As 2015 winds down, it’s a good time to look into the crystal ball for one of the toughest industries to predict: healthcare.
We recently picked the brain of David Eichler, a managing partner with New York-based venture capital firm Psilos Group. Eichler (pictured) focuses on investments in digital health and medical device companies, and he currently is the board chair of Gamma Medica and Caregiver Services.
Among the themes that emerged in our e-mail exchange: more health IT companies are starting to have positive, measurable impact on healthcare quality; investors are returning to medtech after a post-recession drop-off; and it’s often harder and takes longer to build a “unicorn” startup in digital health than some other sectors, Eichler says.
The following is a transcript of our conversation, edited for style and length.
Xconomy: What’s your boldest prediction for healthcare investments in 2016?
David Eichler: Digital health will emerge as the top performer across the venture investment landscape. Today, healthcare companies account for only around 7 percent of the total number of private companies valued at $1 billion and greater. Most of these are in the biotechnology or molecular diagnostics sectors. Next year, health IT companies will catch up and account for nearly a quarter of the newly minted “unicorns” in 2016.
In the past five years, more than $13 billion has been invested in venture-stage digital health companies (according to the most recent data from Rock Health); 247 companies raised over $4 billion just this year alone. Most of this activity has been in seed or Series A rounds. However, the best of these new digital health companies are starting to emerge as legitimate growth equity opportunities pursuing very large addressable markets.
Healthcare has stubbornly remained decades behind other industries when it comes to the adoption of modern information technologies. This new wave of innovation is finally driving large-scale transformation of the $3 trillion healthcare economy. The current generation of digital health companies leading this disruption will raise the capital necessary to stay independent and privately held for longer in pursuit of valuations well above the magic $1 billion threshold.
X: Fewer dollars were funneled into medical devices and diagnostics in the years following the recession. Do you see that starting to change, and why?
DE: Yes, I do see a change happening now. Venture capital activity in the medical device and equipment sector fell nearly 40 percent from its peak in 2008. The recession certainly played a role generally, but cost and reimbursement pressure on hospitals—and the uncertainty created by Obamacare—contributed to the lack of investment in medtech companies. The pendulum has begun to swing back a bit over the past couple of years.
Today we are seeing more activity and larger financing rounds being done in this sector. But this renewed interest is aimed at medtech opportunities that are characterized by commercial and execution risk, as opposed to the achievement of key development, regulatory, and reimbursement milestones. And from a valuation standpoint, it’s definitely been a buyer’s market for these companies that still need growth capital, but have not yet reached a stage where they can go public or strategic acquirers start to emerge.
Also, today’s medtech entrepreneurs by and large are focused on game-changing technologies that deliver real value to
