Europe’s digital health scene: to stay or go?

Is Europe an attractive region for health startups – or should we all ship off to Silicon Valley?

Frank Boermeester  is a partner at HealthStartup, a European conference on digital health. 

The digital health scene is on a roll, no doubt. But this is mainly a U.S. story.  Have you heard of one European health startup that is really breaking through?  Probably not.  We know of Withings (a maker of personal body monitors) and Scanadu (developing personal diagnostic devices). To call Scanadu European would be a stretch – it has Belgian roots but set up shop in Silicon Valley at its founding.  Will this export of talent and ideas to the U.S. be the fate of Europe’s digital health sector?  Or will European stars like Skype and Spotify show us the way?

In the preparation for our conferences we look for European startups who have the potential to make a significant difference to healthcare.  While we’ve succeeded in putting a total of 22 excellent ventures on stage, it hasn’t all been smooth sailing.  In fact, it’s pretty tough to find promising companies and they all face some distinctly European challenges (in addition to the usual entrepreneurial challenges).

Europe’s fragmented market

The healthcare sector in Europe isn’t a single market.  All of the union’s 27 member states have their own reasonably unique healthcare regulations and financing models.  And we all speak different languages.  This makes it really tough for health startups to scale efficiently.  Take our home base Belgium as an example.  If a startup here wants to succeed in selling a personal health record system to Flemish consumers, then in addition to the actual development work it will need to negotiate various forms of partnership with doctors, providers of existing medical record systems, insurance funds, preventative care agencies and so on –an enormous task, that may well dwarf the development costs of the actual product.

But say you succeed and gain some traction in the Flemish market, what then? You could look toward the other Belgian region, Wallonia (where they speak French), or our neighboring country the Netherlands where they at least speak the same language.  But in both cases you can basically start from scratch, customizing the product to local regulations, norms and language, and embarking on another round of lobbying among local stakeholders.  In other words, it is difficult to scale in Europe, which is so important to leveraging digital innovation and attracting decent funding.  This obviously applies to companies selling to institutions and businesses but it also applies to B2C companies.  Building a strong consumer brand in Europe is tough, requiring a lot more customization in product, communication and distribution.

Not enough entrepreneurs

Health startups are still startups–they are in need of entrepreneurs.  In Europe we don’t have enough entrepreneurs.  Speaking to investors or accelerators, you’ll hear that statement as a common refrain (along with, ‘we don’t have enough successful entrepreneurs’).  The statistics confirm the sentiment.  According to the Global Entrepreneurship Monitor (an annual worldwide study of entrepreneurial attitudes and activity), the U.S. consistently outperforms Europe in early stage entrepreneurship.  To illustrate, the study’s central measure is the Early Stage Entrepreneurial Activity (TEA) rate, which consists of the percentage of individuals aged 18 – 64 years in an economy who are in the process of starting or are already running new businesses.  In 2012, the U.S. tops the list of innovation-driven economies with 13%; the European Union average is 8%, and big economies like Germany and France manage a paltry 5%. If policymakers want to stimulate more health-related entrepreneurship then they shouldn’t necessarily dwell on healthcare–they should look at entrepreneurship generally and try to solve that problem, first, as a matter of course.

Lack of investment capital

According to the European Private Equity and Venture Capital Association, Europe’s venture capital sector has returned only 0.7% annually on average over five years, and lost 1.9% annually over 10 years.  In the U.S., VCs returned 49% over 5 years and 8.4% over 10 years.  Commentators attribute these ills to a range of causes, from the lack of a decent ecosystem of VCs, lawyers, entrepreneurs and potential acquirers in a single cluster, Silicon Valley style, to the ‘timid’ investing approach supposedly common among European VCs.  Be that as it may, we don’t think seed or early-stage funding is a key obstacle in Europe.  If you have a decent team and interesting IP or a prototype, then money is available from angel investors, VCs or one of many government-linked initiatives.  And, once you’re established yourself, you’ll gain access to plenty of government-backed support schemes to help fund your R&D.  For bolder moves, it probably makes sense to look west, but good entrepreneurs do find money in Europe.

