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A year ago, our annual insights report revealed a fast-growing health tech sector. We noted that nimble and consumer-focused health tech innovators had begun to fill the gap between current and future needs, enabling a path toward the Future of Health™.1 But a year is a long time in this fast-paced sector—and 2020 was an exceptionally long year. As it did for all industries, the COVID-19 pandemic created an unprecedented crisis for the health care industry. It triggered rapid and large-scale responses, such as a reliance on virtual care delivery, an increased focus on mental health and well-being, and a push for quicker drug and vaccine candidate discoveries. Health tech innovators were critical to this response.
Venture capital funding for health tech innovators is often considered an important indicator of their value propositions and potential for long-term success. The Deloitte Center for Health Solutions recently analyzed the latest venture capital funding data from Rock Health’s Digital Health Funding database and interviewed 15 health tech investors—venture capitalists (VC), private equity investors, and corporate venture capitalists (CVCs)—to understand their focus and long-term priorities. Here is an overview of our findings:
At the intersection of health care and technology, health tech innovators have a unique place in the Future of Health, but they face some challenges. These include demonstrating effectiveness and market opportunity beyond pilots, managing sales cycles and capital, and navigating regulations—to sustain and thrive in this future.
Investors, especially CVCs,can support the innovators and the industry in general. Innovators could bring transformative business models and a consumer-centric approach. However, it is imperative for investors, including industry incumbents, to coach innovators and support them with industry and regulatory expertise, in addition to capital, to accelerate toward the Future of Health together.
In 2020, venture funding for health tech innovators crossed a record US$14 billion. Even as the economy and industries, including the health care industry, reel under the impact of the COVID-19 pandemic, venture funding for these innovators nearly doubled in 2020, compared to 2019 (figure 1).
Venture funding is often considered an important barometer of innovators’ value propositions and long-term success. Moreover, it can indicate future market performance and emerging trends. To that end, we analyzed where investors—traditional VC firms and CVCs—are placing their bets in the Future of Health. We employed a two-pronged research approach:
Quantitative analysis: We analyzed Rock Health data on venture capital deals in health tech between 2011 and 2020. We classified the innovators based on:
“The health tech funding infrastructure has been laid, but we’re still at the very beginning of a trillion-dollar opportunity”—Cofounder, health-focused venture fund
Close to two-thirds of total funding was advanced series funding—Series C and above—as investors focus on innovators with proven value propositions and existing relationships. Investors are ready to pay a premium to support innovators that show a solid return on investment. As a result, valuations of many innovators are at record highs. When asked about current valuations, most interviewees said they did not think there was a valuation bubble, but that this was the beginning of a multiyear opportunity in health care innovation.
Participation from CVCs has increased. Compared to previous years, CVC participation has generally shifted to later-stage deals (figure 2). For VC arms of large health systems and health plans, investment gives them first access to innovative solutions and the ability to pilot extensively and shape the solutions rather than just be customers. Interviewees said CVCs go beyond getting access to emerging solutions; some are focused on investments as a stepping-stone to full-scale acquisitions, others are focused on financial returns and diversifying their revenue sources.
Venture arms of big tech companies have also been active investors. Interviewees told us that they see interest from big tech companies as more of an opportunity than a threat to health care incumbents. They said that big tech will likely stick to their core competencies while funding innovators that fill gaps in their health offerings.
“Everybody’s (industry CVCs) got a horse in the race. It’s a question of who is investing in building it out.”—Partner, health-focused fund
UnitedHealthcare Group launched its venture capital arm, Optum Ventures2, under its fast-growing business division Optum in the fall of 2017. Though a late entrant into venture funding compared to its peers, Optum Ventures has grown rapidly. Beginning with a US$250 million fund and four investments in 2017, it currently has invested in 31 innovators and a US$600 million portfolio. In 2020, Optum Ventures was one of the most active CVC participants overall, investing in 18 innovators. Its major investments include:
While investing in a diverse set of innovators—care management, virtual care delivery, diagnosis, disease management, and more—the common denominator for Optum Ventures is data and technology platforms used as a means to serve various care and well-being needs.
