Dinner with UK's Health Technology investment community

Earlier this year I joined Eight Roads and F-Prime, sister tech and healthcare funds backed by Fidelity, as an Entrepreneur in Residence and on 5 September we convened a dinner of some of the UKs leading health technology investors. Dinner was served in the private dining room of the fabulous Carousel Restaurant in Marylebone. The gathering included the whole spectrum of investors from seed, to series A and B venture capital and private equity; the purpose of the evening was to discuss the European health IT investment opportunity, prospects for growth and the route to scale.

We started with the sobering acknowledgement that of the nearly 30,000 Health IT companies in the world, only a handful have achieved valuations of over $1bn, less than 30 over $100m and the vast majority of companies remain valued between $5-10m, making the average investment return rather modest, and the impact on patient care likely sub-scale and fragmented at best.

But a sense of optimism began to grow as it quickly became clear that the health investor community (mostly made up of doctors and scientists) has lost none of its optimism for the arc of progress in both life-sciences and medicine. UK health IT investors have strong conviction that carefully allocated capital and world class founders can and will create self-funding European businesses that generate attractive returns, and improve the clinical outcomes and the experience of healthcare for our loved ones and society at large.

We discussed whether financial valuation was the right metric for success, and whether instead we should be focused on traction and patient outcomes. Despite the unmistakable passion for healthcare in the room, it was noted that while a successful healthcare business doesn’t necessarily have to demonstrate unicorn growth, it does require a solid route to cash flow sustainability in order to make an impact on patients. However, achieving this scale within Europe, where national boundaries create fragmentation and a brake on rapid growth, is a formidable challenge.

There was a consensus that new business models are required: a patient-centric approach, bypassing the hard borders of national institutions, has been shown to provide one route to scale for some B2C start-ups. With B2B start-ups, it was noted that controlling an entire pathway end-to-end, including the feedback loop with outcomes, can make it easier for an innovator to fit in with payor tendering patterns. In other words, a pure tech play is often too difficult to buy within a single payor health system, and companies that integrate tech with a service model find quicker market traction.

We all recognised the tremendous business model innovation of FlatIron Health, Foundation Medicine, Decode and others who have flipped the value equation towards the monetisation of insights from data, by targeting BioPharma rather than traditional payor reimbursement as the major revenue source. Is this the dominant future funding model? Are we following the example of the newspapers which have flipped from selling media to consumers, to selling consumers to brands? In the healthcare context, will we move from selling tests to patients, to selling aggregate patient data to biopharma? Even if patient trust and information governance issues can be overcome, we still shouldn’t be too fast to rush to this conclusion. As one investor reminded us, last year Goldman Sachs estimated in their report titled ‘Healthcare’s Holy Grail’, that trapped value in value based healthcare in the US alone will be $650bn by 2025... and that this value could be released through shifting care to lower-cost settings, moderating price inflation and reducing $1.4Tn in annual waste (unnecessary services, excess administration etc). This potential prize is a fortune bigger than the whole US Pharma market!

So how do we capture this trapped value? Molecules vs Bits was a topic of great debate, as the room was divided between investors with a taste for embracing the cost and complexity of molecular biology start-ups, versus others who like to stick to the information layer. A provocative challenge was made that it is sometimes quicker, cheaper and easier to create a novel binding molecule that changes the behaviour of a protein, than changing the buying behaviour of a Clinical Commissioning Group (CCG) and that it was a fool’s errand to try to sell to a CCG a novel business model that they are just not experienced in buying. This led to a broad agreement that of the three ingredients needed for start-up success in Europe - great founders with transformational ideas, an encouraging policy and reimbursement framework, and patient capital for investment- that it was the policy and reimbursement challenges that were the biggest challenge to a European healthcare investment thesis.

All in all, I left the dinner feeling positive. We have a new Secretary of State for health in the UK who is laser focused on driving home the digitalisation and interoperability of hospital and primary care systems and is talking a very tough game on unblocking major supply-side barriers. We have a world-class founder community that is growing in confidence and innovating at a break-neck pace. We continue to be ground-breaking in genomics and national genomics policy, with Genomics England truly taking a leading position amongst nationalised programmes. And we have an investment community which is passionate about healthcare as a cause and not just as an asset class.

As it has been said ‘sometimes we all need a unicorn to believe in... and sometimes we also need unicorns to believe in us’. The investment community is primed and ready to support founders to build incredibly health technology businesses across Europe and beyond.