Q&A with Abhas Gupta of Mohr Davidow Ventures
Healthcare costs are soaring – the US spent ~$2.7 trillion on healthcare in 2011, and it costs over $1 billion to bring a novel drug to market. Yet digital health companies can innovate faster and demonstrate their proof of concept with comparatively little money, which is creating new and exciting opportunities for healthcare entrepreneurs.
I recently sat down with Abhas Gupta, MD a partner at Mohr Davidow Ventures to discuss the opportunity for digital health, changes in medicine, and his advice for entrepreneurs. (Mohr Davidow Ventures is a Limited Partner in the Rock Health Fund).
Here are a few highlights, and the full interview is after the jump:
- Digital health companies – in the eyes of a venture capital investor, are characterized as software-driven, capital-efficient, quick to fail, and able to scale. Investors look for passionate, strategic thinkers when evaluating potential investments.
- The single biggest change in the US healthcare market is the shift in business models from a fee-for-service system to an at-risk system. Simply put, doctors are paid today for the number of lab tests or procedures they perform irrespective of patient need or outcomes. In the future, physicians and healthcare systems will be accountable for managing the health of patients with a fixed sum of money (capitation); therefore, healthcare organizations will bear the financial risk. The most attractive digital health opportunity today is to enable physicians and case managers to identify, track, and manage their potential high-cost patients and prioritize cost-effective interventions thus reducing the level of financial risk.
- Gupta’s advice for first time entrepreneurs is to find a niche where you can directly take on soaring health care costs, familiarize yourself with venture math (the mentality of a VC investor) before pitching, and think about the right investor fit for your venture when you raise money.
What triggered your interest in digital health?
Abhas Gupta, MD: After my undergraduate training in computer science and computational biology, I spent a few years in biotech and then pursued an MD/PhD program. I later left academia for a boutique healthcare consulting firm and eventually came out West looking to join a therapeutics-focused startup. Very serendipitously, I got in touch with MDV, which was trying to better understand the digital health landscape. Through my research, I quickly realized that digital health could be completely game-changing.
Omada Health is a great example: they developed an online diabetes prevention program with $800k of seed funding, and the outcomes they have achieved through their online-based intervention are equivalent to Astellas’ obesity drug, Belviq, which took some $600M to develop. With digital health companies, you know within the first millions of funding if this is going to work, rather than spending hundreds of millions of dollars going through phase I and II [of clinical development] only to find a drug that fails in phase III. The difference is dramatic when you look at time to market, regulatory risk and product safety risk for digital health compared to traditional healthcare product companies.
“With digital health companies, you know within the first millions of funding if this is going to work, rather than spending hundreds of millions…[on] a drug that fails in phase III…”
How do you compare your various experiences in medical school, strategy consulting, and venture capital?
I view medical school as the content acquisition period. Med school is like a fire hose, where your goal is to remember an immense amount of clinical information and be able to retrieve it on demand in the future. On a personal level, I began to realize that medicine was not a good fit. I enjoy thinking about multidisciplinary problems, like applying techniques from different fields to solve a challenge, and to me, medicine was very antithetical to that type of thinking. Medicine is about honing a skill to the point where you don’t have to think and where you respond the same way every single time you are presented with that case. Once I made that realization, I knew it was time for me to move on to something else.
Then it was on to consulting, which although you’re a step removed from the companies you serve, consulting can be very valuable to see what’s happening at a bird’s eye view across companies and to understand fundamentals of business. One of the best things you learn in consulting is how to structure a problem and solve it in a very logical manner. That’s a skill people may learn over decades in their careers, but in consulting, you can get pretty good at it in a matter of years.
Venture investing, however, is incredible. I love what I do–I get to combine the knowledge base I gained in medical school and the approach to thinking about problems and opportunities and apply all that to seek out opportunities and support companies as they scale from 2 to 2000 people.
How do you define digital health? What characterizes a company or product as digital health?
There are a lot of different definitions out there. What’s most salient for us at MDV is what it means from a venture perspective. The profile of a company we consider as digital health is fundamentally software driven, capital efficient, quick to fail (meaning they are not going to take $30M before we realize the FDA won’t approve the product), and able to scale quickly.
The boundaries between different terms become artificial at some point. There is a lot of overlap between digital health and health IT. Personally, I encourage the use of digital health because it brings some of the energy and excitement that exists in a nascent field that may not exist in traditional health IT.
