Investors have pumped a record amount of money into digital health companies this year, according to recent data from StartUp Health. But even with rising interest in the sector, new venture funds continue to join the fray.
Take Boston, where several first-time funds focused, at least in part, on healthcare technology have been announced in the past few months. They include M33 Growth’s $180 million growth-stage fund, Leerink Transformation Partners’ $313 million growth-stage fund, and Optum Ventures’ $250 million early-stage fund.
“Even though people think there has been a digital health bubble from an investment perspective, in some ways we see the spend in the health sector, and the need for transformation in that domain, continues to be such a magnetic opportunity that there is still a lot of room for a lot of funds in this area,” says A.G. Breitenstein, one of Optum Ventures’ partners. “And particularly if you have really good domain expertise to understand where those opportunities sit, I think there’s a lot of bullishness about bringing early-stage capital in.”
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Optum Ventures is the startup investing arm of Optum, the healthcare services business owned by Minnesota-based UnitedHealth Group (NYSE: [[ticker:UNH]]), which also owns health insurer UnitedHealthcare. Breitenstein previously founded ventures—both for-profit and nonprofit—focused on using data to improve healthcare. Her last startup, Humedica, was acquired by Optum in 2013. Breitenstein served as chief product officer for Humedica and held that same role in Optum’s analytics business after the acquisition. Virginia McFerran, the other Optum Ventures partner, has served as CEO of Optum’s analytics business. Before that, she was chief information officer at UCLA Health, Weill Cornell Medicine, and the Salk Institute for Biological Studies, according to her LinkedIn profile.
Optum Ventures plans to back healthtech companies at the Series A and B stages—startups with at least a basic product that has attracted some early customers, Breitenstein says. The fund—which has offices in Boston and Menlo Park, CA—will generally cut checks of between $2 million and $20 million, although amounts could go higher or lower, she says. The focus is on companies using data and machine learning tools in healthcare. Initial investments include Apervita, Mindstrong Health, Buoy Health, and Shyft Analytics.
Breitenstein thinks the healthcare A.I. field is moving away from “big, amorphous, ‘A.I. is going to cure hunger and world peace’” ideas, and toward products that are more narrowly focused and pragmatic, but could still have a significant impact on healthcare. She points to using A.I. tools for scheduling appointments, matching patients with doctors, or helping patients figure out the appropriate level of care required for their ailment.
“The specificity of the question that your A.I. is going to solve, to me, is the first step, as opposed to natural language understanding of every medical record note ever written, which at the end of the day is a massive and complex problem,” Breitenstein says. “We’re going to see a lot of these technologies wrapped with services, delivered on broad platforms, and really focused on the ways in which the inefficiencies in the healthcare system have proliferated.”
For years, corporate venture funds have “stunk” at investing and have been “company killers,” former General Electric CEO Jeff Immelt said at a digital health event in Boston on Thursday. Breitenstein agreed that corporate funds have had an unfavorable reputation among entrepreneurs, due to a legacy of “bureaucratic overhead.” Optum Ventures is trying to be more “nimble,” Breitenstein says, by setting up the fund as an entity separate from the affiliated company and implementing a simple oversight structure. A two-person committee of UnitedHealth leaders will give every proposed investment a simple thumbs up or thumbs down, Breitenstein says.
It’s getting harder for venture funds to stand out, and the ways in which entrepreneurs can raise capital are evolving—think online equity crowdfunding and digital token sales. No one knows how much those new tools will impact traditional venture firms in the long run, but Breitenstein isn’t worried. Her firm’s connections to Optum and UnitedHealthcare could prove valuable for startups, perhaps helping them win customers, or at least getting feedback on their products from people in the industry.
“Being able to get access to market and product validation I think, particularly at an early stage, is one of the most valuable things an early-stage company can do to mitigate risk,” she says. “I think plugging into the right venture firm that is going to help them get that validation on business model and on product-model fit, is always going to be compelling to smart entrepreneurs.”
Optum Ventures will also help portfolio companies gain access to reams of useful healthcare data from its parent company, she says, which is crucial for A.I. developers to train their algorithms. A.I. technologies “sound sexy, and there sure is some fancy math and fancy tech there, but the reason A.I. struggles is there isn’t enough data to support it,” Breitenstein says.
