Duane Gafoor in Personal Finance and Investing, Entrepreneurs, Business Managing Director or Growth and Private Equity • Bell Road Capital Feb 6, 2020 · 2 min read · +200

Investors Beware: Health-Tech Start-Ups Not Always What They Seem To Be

Investors Beware: Health-Tech Start-Ups Not Always What They Seem To Be

While venture firms still find the $3.5 billion healthcare industry quite lucrative, they are becoming aware that health-tech start-ups can not be run the same as other tech newbie companies can.


Health-tech companies are slowly figuring out that their business model does not work well under the “shake up the industry” approach.


Why?


Healthcare requires patience and trust.


Trust between whom?


Trust between practitioners, patients, other healthcare companies, and yes, investors as well.


This trust, however, has been diminishing as of late as many health-tech start-ups have tried to employ the same ‘status-quo busting’, ‘growth-focused’ approach that has been used with a great deal of success by many of the other tech businesses in Silicon Valley.


Along with this diminishing trust came diminishing investment dollars.


More Deals, Fewer Dollars In 2019


In 2018, healthcare startups had a record-breaking year when it came to raising investment dollars. Last year, however, things slowed down a bit.


Sure, investors were still pumping money into new health-tech companies due to the industry’s stellar performance in 2018 but the overall investment dollars went down in 2019.


This monetary pullback could be largely due to the negative feedback health-tech companies have been receiving in the news lately.


It seems that to satisfy growth expectations, some health-tech companies decided that some corners had to be cut.


However, when it comes to the public’s health nothing good can come from taking shortcuts.


Negative Headlines


Three health-tech companies, in particular, Theranos, Nurx, and uBiome made headlines between 2017 & 2019 for using illegal and unconventional methods to increase growth.


Nurx


This birth control medication company was caught storing their product in closets using shoe organizers to arrange their pills.


uBiome


The creators of the microbiome test, SmartGut, got raided by the FBI for its unscrupulous billing practices.


Theranos


The company’s former CEO, Elizabeth Holmes, was indicted back in 2017 by the Securities and Exchange Commission for fraud in regards to Theranos’ devices.


She will stand trial for fraud in July 2020.


These three companies all had two things in common, they raised a lot of capital from private investment firms and all three of them decided to manipulate growth measurements to impress private investors and Wall Street respectively to get more investment dollars in the future.


Growth or Lives


As far as investors are concerned, they have to include ethics into their decisions when investing in health-tech businesses.


Whether or not the company will make them money in the short-term is irrelevant if the company can not back its claims and increase the possibilities of human health in the long-run.


This is not to say that health-tech companies don’t offer opportunities for investors, it just means that investors need to be more cautious when deciding which healthcare companies will use their capital injection with the customer in mind.


There is plenty of upcoming AI-enhanced healthcare technology and healthcare software that have the potential to assist in getting the right medicine to the right customer, at the right time.


However, health-tech promises have to be backed by evidence and not just fake numbers or unethical cost-cutting techniques that deliver growth hacks that look good on the books but do nothing for human lives.


In this regard, there are things investors can look for to make sure they are investing in health-tech start-ups that have a strong desire to make a difference within the industry.


Things To Look For


The best thing an investor can do is to look for health-tech companies that are willing to test their products thoroughly and gather enough evidence to back their claims before they ever hit the market.


Of course, this will require more upfront investment to do so but it builds trust and actual results which will increase the likelihood of receiving a hefty monetary reward later on down the road.


Also, it is usually more desirable if the founders and CEOs of health-tech start-ups are seasoned and have some experience within the industry.


Typically, younger Silicon Valley neophytes tend to thrive on the more aggressive and growth-oriented consumer and enterprise software environment and don’t have the patience, empathetic skills and medical expertise required to deliver legitimate results within the healthcare space.




Diwaker Agarwal 10 h ago · #2

Great article, thanks for sharing! And thanks for raising awareness to this!

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Great article!

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