There’s a bright side to the market doldrums, says managing partner Hemant Taneja: stronger companies will rise to the top as frothiness subsides.
The past few weeks have been marked with layoffs and rescinded job offers from a number of major technology companies. The digital health industry has been no exception to this trend: primary care unicorn Carbon Health, medical billing processor Cedar and virtual care company Ro, among many others. The war in Ukraine, supply-chain hurdles and an end to most pandemic restrictions in the U.S. and Europe have taken their toll.
Hemant Taneja, however, isn’t worried. Speaking from his office in Palo Alto, he’s calm and optimistic about the years ahead. The General Catalyst managing partner and veteran venture capitalist even sees a bright side to the market downturn, which he says “brings a lot more rigor to company building and discipline that a lot of people had sort of forgotten.”
That’s why, as the world is moving through the third year of the Covid-19 pandemic, which both “accelerated and eviscerated” the U.S. healthcare system, the 22-year-old Cambridge, Massachusetts-based venture capital firm is redoubling its efforts in the healthcare industry. A little more than a year after General Catalyst closed its first $600 million healthcare fund, the firm has raised another $670 million for Health Assurance Fund II and continues to build out its roster of investors, expert advisors and hospital system partners. “Healthcare, perhaps even more so than in most sectors, you have to think long term,” says Taneja.
In February, General Catalyst raised $4.6 billion for its 11th general fund, which will co-invest alongside the two healthcare funds, in company creation, seed, early-stage and growth. The firm, which has raised $14.75 billion in its over 20-year history, reported $33.3 billion in regulatory assets under management at the end of 2021.
There’s been a cooling off in venture investment in digital health startups in the first half of this year. VCs deployed $17.6 billion in the first six months of 2022, a 40% decrease from the $29.4 billion raised at the halfway mark last year, according to CB Insights. There was also a significant slow down in exit activity, with the IPO and SPAC markets tapering off significantly while M&A activity was down over 42% from Q1 to Q2 this year. But it’s not for a lack of cash in the hands of investors. A report from Rock Health published in July suggests there’s been a pullback from the more generalist firms that started investing in healthcare when the market was at its peak, but interest from specialists and repeat investors remains strong.
Digital health investing has reached an inflection point where the frothiness of the past few years is going to settle and the enduring digital health companies are going to be separated from the low-hanging fruit, says Chris Bischoff, a managing director at General Catalyst, who oversees the firm’s healthcare strategy. “We’re actually excited about the opportunity to build companies that are more intentional and that are really truly focused on the gaps in care and encouraging management teams to concentrate on their core, rather than some ancillary business that might have made sense during a different time.”
“It’s the only industry that looks after you from the day you’re born to the day you die—and it’s one that has to transform.”
This focus on fundamentals is playing out in board meetings across the country. Over the past few years, healthcare startups have been egged on by their investors to focus solely on growth as a measure of success. But as capital dries up, they’re now looking to conserve cash by concentrating on profitability and extending the runway of current funding, especially as high inflation makes borrowing money more expensive. In practical terms, this is resulting in headline-grabbing double-digit layoffs. Digital health companies are also slowing down plans to enter certain markets or even pulling out of them in order to consolidate operations.
Taneja, an early investor in Snap and Stripe who ranked No. 23 on the Forbes Midas list of top venture capitalists last year, says many of the woes currently facing the digital health sector have to do with investors and founders who failed to understand that healthcare is a slower burn than the typical Silicon Valley tech time horizon. There was also a tendency towards valuing digital health companies that combine software and services at software-like valuations, even though they are more challenging and capital intensive to scale. By contrast, he says his firm’s core thesis is that in order to succeed, companies have to demonstrate a tangible impact on reducing the $4 trillion in annual U.S. healthcare costs. “If you’re not making [the healthcare system] more affordable, if you’re not making it more accessible, if you’re not making it more proactive, measurably,” Taneja says, “then you’re not going to be a business that’s going to endure because our system can’t afford it.”
In the digital health sector, the firm is looking to recreate the success it had with the chronic disease management company Livongo, which Taneja incubated in General Catalyst’s offices with health industry veteran Glen Tullman in 2008. Livongo’s main selling point to employers was that it would help diabetic employees better manage the condition through a combination of software and human coaches and reduce overall costs. In 2019, Livongo went public and a year-and-a-half later was acquired by Teladoc in a deal valued at $18.5 billion. (After peaking in February 2021 at over $294 a share, Teladoc’s stock is now around $41 a share and the company’s market cap was $6.6 billion, as of Tuesday’s close.)
Regardless of market conditions, fundamental truths about the U.S. healthcare system remain the same, Bischoff says. “This is 20 years behind other sectors. It’s the largest sector of the economy. It’s the only industry that looks after you from the day you’re born to the day you die and it’s one that has to transform.”
That transformation includes using technology to focus on underserved populations (Cityblock for Medicaid recipients), underserved conditions (Sword Health for musculoskeletal care), clinical workflow (Aidoc for decision support) and infrastructure (Commure for data exchange), among other solutions. Bischoff, who is based in London, is also looking beyond the U.S. healthcare market, to other geographies, including Europe, Latin American and Asia.
Another aspect of that transformation is partnering startups directly with existing healthcare systems. For example, General Catalyst incubated the Philadelphia-based patient engagement software company Tendo Systems in partnership with Jefferson Health, with the health system serving as an investor and first design customer. The firm has also announced strategic partnerships with HCA Healthcare and Intermountain Health. To expand these partnerships, General Catalyst has hired Daryl Tol, the former president and CEO of Florida-based Advent Health, to continue building out the network of strategic partners and help C-suite executives sort through the noise of the raft of startups vying for their attention.
The fund is also investing in new startups founded by Livongo’s experienced entrepreneurs. This includes once again teaming up with Glen Tullman for his new company Transcarent, which is using data and software to cut healthcare care costs by steering patients to cost-effective care options. General Catalyst is also backing Homeward Health, the new startup from former Livongo president Jennifer Schneider, which aims to improve how healthcare systems in rural areas handle patient care.
Going after the bigger, stickier healthcare challenges means these companies can’t be looking for a quick exit–they have to scale and mature to a higher degree compared to tech companies. It also means that investors in the industry need to focus on whole portfolios, rather than one big winner. “If you’re going to transform the healthcare system,” says Taneja, “it’s going to take an ecosystem of companies.”
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