What are the biggest trends that are shaping digital health today? How will digital health be different in 3-5 years?
Without a doubt, the biggest trend in healthcare is the shift from fee-for-service to at-risk organizations. We are talking about fundamentally altering the business model of a $3 trillion industry. This transformation, which will happen in the next 5-10 years, will create massive opportunities for entrepreneurs.
All of the software technology that we think about today in healthcare is not designed for an at-risk world; it’s designed for a fee-for-service world. A lot of the organizations that are taking on this risk are not using technology in a way that helps them be better and more profitable businesses, but rather, they are shifting to the at-risk model as more of an accounting measure.
At MDV, we want to invest in organizations that embrance this fundamental trend: we want to invest in organizations that are willing to take on risk and the technologies that help them do that. That can mean better population management tools and better risk characterization tools.
More generally, how will the routine practice of medicine be different in 3-5 years?
Unlike a fee-for-service world, the emphasis in an at-risk world shifts from specialist care and end of life care to primary care. More importantly, at the primary care level, the key stakeholder is no longer the physician but really the case manager. The way that healthcare is managed is not on an individual level but on a population level. Those are pretty dramatic changes in the logistics of medicine and better technologies are needed to facilitate that change.
I don’t anticipate major changes in the clinical guidelines or use of prescription medications, but rather, I expect the practice of medicine to shift toward addressing and monitoring higher cost individuals. Physicians may adjust the level of attention they pay to specific, high-cost conditions.
Another element of this is that students graduating from medical school with significant debt are drawn toward specialties where they think they can earn double what a primary care physician (PCP) makes. There is already an oversaturation of specialists and under-representations of PCPs. These innovative technologies are designed to further reduce demand for specialists which is going to exacerbate the specialist problem. Moreover, I think savvy PCPs who get the importance of population health are likely to garner salaries that are three to five-fold what they are today.
What would you consider if you were jumping into this field as an entrepreneur?
One school of thought suggests entrepreneurs should pursue problems that they are familiar with. The idea is “look at the world around you, figure out where you see pain, and build a solution for that problem.” That is certainly one way to think about it.
But if I were an entrepreneur today, I would think strategically and ask myself: what is the low hanging fruit? What are the challenges that I can pursue or that not enough people are pursuing so that I’ll have an edge or that there won’t be a lot of competition? Healthcare is absolutely ready for the picking: it’s a completely bloated industry and because significant business model changes are taking place, there are tremendous opportunities. The vast majority of healthcare stakeholders are not clued into these major changes that are taking place, so if I were an entrepreneur, I would look to understand the trends and jump with both feet.
What’s the winning recipe for a digital health company today?
Figure out what the biggest cost issues are – it’s all about costs now. From there, think about what you can do to change those cost areas. Ask yourself, how can I apply technology or service innovation or my unique edge to reducing those costs? Then come up with a scalable way to do that in healthcare – that’s the winning recipe.
You’ve met a lot of tech entrepreneurs. What do you wish first time entrepreneurs knew? What is advice would you offer founders to avoid some common pitfalls?
We have backed plenty of first time entrepreneurs and I think what is consistent across all of them is that they demonstrate good strategic thinking, that they are focused on the issues that are important for the stage of their comapny, that they know this is a game of understanding risks, prioritizing risks, and taking risks off the table, one after another. That sort of thoughtful mentality is a quality present in all of the first time and serial entrepreneurs that we back.
Here are two more pieces of advice:
1. Have a sense of what is the right investor fit for your company. For example, we (MDV) have a $700 million fund. In order for us to return the fund, we have to believe that every company we invest in has the potential for a billion dollar exit. If someone comes to us with company that doesn’t reduce costs or where the market opportunity is $50 million, it’s very hard for us to justify making an investment. As a result, we cannot move forward with an investment and entrepreneurs sometimes get upset about that. Entrepreneurs who understand this venture math, for better or worse, are likely to be more effective in their fundraising.
2. Think about how much money and when you should take on. Growth rates and exit potential are two important factors when considering venture capital versus other funding sources (i.e., debt, growth equity). In addition, knowing the milestones that directly impact your valuation, and when you can achieve them, are also important considerations. Again, going through the exercise of placing yourself in an investors shoes can be very helpful in targeting the right partners for your company.
Abhas Gupta joined Mohr Davidow in 2011 and focuses on digital health, education, and predictive analytics.