From doctor to investor: What digital health VCs are most excited about

We caught up with healthcare aficianado-turned-investor Dr. Michael Matly to get his take on what’s missing in healthcare, why investors are excited about digital health, and what exactly they’re looking for in companies to invest in.

What was the most shocking thing going from working at a hospital to working in VC?

I wouldn’t necessarily use the word “shocking” but different.  First, the pace in venture is much faster than healthcare.  Healthcare is slow. This is probably a result of years of training and unfortunately low accountability.  Healthcare has not had to operate much like a “business” until more recently with the mounting pressures on reimbursement, higher costs, and an increasingly unhealthy population.  Investing, on the other hand, is quite different.  We have immediate accountability every day, to portfolio companies and to our investors.  We invest on behalf of pension funds, university endowments, family offices, etc., and with that, there is a responsibility to invest diligently and eventually exit your investment.  What makes health investing most exciting is that while making returns for your investors, you are fuelling transformational solutions and services that provide better care and access to society.  Nothing wrong with doing good and making money at the same time!

What are you most excited about in digital health?

Digital health may not have been possible even 5-7 years ago. Since then we’ve grown into a socially and digitally connected society, comfortable sharing photos, data, and communicating through our mobile devices.  Technology has also advanced to a point that allows for amazing diagnostic tools, data processing and algorithms that provide transparency solutions, and a dramatically more empowered patient (and consumer) that is smarter about his/her choices and also more responsible financially for their health.

We are particularly focused on solutions that empower the consumerization of health and wellness as well as solutions that bring down costs to our system — such as transformative diagnostic/therapeutic solutions or finance/payments innovations.  Our last three investments were a mineral cosmetics company that has the highest SPF protection on the market and is sold through physician channels (also Cameron Diaz uses it), a differentiated dialysis chain that is focused on innovative treatments including home dialysis, and the leading software solution in the health, wellness, and beauty sector.

Frankly speaking, we use the word “health” in our investment thesis, not “healthcare”.  We view health much more broadly than traditional life sciences investments —which is not where we spend our time.   We are excited about wellness, aesthetics, lifestyle, technology — all areas that have broadened beyond the traditional definition of healthcare.  Digital health is one pillar of that focus.

In digital health startups, we look for companies that have a robust, sustainable, and scalable business model that is beyond advertising revenue.  We are growth, and commercial investors and the digital health market is maturing with companies reaching significant scale — our pipeline is more robust than it has ever been!

What sorts of metrics do you look for in a company in order to make an investment?

As I mentioned, we are later stage investors.  In health, this has a lot of definitions.  For some, late stage could be a Phase IIb trial. We define late stage as commercial growth with commercial proof of concept.  These are companies that are often making $5-$50M a year and growing 50% y/y.   So, in digital health, we ask: are there customers paying for the solution?  Is the unit economics understood?  Our capital is often used to grow the sales infrastructure, expand to new product lines, or fund an acquisition for growth.  We also like to understand the 3-5 year path to reach commercial goals.  How do you get from $10-$100M in revenue?

You recently led an investment in MindBody. How does this fall into digital health? Why are you so excited about it?

We are extremely excited about MINDBODY.   Our investment process always begins with the identification of key trends, and then we search out the category leaders.  In this case, we had identified two important trends.  First, there is an increased use in what we call alternative and complementary medicine (think yoga, fitness, meditation, and acupuncture). Medicare now covers yoga in certain circumstances.  Couple that with increased technology allowing increased access to these services and you start to see an exciting new market opportunity.

MINDBODY is the market leader addressing these trends.  Their software solution provides the backbone for health, wellness, and now—  beauty providers — to run their business — in everything from account management, scheduling, retail point of sales, merchant account processing, marketing tools, etc.  They now have 35,000 business customers  in 100 countries using the MINDBODY platform and are the largest player in this sector.  What’s exciting is that they are becoming a powerful platform solution for the corporate wellness market as well as linking to reimbursement plans.  In addition, the consumer facing app that you can download called MINDBODY Connect has provided a consumer facing solution to book, pay, and now review your trainer or practitioner which will continue to consumerize this high-growth market.  We like this because the reviews are from paying customers — which we know because MINDBODY is also the payment platform for the consumer and business.

We are excited about the prospects of the business and its exemplification of digital health, even among the investors.  We were invited to participate in the syndicate for our health and consumer health experience, joining current technology-focused investors such as Bessemer and IVP.  I see these types of diverse syndicates only continuing.

Dr. Michael Matly is a Principal at Montreux Equity Partners and formerly led led Business Development and New Ventures at the Mayo Clinic Center for Innovation.