The commercial stain

In Europe, there are widespread beliefs that everybody has a right to free healthcare, that insurance (and government) should simply pay up and not sully itself with risk-profiling and cost-benefit analysis, that doctors and hospitals shouldn’t advertise or promote their services, that one shouldn’t ‘shop around’ for healthcare, and that doctors, specialists and hospitals shouldn’t be publicly evaluated or rated by ‘consumers’ or consumer movements.  Leaving aside moral judgement, these beliefs and attitudes do make many of the new services gaining traction in the U.S. hard to implement in Europe.  The promise of digital health technologies lies in a more transparent and efficient healthcare market where consumers and patients play a more responsible and engaged role.  Ideologically, that’s a tall order, in Europe.

So much for the European challenges, but here’s why companies should invest in Europe.

We’re the biggest

Let’s start with the obvious: with a GDP of €12.629 trillion (U.S. $17.578 trillion in 2011), the European Union’s economy is the biggest in the world. So, on that basis alone, if you have global ambitions, you can’t afford not to be in Europe.  And, if you crack Europe, fragmented market and all, then the rest of the world should be a breeze.

From a budget perspective, we’re crying out for healthcare innovation

Europe needs healthcare innovators.  Along with the American healthcare system, Europe’s healthcare system is financially unsustainable.  Compared to the U.S. (where healthcare spending is a mindboggling 17% of GDP) most European countries deliver better healthcare at half the cost, so we’re doing something right.  Europe’s problem, however, is that its population is aging fast, which will drive up costs and reduce the already limited supply of healthcare workers.  Technology is needed, and fast, to bring healthcare costs down to a sustainable level, and to simultaneously continue to improve the quality and effectiveness of healthcare.  Thanks to the advances in technology, especially in sensors, mobile and data management, we now have a real chance of doing exactly that.

Technology entrepreneurship is booming

Silicon Valley was – and still is – the undisputed capital of tech entrepreneurship, but in recent years Europe has caught up nicely.  Europe’s expanding list of tech clusters – London, Berlin, Istanbul, Paris, Tel Aviv, Moscow, Stockholm, Barcelona, Helsinki and Amsterdam – are spawning an increasing number of global successes such as Spotify, CloudSound, Rovio and Vente-Privee (and don’t forget Skype).  Simply put, there is lots of talent and money flowing into the sector. The digital health scene will benefit from the updraft.

A robust and expanding digital health ecosystem

Europe already benefits from well-established technology and healthcare ecosystems.  The region hosts some of the largest pharmaceutical and medical devices companies, it has many top universities with increasingly dynamic tech-transfer divisions, and local venture capitalists have long focused on biotech and medical devices.  While much of the existing ecosystem has tended to ignore healthcare IT and even looked with disdain at the ‘dotcom party’, the success of American web-based startups and their implications for the healthcare system has become difficult to ignore.  Many of Europe’s larger VCs and corporate venturing divisions are taking the potential of web and mobile technologies seriously.  As such, they’ve also begun to play an important role in supporting or even helping set up the numerous conferences, accelerators and incubators focused on digital health  – including our own conference HealthStartup.

Most recently, governments have taken note.  Most have initiatives in place to support healthcare innovation (e.g. FlandersCare in Belgium) and some have announced forward looking digital agendas (e.g. at our last London conference a NHS representative emphasised the organisation’s commitment to open data as the means to stimulate innovation, he claimed that 80% of all prescribing data had already been released and that by 2015 all patients would have access to their GP’s medical record).  And Commissioner Neelie Kroes of the European Union appears to be on an absolute mission to boost tech entrepreneurship in Europe.

Regulatory benefits

If you’re developing medical products subject to regulation then Europe may have an edge over the U.S., at least from a development cost perspective.   In recent years the regulatory environment in the U.S. has become more stringent with an increasing number of medical devices companies seeking European regulatory approval first.  Once a company has obtained its CE mark (which certifies that the product is safe, but not necessarily effective) it can, in principle, begin commercializing its product anywhere in EU while simultaneously gathering data and conducting the necessary clinical efficacy trials. In the U.S. products typically don’t receive FDA approval before successful efficacy trials, which lengthens the development process.

These are some of the important reasons why it makes sense to start a digital health company in Europe – and to stay put too.