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November 9, 2015

Why it's hard for health care startups to break into the industry

Daily Briefing

Many investors are making big bets on technology-focused health care startups, but startup culture is not always a great fit for the highly regulated health care industry, where hype can only get you so far.

Venture capitalists invested $9.4 billion in health care startups in 2014, a 34% increase from the year before. And companies like Google and Apple are also making big investments in health care, although sometimes outside of public view.

But the playbook that works for startups in consumer markets can cause problems in health care. Consider medical testing startup Theranos, which raised billions on the expectation that its blood-testing technology was a game-changer. But after a Wall Street Journal article on the company put its claims under scrutiny, the company—and its high-profile CEO—have been on the defensive.

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The right mindset

Bryan Roberts, a partner at the venture capital firm Venrock who has invested in companies like Athenahealth, says Theranos is a reminder that in health care it is best to let the data do the talking. "Especially in biotech and diagnostics companies, you have to follow the scientific axiom of trust the data and nothing else," he explains.

"As an investor," he says, "I want to read things that show that a new product to be a substantial improvement over what is already happening."

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And while innovation is good, Roberts says it is important for health care startups to have board members with industry experience who can test a founder's assumptions. "At the end of the day, the company needs to integrate their totally new approach with cleareyed [sic] realism about the industry they're trying to change," he says.

Working with established players

A key challenge many health care startups face is how to coordinate with much larger organizations who may want access to innovative technology. For example, Michael Doherty, head of pharmaceutical regulatory affairs, strategic innovation and policy for Hoffman-La Roche and Genentech, says the pharmaceutical industry is looking for ways to combine technology and pharmacology.

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"Over time, what you'll begin to see is the emergence more of what we would call combination products," he says. "There's a huge interest in the industry in what's called a beyond-the-pill concept, whereby you're trying to find the digital solutions which take the pharmaceutical product to a different level by either compliance, behavioral, or fitness monitoring."

But such products create another set of problems, such as how to gain regulatory approval and who owns patient data associated with "beyond-the-pill" treatments. And the value of that data can be "quite tremendous," says Saeed Azimi, the founder, CEO and president of DynoSense.


Regardless of who owns the data, panelists at a conference recently held by the law firm White & Case say data security is paramount. "Information security and privacy: it's not an overhead expense," explains Steve Hoge, a senior legal director at Medtronic. "It's a marketing expense—because if you have a breach or an inappropriate use of data, you're going to spend a lot of money trying to rehabilitate your brand."

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These types of complex issues used to scare away many larger investors, Roberts says. But the market is now too big to ignore. Changing payment models and health care reform are accelerating the pace of innovation in the industry and "more technology entrepreneurs and investors are going into the space," he says.

But with so much money flowing into the industry, Roberts notes it is important to get outside the "echo chamber" and do your own research. "When people hear things 10 times they assume them to be true," he warns (Benner, "Bits," New York Times, 11/5; Parker, Silicon Valley Business Journal, 10/6).

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