside influences. And I'd be also very wary of backing a group of Bay area entrepreneurs who have only been inside of an urgent care.”
LC: Do either of you think entrepreneurs in this space are more successful if they come from health care and they understand the environment that they’re building solutions for and selling into? Is that a success factor that you're seeing?
MH: We've seen success from folks who've been in health care as well as from folks who've not been in health care. We've seen folks struggle who've been in health care or who've not been in health care.
MK: I would be very wary of backing a management team of all members of a health system or health plan with no outside influences. And I'd be also very wary of backing a group of Bay area entrepreneurs who have only been inside of an urgent care when they were sick and don't have an appreciation or an understanding of how the mechanisms work behind the scenes.
MH: Matt, let me jump in there because I think you brought up an interesting thread earlier, which I think is health care is broken. And I think health care as a general space is on this trajectory to try to look more like a regular business. Even though we know it will never be because we're dealing with human life. But as health care starts to look like a regular business, several things have happened along the way. One is the emergence of marketing and brand. And marketing has emerged from the basement into the C-suite. And brand importance is becoming widely known and promoted in ways which we've never seen or imagined.
And as health care starts to look like a regular business, that is also causing this incredible importance on the consumer, who is increasingly paying a larger portion of the health care tab. Some estimates I've seen are suggesting that that numbers are going to go from 15 percent to 30 percent. And health systems and health payers on the brand rating side need to improve and need to figure out ways to delight their consumers.
It just opens up a whole host of really different spaces for entrepreneurs to play in, where some of that non-traditional health care knowledge can actually be an advantage. If you've deployed a solution in another vertical to health care, that may be a laggard in this space. It really depends on the situation.
MK: I think that's a great point. It's going to be really interesting as we get into this, as lessons from retail or consumer packaging start entering in health care because consumers are voting with their pocketbooks increasingly. And they start making that mix of rational and irrational decisions as a result, like we see from other industries. It's going to be really interesting to see how all of the different players react. And I totally agree that it makes it that much more important to bring in talent from these other industries.
The counter point to that, though, is I still think we're still in largely a fee-for-service world. And I still think that there almost needs to be an entrepreneurship type bootcamp that says, "Hey, take a look at, again, at the who pays question." As a payer-centered entity we get so many people knocking on our doors and we're the third and maybe last door to knock on and say, "Hey, listen. The consumer is the one who benefits here, but consumers don't seem to want to pay for anything themselves today." They may be willing to pay a copay to go into their doc, but they're not willing to pay for say a wellness program.
They expect the employers going to pay for it, and so you go to the employer and they try to sell into a group employer, and the employer says, "Hey, listen. I know you can't just add some program. Especially one where either efficacy is questionable or engagement is likely to be low."
They end up knocking on the payers door and saying, "Hey, you guys are the insurer so you must want to pay for this right?" This is why I think the value of a corporate strategic investor from health care can really keep an entrepreneurial team, especially at an early stage, from spending a lot of cycles chasing after dead ends. Just a little bit of Sherpa-type of action can help lead people down the right path instead.
The Unique Role of Corporate Strategic Investors
“I hate to say, it's cliché, but a good entrepreneur should be able to have access to and take money from anyone.”
LC: That's a perfect segue. I wanted to ask you both about your roles as corporate strategic investors. What should entrepreneurs know about working with corporate strategic investors versus financial VCs and other financial investors?
MH: First of all, it's really important to highlight that the entrepreneurs are the heroes here. It is not the venture folks like Matt and myself. The entrepreneurs are doing the heavy lifting to convert this idea into a product, into a solution, that is delivering on. Folks like Matt and myself, our job is to support them with thought, with knowledge, with strategic thinking, and with our networks that traditional venture investors bring.
Or they may be a little bit different. I think what's different about us is that we are employees of a health system, which gives us much greater visibility into their strategic priorities, challenges, pain points. And what we try to do is bring that wisdom into the board room or the companies we invest in.
Having previously been at an independent fund and seeing the value from being a part of a strategic fund, it makes it hard for me to even consider working as an independent investor and the additional challenges and hurdles that they have in front of them. Where we've just got a wealth of additional resources, knowledge and capability in front of us.
MK: Yeah. The only thing I'd add is just that the organizations that we represent. These are the potential buyers. These are the potential partners and these are also the ones that have tremendous scale to leverage and have teams of people thinking about how to solve the problems that the entrepreneurs are seeking to resolve. I hate to say, it's cliché, but a good entrepreneur should be able to have access to and take money from anyone.