Innovators focused on well-being and care delivery models received a record US$6.4 billion funding in 2020 (figure 3). The pandemic accelerated funding for innovators with alternative forms of care delivery, such as remote monitoring and virtual health, as providers who had not already invested in these technologies had to pivot to them quickly. Virtual health is expected to continue postpandemic, even as in-person visits resume. A challenge will be finding an effective, scalable balance between virtual and in-person visits. Interviewees suggested that major focus areas for 2021 and beyond include on-demand health outside of traditional health care settings, mental health, and fitness.
Right behind well-being and care delivery, data and platform innovators received US$6.1 billion funding in 2020 (figure 3). Data and platform innovators in 2021 and beyond are expected to address back-office solutions, such as reporting, data collection, prior authorization, revenue cycle management, and interoperability solutions, among others.
What types of advanced technologies underpin these offerings? Well-being and care delivery innovators are, not surprisingly, leveraging the Internet of Things (IoT) to a greater extent than other technologies (figure 4). Data and platform innovators are focused on artificial intelligence (AI) and machine learning (ML).
Ohio-based Olive AI Inc. (Olive)3 is a health tech innovator that achieved the unicorn status in 2020. It raised more than US$380 million in multiple funding rounds in 2020, and in its latest round achieved a US$1.5 billion valuation. Founded in 2012, the company improves upon one of the most pressing pain points in health care—back-office inefficiencies in revenue cycle, supply chain, and pharmacy transactions—using technology. Olive breaks from the competition in two ways:
These value propositions have helped Olive rapidly gain over 600 hospitals as customers. It also has a growing portfolio. In fall 2020, it acquired Verata Health, an AI platform provider for prior authorizations to help “close the loop” with the payer side, according to the company CEO.
Going forward, interviewees believe that scalable, disruptive business models that can show a return on investment will be most successful. AI/ML and deep learning will be table-stakes. Investors are interested in innovators that use automation and robotics (including RPA) technologies combined with AI/ML. Data security is not a major focus but should be, according to our interviewees.
“AI applications, combined with things like RPA and computer vision, will help achieve several low-hanging fruits in terms of efficiency.”—Partner, health-focused fund
Public offerings are one of the biggest indicators of potential success for companies. The market is very receptive to health tech IPOs. A record 11 health tech innovators have gone public in the last two years. Interviewees attribute this trend to a combination of factors—the pandemic, as bad as it was, gave innovators an opportunity to demonstrate their value (e.g., remote care, well-being, data and interoperability, drug discovery) more quickly and at a larger scale. Amid economic headwinds, investors saw potential value in health innovation. Interviewees believe the success of these IPOs will push several late-stage innovators to consider going public in the next year or two. In 2020, 33 innovators raised US$100 million or more in late series funding (C+), based on our analysis of Rock Health data.
Apart from the traditional IPO route, investors and innovators have recently considered SPACs as an avenue to go public. SPACs are shell companies that acquire a private company and take it public before their acquisition target is identified. In 2020, close to 20 SPAC transactions were focused in the health care industry, higher than during the last four years combined.4 Interviewees said that SPACs require a lot of capital, but in certain cases could make sense as a strategy for some investors.
“It’s completely changed in the past 12 months. It’s now viable to go public, and there are increased M&A opportunities.”—Partner, health-focused fund
SPACs have the potential to create a business that crosses a larger spectrum with increased opportunities. For instance, last November, GigCapital2 Inc., a SPAC, merged with Uphealth Holdings, a digital care management and digital pharmacy company, and Cloudbreak Health, a telehealth provider, to create a public digital health company valued at US$1.5 billion.5 The combined entity, through complementary offerings and channels, may end up being more than the sum of its parts.
