Digital Health 2.0? The Next Generation Of Startup Business Models

At Tau Ventures, these are three principles we continue holding as generally true:

i) In healthcare typical sales cycle to get a true recurring contract are 9-18 months

ii) Once you get a contract it’s hard to displace you i.e. there is inertia

ii) Markets are huge and large enough for multiple winners, go to market are the big challenge

The time-tested business model for digital health startups has been around the 4Ps i.e., Patients, Providers, Payors, Pharma. But as digital health is maturing as an industry we are seeing increasingly traditional business models evolve and new ones becoming viable.

1) Patients — One major trend is out of pocket expenses are increasing. In other words, business models built on Patients are becoming more prevalent, case in point the boom in physician-driven ecommerce or concierge medicine.

2) Providers — Another change we have been seeing is that Providers are increasingly becoming more structured to work with digital innovation. Funding is one data point. The covid crisis since 2020 has almost doubled the amount of funding in healthcare, but even excluding that we can see the organic trend:

3) Payors — Major payors all have accelerators and venture arms at this point, the former to work with very early startups, the latter to invest especially in series B and beyond. What we have noticed at Tau is an increasing willingness of smaller payors to innovate, especially if they are integrated systems (provider + payor) i.e., inherently more aligned incentives. Which is how you get headlines like “Geisinger, UPMC among health systems fast-tracking tech, telehealth projects for COVID-19” and “Volatility Drives Payer Technological Innovation, Partnerships.”

4) Pharma — We very much subscribe to the view that the model of 10 years and $1B developing a blockbuster drug, focused on rare diseases, is unsustainable. Indeed, a whole generation of companies are getting created to accelerate the drug development process, especially leveraging AI. At the same time we see a movement from Pharma to be in closer touch with Patients; the graph below provides a data point on their increased openness to work with startups.

5) Other Business Models — Another favorite of startups for a long time is self-insured employers. Our view is there is a much smaller finite number of customers there so the channel is currently saturated. What we have been noticing increasingly and encourage also is companies with a foreign go-to-market i.e., test the product in another market. The US is essentially a magnitude bigger than other developed countries given its population and complexity. So it often makes sense to start off in certain places in Europe or Asia, where working with one or a handful of providers and payors means access to a disproportionate part of the market. Finally, we see enough density where partnering with other startups is now a feasible go to market

Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.