And so why wouldn't you bring someone on who has not just has the insights and the opportunity to connect you with the other organizations and entities that would be potential partners, clients or help refine your strategy. I think that what you should expect is that this gives you a foot in the door. And the right people with the right eyeballs looking at your company and giving you the right partner in the trenches.
MH: I was just going to add one pearl of wisdom to build on that. I think what entrepreneurs should do is do their reference checks on the firm and the people they're going to be working with. Because in too many instances, I don't know if that work is actually being done. It's really important in the way we do business. We do reference checks on people before we invest in them. Entrepreneurs should do the same on their venture partners.
MK: I would say even if possible, do reference checks on the deals that have not worked out particularly well. How they work with a company when things are not going well is probably more important than when they are. I think it's also absolutely fair game to understand what goals the individual partners are measured against and how they're compensated. You'll get a good understanding for their orientation and what's important to them based on that.
LC: Thank you for talking a little bit about the corporate investment side and the benefits of that for the folks that you're working with. But are there also challenges?
MK: I've heard a very high profile named CEO giving advice to earlier-stage entrepreneurs. This CEO said, "Hey, the worst thing that can happen to you is that I make an introduction to a large health system." And I think you could by the way substitute large health system for large payer, whatever. He said, "It's the worst thing that could happen, because you'll get that meeting and you'll get a second meeting. There's actually a big enough layer of middle managers, enough risk aversion where no one wants to be the one that says yes. That you'll get a third, a fourth, a fifth, and a sixth meeting."
"And if you're lucky at the end of all that, you'll be lucky if you don't get the contract. Because if you do get a contract, that's the next worse thing that could happen to you, because then you're going to spend all of your time and all of your cash runway chasing after this one client that may or may not convert into something bigger. During which time, you could have chased down numerous other opportunities and built it organically from bottom up. At which point you'd be better prepared to service a large entity like a large payer or health system."
I thought that was really, really insightful and I know that a lot of what we do is to try to catalyze the growth but also to help our companies try to deal with the clients once they have it. But I'd be curious Matt if your perspective is similar.
MH: Yes, I think the answer is always it depends. It's very dangerous to make cut and dried rules like that. And it ties into a little bit my answer from earlier, which is you really need a good qualifying process on the front end. Because yes, large organizations have the potential to crush an early stage company because calendars are booked.
But if done right and done well, I have seen companies get made by some of these relationships. Maybe at the end of the day I'm just a glass-is-half-full kind of guy. And the reason I do what I do is because I think a platform like yours, like mine, really affords us the chance to change the world and create some monumental change in health care, which is an industry that needs it.
LC: To wrap up, I just wanted to ask you both. What are you excited about? This is obviously a very dynamic environment. What's on the horizon that gets you excited?
MH: I've mentioned a couple of them along the way. I think this marketing area, this connecting with consumers is going to become more and more important. And as the space we've been spending time I think this patient payment space is going to be increasingly important. I think there's a series of technologies that are not yet ready for prime time but will be very soon. And we're keeping an eye on things like virtual reality, more robotics. I think these are really exciting times to be doing the work we're doing.
MK: That's a great lesson and I'll add another yes to that. I think that we'll see an increased focus on real solutions for breaking through access and stigma issues for mental and behavioral health. I think an increased focus on social determinants of health that I think is exciting. It's my hope that we start to see increased pressure around nutrition and bringing that in.
Alongside, a lot of the emphasis on chronic conditions like diabetes and adrenal disease. I also think it's really exciting. Many of the advancements will end up delivering a better consumer experience. But I think with emphasis on those organizations, as opposed to try and do this and deliver this by themselves, are leveraging the existing scale from health systems, health plans and helping them to deliver it better.
LC: Thank you both so much for joining us today. This was a really, really insightful conversation, and again, I would like to thank Matt Hermann from Ascension Ventures.
MH: Thanks for having me, Leslie.
LC: You are so welcome. Thank you for joining us. And I'd also like to recognize and thank Matt Karls from Echo Health Ventures.
MK: Thanks, Leslie and Matt. It was a pleasure to be here.
LC: That wraps up this episode of Health Changers. Please subscribe to HealthChangers on iTunes or Stitcher and leave a review. Thanks for listening.