Interviewees cautioned that SPACs have potential pitfalls. With a time constraint of two years to invest in innovators and going public or a deadline to return the money, the quality of innovators may be affected, increasing the risk for investors in the longer term.
Even as the public market route has opened up considerably, the traditional merger and acquisition (M&A) route will also accelerate, according to the interviewees. In the past few years, M&A volume for health tech deals declined slightly before rebounding in 2020. Interviewees pointed at an increase in mega-deals as a larger trend. Interviewees told us they expect two major trends to continue to drive large-scale M&A:
In August last year, Teladoc Health (Teladoc)8, one of the largest virtual care solution providers in the United States announced its merger with tech-enabled chronic health management solutions provider, Livongo Inc. (Livongo). Typically, the M&A process takes several months, even years, mainly due to shareholder approval delays. However, this merger was completed within just three months of announcement, indicating strong shareholder confidence in the combined capabilities and compelling value proposition.
Teladoc and Livongo traditionally had different focus areas. Teladoc provides virtual visits to patients. Livongo, starting with diabetes care, offers health-management programs for individuals with chronic conditions. Together, their capabilities will help manage “whole person care,” with more comprehensive insights on preventative care, according to leaders from both companies. Teladoc is looking at Livongo to accelerate consumer adoption and drive engagement. On the other hand, Teladoc customers—both providers and plans—will be able to refer patients with chronic care conditions to Livongo’s programs. In addition, Teladoc’s global reach will help expand Livongo’s business overseas.
The combined value proposition has shown encouraging initial results in cross-selling. In October last year, Guidewell Health—parent of Florida Blue health plan—announced it will offer Livongo’s diabetes management platform to 50,000 members with no copay. Guidewell has been a Teladoc customer for the past few years, and the reseller agreement helped facilitate a quick win for Livongo. This is the first of many more likely cross-selling opportunities in the pipeline, according to company executives.
Silicon Valley still has a significant gravitational pull for many investors and innovators, but it is no longer the center of the universe. Not only are investors and innovators spreading out to other areas of the United States, but talent and good ideas can be found around the globe. Global markets grew in 2020, despite the pandemic.9 Of note, Israel has been and continues to be a major hub of health tech innovation, with several innovators focused solely on exporting their intellectual property to the US market. While there are challenges to trying to sell solutions into a different health care market, interviewees noted that key success factors for innovators include capital efficiency, talent quality, and a supportive local infrastructure. Specifically, partnering and strong relationships with local organizations are key.
China stands out among emerging markets, having invested US$7 billion in health tech in 2020, while the number of Chinese investors participating in US deals has increased.10 Chinese big tech companies (e.g., Baidu, Tencent) are active investors in US health tech. In India, several innovators with a focus on consumer health and preventive care are emerging, but lack international investments so far, according to interviewees.
European investment activity continues to be robust, and health tech activity has mirrored US trends. However, interviewees noted a few challenges: different reimbursement models across countries, innovators preferring local VCs with local knowledge, and some investors taking more of a wait-and-see approach.
Health tech innovators have a key place in the Future of Health, but they aren’t without their challenges. They need to overcome a few hurdles to sustain and thrive in this future:
As the health tech market continues to grow, successful innovators should move beyond pilots to demonstrate market opportunity to their customers through improved quality, decreased costs, and/or a better experience. According to investors, scalability and key return on investment metrics will separate the winners and losers.
Investors, especially CVCs,will have important responsibilities toward innovators as well as the industry in general. In addition to providing capital, they should assume the role of a coach and bring their industry and regulatory expertise to innovators to move the industry as a whole toward the future of health.
Madhushree Wagh contributed significantly with the quantitative analysis and assisted in writing the report.
The authors would also like to thank Rahul Mehendale, Brian Whisnant, Joseph Bakutes, Boris Kheyn-Khefets, David Betts, Neal Batra, Laurel Pea, Sarah Thomas, Claire Cruse, Ramani Moses, Laura DeSimio, Apoorva Singh, and the many others who contributed to the success of this project.
