Other7/30/15

What digital health VCs think of the IPO landscape

Mollie McDowell

Creative Direction

Bessemer Venture Partners has been active in healthcare technology investing for over three decades. They’re also one of the lead investors in the Rock Health Fund and have co-invested with Rock Health. We talked to Vice President Ambar Bhattacharyya about digital health’s evolution over the past 30 years, his thoughts on the IPO landscape and some of his favorite companies in the space.

[Mollie McDowell] Q: Why do you think so many IPOs are happening now? What does this mean for digital health funding?
[Ambar Bhattacharyya] A: The IPO window has opened on the biotech side the last 18 months and on the digital health side the last 6 months. In digital health, if you look at Evolent, Fitbit, and TelaDoc, these companies each trade above $1B market cap and have matured to the point of sustainability in public markets. Fitbit is already a billion dollar revenue company; Evolent Health has posted amazing top line growth in a transformative space; and Mindbody, a Bessemer portfolio company that went public this past month, is the clear market leader for health and wellness studios.  This creates very positive signalling for digital health. If the market continues to reward Veeva, Benefitfocus, and this past IPO class well, I’d expect a whole host of companies to file and go public in 2016 and 2017. I’d be shocked if they didn’t.

Q: What are your thoughts on Castlight’s IPO?
A: It depends, as I tend to view these investments over a longer investment horizon than most.  The initial IPO spike was obviously eye-popping, but since then, the stock has traded down. But looking at the company from the time it was founded, it’s a tremendous growth story of a digital health company that is still trading in the $750M-$1B range. The fundamentals have improved, gross margins are above 50%, and they’ve stemmed their losses and added great people to their sales team, so the best may be ahead of them.  And notwithstanding its recent trading history, it hasn’t had a negative impact on the digital health IPOs year to date.

Q: Bessemer has been in digital health for quite a while. What has surprised you in the past four to five years?
A: One of the trends we identified four years ago was the consumerism of healthcare. Instead of calling them patients, we call them consumers. That trend has come and gone in different ways. Initially, there was a rush for B2C models, like Better or Doctor on Demand, but many of these companies have ended up also focusing on the B2B2C, where it has been easier to aggregate consumer demand.  What I find interesting is the continued resilience of the pure B2C approach, particularly in attracting talent and financing. When I look at several companies that recently been funded, there is a renewed focus on the “2C” to make the product more consumer-friendly. We’re starting to see more “Uber for healthcares,” like Honor, PillPack, or Pager. I am encouraged by all of these models and their recent rounds; what remains to be seen is if they can continue to find attractive channels for direct to consumer patient acquisition that can scale profitably in the long-term without also incorporating a B2B2C component.

Q: Is Bessemer still focused on the consumerization of healthcare?
A: Absolutely.  In general, our investment theses, which we call “roadmaps,” allow us to be particularly proactive about a space. But we certainly maintain a balance of being thematic and opportunistic. Our focus is two-fold. First, we follow the patient along the value chain and see what processes are broken. We end up seeing a lot of fragmentation on the provider side of healthcare and opportunities at each point along the way. Second, we follow the money to see where there’s opportunity. Periodically, we talk to the C-level at hospitals, payers, and employers to see what their concerns are, and we try to track that. This allows us to be one step ahead of where the pitch is, identifying interesting companies or entrepreneurs wanting to solve that problem— and immediately have a customer introduction.

Q: What exactly are you looking for when selecting companies?
A: There’s a standard pattern that we go through. We think a lot about the team, the market, the value prop, the competitive landscape, and unit economics. But more than any of those things, the earlier stage you go— especially in markets that don’t exist today— you have to take the playbook, throw it out the window, and put on your entrepreneur hat to see what the world would look like if this company was successful and if this team can execute. Then it’s a risk-reward analysis with the opportunity coupled with the quality of the entrepreneur and the timing of the market. Over time, you hope to find a mutual fit with entrepreneurs and a deal that works for everyone.

Q: What company outside of your portfolio are you most excited about right now?
A: Collective Health. Trying to reimagine an industry that hasn’t been innovated in the last 40 years is fascinating. How would you build a Third Party Administrator from scratch, how can you make it more tech-enabled, and can you improve the gross margins?  They’ve taken almost a commodity-like service and turned it into an asset for the HR department within an employer. Today there’s no way for an employer to identify your employees to send targeted outreach or manage their employees population health in a proactive way, which Collective Health allows them to do.  Existing TPAs will have to somehow keep up and respond with technology like this. It’ll take TPAs a really long time to do it— if at all— which gives Collective Health a long window.

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