Digital health's responsibility to patients

And why clinical leadership is critical to unlocking success...

TL;DR…

Building a health tech / digital health / healthcare services start-up differs from building in any other industry and comes with high stakes 🃏 and lives on the line. Investors play an essential role in creating incentives to drive management, and the right clinical leaders are critical to orienting to the correct North Star ⭐️.

Intro…

It seems like you can’t go one day without seeing ‘digital health’ (or its close cousin ‘health tech’) pop up at least once as you scroll through Twitter, peruse your LinkedIn feed, or open one of the 15 healthcare newsletters 📰 you subscribe to (h/t to the real ones and some of our favorites, Nikhil Krishnan, Kevin O’Leary, and Blake Madden). We all talk about it a lot and probably have a decent grasp of what it means; what seems to be often lost in the discourse (particularly regarding the funding of early-stage digital health companies and their attempts to grow) is just what exactly is at stake. After all, unlike other industries, the good (or service) being created and delivered here is the health and well-being of patients 🏥, and the risk of a poorly designed product or company failure is not just a dissatisfied customer or an inconvenienced end-user; instead, it is potentially illness and even loss of life. These are conversations we have frequently with folks building and investing in digital health, and here we explore some of the idiosyncrasies of investing in healthcare businesses and suggest mechanisms to ensure the well-being of patients isn’t lost in the quest for growth 🚀.

Investors matter…

A key partner to those early-stage digital health companies is the investor. Building a healthcare company (particularly a healthcare services company) is expensive 💰 (although we haven’t seen data to confirm, we hypothesize that healthcare is among the most expensive industries to start a company in). Compliance costs are high in the strictly regulated world of patient care, as are security costs to safeguard the intimate content with which patients entrust their care providers 🤐. And human capital is also expensive - the team a healthcare services company employs to deliver care (and, when done right, to also inform / build the care model) is made up of highly trained, highly skilled, and highly desired clinicians 👩🏽‍⚕️ who demand (and deserve) high compensation. These factors, taken together, mean it takes significant capital investments to scale a healthcare services company. Venture capital (along with growth equity and private equity) can play a critical role in funding these expensive undertakings. And early investor capital can meaningfully change the trajectory of a healthcare start-up, enabling it to quickly expand its clinical team, invest in its tech backbone, and weather the often extended sales cycles (if target customers include hospital systems or payors) teams face in this world.

And incentives matter even more…

However, healthcare is different (yes, we know everyone says that about their industry, sector, and specialty). But it truly is different, particularly when considering the knock-on effects of taking on significant outside funding from a misaligned investor. Remember - in this case, the product being built and delivered is health care, and the customers are patients. The potential for harm in instances where there is misalignment between management (and investors, by proxy) and patients is high - it could quite literally be deadly. And this can manifest during two stages of a company’s lifecycle: both in settings of hypergrowth 📈 (when scaling might be prioritized at the cost of clinical rigor) and during times of downsizing 📉 (when quick decisions made to prolong runway could compromise the standard of care in adequately offboarding and discharging patients). We’ve seen clear examples of both in recent history (misaligned incentives in hypergrowth - see Cerebral and Ahead, questionable practices in shutting down services - see Elemy).

We also want to call out that it’s not just healthcare services companies that directly care for patients playing a high-stakes game. Evan SaaS companies 🖥 in healthcare have the potential to negatively impact patients if growth is irresponsible or scalebacks are hasty. When a purpose-built healthcare service has to stop providing the product a digital (or even legacy) healthcare company has relied upon for critical functions (due to not meeting a funding milestone or needing to pivot the business to preserve runway), the customer company’s ability to provide services (in many cases, care) to patients may be severely compromised, directly harming patients.

If there’s one thing we both know by virtue of being psychiatrists, it’s that incentives matter and truly drive behavior. It’s disheartening to see some investors take a position of asymmetric responsibility when backing healthcare companies. They might celebrate 🥳 when a portco achieves a financial milestone for them and their LPs (unicorn status!, acquisition by a strategic!, IPO!) - it creates a halo for the entire portfolio. But they (investors) may be suspiciously quiet 🤫 when a portco is accused of serious wrongdoing by all the wrong three-letter agencies or has to suddenly cease providing care to patients depending on it (‘portco ‘x’ represents only one of a handful of our investments made to date, and we’re just investors, nothing more and nothing less’). The bottom line is that investors can play an important role in the outcomes of a business, and if successes are to be celebrated, then failures should be owned and autopsied too.

