February 19, 2019
If 2018 Was the Year of the Entrepreneur, 2019 Will be About Consolidation
Twenty-eighteen was the year audiences watched with bated breath as the Digital Health market continued to inflate quarter after quarter. The year started with Q1 reports at $1.62 billion and topped out at a whopping $8.1 billion. This not only crushed 2017 ($5.7 billion), but also made 2018 the largest year of investment in history (Rock Health). Articles abound teasing the notion of a bubble and if it will or won’t pop, while others wonder if this increase is even a bubble at all or simply the critical mass required to make change.
What’s happening in the digital health sector though is not unique. In fact, it’s tracking very similarly to the global business market as a whole: dollars are up, but deals are down (or stagnant, seeing a negligible increase to 368 from 2017’s 360 (Rock Health)).
As the saying goes, “energy flows where your attention goes,” and it would seem the same is true of investment dollars. It would be fair to say we are living in an entrepreneurs market, but notably, mostly for those entrepreneurs who already have a few years of skin in the game. Investors are investing bigger dollars in lower risk, later stage companies. Mega deals, those valued at $100 million or more, were also up in 2018.
And then of course there are the unicorns, an elite class that startup dreams are made of. Fifty three were crowned in 2018 (CB Insights MoneyTree) and within the Digital Health sector include the likes of Oscar Health ($1.3 billion USD), that acts more like a consumer product for a tech savvy generation than a traditional insurance company; Flatiron ($1.9 billion USD), who was acquired by Roche last February; and Tempus ($2 billion USD), whose co-founder is of Groupon fame and known for his generous donations to cancer research started the company to help doctors make more informed treatment decisions. Underscoring the global trend, these three unicorns share a certain maturity making them prime for later stage venture funding. According to CB Insights, the odds of hitting unicorn status are less than 1%.
Is this a bubble? It depends on who you ask. The increase in funding is not the only indicator of a trend, but rather should include a look at where the money is going. That the market is beginning to eat up money, talent, and even whole companies shows unprecedented consolidation. This compounded by tech giants like Apple and Amazon launching Digital Health divisions of their own, only made possible by the groundwork laid by entrepreneurs who came before them, shows that the needle may actually start to move. The size and scale of what can be built in the next 18 months will be telling. With a recession penciled in for 2020, will consolidation be enough to secure the future of health care?
Bayer G4A stands firmly behind the numbers. “The overarching trend in Digital Health investment is paving the road for rapid developments in various technologies” says Dr. Zsuszanna Varga, Head of Digital Health Partnerships for Bayer G4A. “These have, in turn, created massive potential for the reinvention of the Life Science industry moving forward. AI & data science will drastically mature to be at the forefront for increasing efficiency and effectiveness across the value chain. And value based healthcare will gain traction driven by these data science and platform advancements. It’s such an exciting time.” And Dr. Varga would know. Seven of the 50 startups who won a prestigious spot in G4A’s 2018 cohort focused on these very trends: AI used for drug discovery (CYCLICA), patient identification (AGAMON) and monitoring (medocity), behavioral modification (SIDEKICK HEALTH), cardiovascular-related condition detection (KinAptic), enhanced pulmonology hypertension management (medopad), and women’s health (Quid).
In line with the changing approach to investing and engagement telescoped by 2018 activity, G4A is narrowing their aperture in 2019 to focus on fewer partnership opportunities with higher investment dollars attached. More on this to come in February.
Global Head, G4A Digital Health