How to unlock success and build responsibly?

So what does this all mean? The good news is that not all (or even most) investors fall into the above categories. Listen - we both are building at companies backed by thoughtful and healthcare-smart investors who understand the stakes when delivering care to patients and the responsibility all parties involved hold 😅. And we firmly believe that many investors who back companies in healthcare fall into the same camp. The bad news is that even a few ignorant (not even necessarily intentionally ‘bad’) actors (investors) here can cast a shadow on the entire industry and, more importantly, lead to harming patients (which is unacceptable 100% of the time).

How do we mitigate against this?

1. For our clinician readers, take close note: a good amount of this responsibility falls to you 🫡. We need more clinicians to be interested in (and involved in) the building of healthcare (particularly healthcare services) companies. By no fault of their own, non-clinicians don’t always have the perspective necessary to complete a thorough risk / benefit analysis when making fundamental business decisions; we can help complete the picture 🖼 in these cases. It doesn’t mean that our perspective is always the right one; many times, we (as clinicians) utilize relatively algorithmic and risk-averse mental models (in all reality, some level of risk aversion probably makes, on balance, a good clinician). But our perspective does allow the business to adequately weigh the potential impacts a decision may have on patients and clinicians, which is too often glaringly missing when we read about some of the biggest failures of our times.
   
   If and when you decide to make the leap and join a company as a builder, pay close attention 👁 to who the investors are. Ask to speak with them directly as part of the interview process, ask them how they think about weighing growth against clinical rigor for their portfolio companies, and gauge their competence and fluency with healthcare in general. While it’s not always a failsafe, the odds are that a megafund tech manager with a handful of healthcare investments is not going to have the same level of industry-specific sophistication (and understanding of the stake) as a boutique healthcare fund that spends all day breathing healthcare and supporting its portcos.

2. For our builder, operator, and investor readers - know your blind spots, and involve clinicians when completing due diligence on potential investments or from the earliest stages of creating the fundamental business model of your company. When the product being delivered is life or death, it’s important enough that you’ve got to include a clinician as part of the decision-making process. We strongly feel it’s a cost worth incurring that will deliver a positive ROI in the long run. And by having clinicians involved at each step in the process, we can also create the proper checks and balances so that, for example, we reward the ‘right’ types of founders and the ‘right’ types of investors (e.g., those that have taken a truly clinically rigorous approach investing and building). This will help us drive shifts in the industry on a macro level.

Now, operators / builders might ask, ‘how do I choose the right early clinical leader for my health tech / digital health company’? We are here to put what might be a hot take 🔥 stake in the ground around the ideal clinician archetype for an early-stage healthcare company to bring on board. The characteristics to optimize include clinical experience caring for patients (ideally in a relevant specialty) and intellectual flexibility. Often, it would help if you resisted your urge to find the distinguished, grey-haired, ivory tower academic clinician with hundreds of publications to their name. While impressive and helpful in specific contexts, this archetype doesn’t always create the leverage a growing healthcare organization needs to succeed. Instead, find the clinician willing to roll up their sleeves and get their hands all over the clinical model while being a close thought partner to functional colleagues (e.g., product, growth / marketing, ops, legal, etc.) and unlock opportunities for the business.

We can do this, together…

Ultimately, our hope (and vision) is that we, as a healthcare community, can move away from measuring success solely by the size of a company’s last funding round (/ post-money valuation / IPO market cap). Instead, let’s focus on the strength and quality of their clinical outcomes (and ability to keep patients safe) as signals of success. This will require an industry-wide effort and depend on clinicians stepping up to the plate and bringing their expertise to founding teams working hard to solve the many problems our legacy healthcare system has failed to address.

Two Questions:

1. We all know that incentives matter, and so does the lack of disincentives. If investors were held more accountable for patient harm caused by misaligned incentives at healthcare portcos, would we see fewer such failures in the first place?

2. Part of the challenge we find with clinicians stepping up to lead is a need for more understanding of the career path (or that it is even an option). How can we be more thoughtful about undergraduate and graduate medical education to encourage clinicians to think beyond the white coat and the four walls of the hospital or the clinic?

✌🏽 A + A

To read more about our vision for the Stack, check out our intro post here.

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