Written by Christine Hall, Crunchbase News.
The leap from raising seed funding to landing a Series A was difficult for RxRevu CEO Carm Huntress, as it typically is for many in the digital health space.
Although Denver-based RxRevu secured a $5.3 million seed round in 2016, it would take another three years before the company scored its Series A in 2019 via a $15.9 million round led by UCHealth.
The company helps prescribers identify the most cost-effective medications for patients at the point of care. But the company isn’t alone in experiencing difficulty moving from seed to Series A.
Securing next-stage funding in the digital health sector is difficult for several reasons: The health care industry is complex, product market fit has to be right, sales cycles are long, and gathering enough data is difficult. Educating venture capitalists on how the business model works also takes time.
“They want to see scalability, and even want to see double, triple or quadruple growth, which is almost impossible,” Huntress said in an interview. “We are one of the few that achieved that kind of growth in the past two years. We see a lot of good pilots and small demonstrations, but they don’t scale because of the data infrastructure. Gaining access to providers and consumers is hard, and that is why there are so few of us. These are the same challenges we all face.”
Not only does it take time to get in front of decision-makers, initial success is tied to outcomes and benefits–aspects often difficult to obtain in a short period of time.
Making the leap to a Series A is difficult for some digital health companies because digital health is particularly complex in an already difficult health care sector, according to founders.
“Digital health is much more complex … because it comprises the convergence of technology, health care and life science,” Bluedoor Group co-founder and CEO Michael Levy wrote in a 2018 blog post. “It is this level of complexity that creates a marketplace that requires more planning and in-depth exploration to mitigate risk effectively.”
The competition for dollars is also intense. Case in point: RxRevu was one of 381 U.S. digital health startups—out of thousands—that raised funds in 2019, Rock Health recently reported.
There seems to be enough money to go around, however.
Rock Health’s report also showed that those companies raised $7.4 billion in 2019, which was second only to 2018’s $8.2 billion. In fact, amid both a global pandemic and a slow economy in 2020, digital health companies (especially those in telemedicine) should do well. Rock Health also reported that this year is poised to be another record-breaker as $5.4 billion in venture funding has already been raised in the first half.
Venture capitalists who focus on the digital health market are bullish about it.
“The first wave of digital health companies were started from the medical side, but many failed because of a lack of leadership, while some who started from a tech background couldn’t figure out a go-to-market strategy, and it fizzled out,” said Cheryl Cheng, general partner at BlueRun Ventures, in an interview. “This time around, digital health companies are more conscientious of that equal marriage.”
When these startups pursue seed funding, founders typically have not figured out their go-to-market strategies. As a result, investors might be unsure how the application will work or be used.
Investors will compare digital health startups to a sector they are familiar with, such as enterprise software, consumer, or fintech, where it may be easier to assign a certain number of customers to demonstrate product market fit. When a startup in those sectors is growing, it is easy to throw money at it and see how the story plays out, Cheng said.
“Digital health is somewhere in between all of that, so it is challenging to evaluate readiness for Series A, as a result,” she added. “It’s not because investors are uninterested, it is because they don’t want to take the risk without seeing clinical outcomes.”
As RxRevu’s Huntress explained, clinical outcomes can take months or even years to obtain. Meanwhile, that extra time is important because the same $2.5 million venture round won’t go as far for a digital health company—which must prove itself—as it would for a consumer tech company that just has to put software out there, Cheng said.
Helping VCs see potential
The forecast for digital health startups seeking Series A isn’t totally bleak, however. If a startup can secure clinical outcomes and consumers while having doctors and insurance providers adopt the technology, its future can be bright.
“The staying power of a very good digital health solution is incredible once you get there.” Cheng added.
One startup that experienced an easier time raising a Series A round of funding is Modern Fertility, a San Francisco-based company which enables women to test their fertility hormones at home. Modern Fertility was able to secure a Series A round a year after its seed round, said co-founder and CEO Afton Vechery in an email. Because the startup operates in the women’s health sector, it did take work early on to convince venture capitalists of the sector’s potential. When Vechery and co-founder, Carly Leahy, were raising the seed round, the concept of “femtech” was still in its infancy. There were not many fertility startups on the market.
“We were pitching investors (most of whom didn’t have ovaries) and were met with some puzzled faces—‘a fertility company for women without fertility issues?’ and ‘fertility in the wellness category?’ ” Vechery said.
“Some investors got it right away, including Phin Barnes from First Round Capital and Rebecca Kaden from Union Square Ventures. But some weren’t so sure, or only expressed interest after going home and speaking with their wives or daughters. I thought; ‘Do I want to partner with someone who needs second opinions about the value of women’s health tools?’ ” she added.
Modern Fertility ended up securing $6 million for its seed round in 2018, and then set out to raise its Series A. Similar to Cheng’s and Huntress’ observations, Vechery explained that investors in the seed stage are going off of the company’s idea, founding team and market, but for the Series A they want to see tangible business metrics and engagement data to show how a company is resonating.
This time around, investors understood the market, were eager to explore it and expressed interest specifically in fertility, she said. In fact, “there seemed to be a sense of urgency to get into this space,” Vechery said. The company closed its $15 million Series A in June 2019.
“Based on the continued interest from VCs, it seems the emerging sector is seeing significant growth,” she said. “Women’s health has largely been neglected from the technology-driven change and modernization that’s transformed so many categories, and yet women’s health touches half of the population. I think there’s so much opportunity for new companies to fill these gaps, make a difference for women, and build durable, meaningful businesses.”
‘Glad to be on the other side’
Meanwhile, following RxRevu’s Series A, Huntress said there will continue to be a challenge for digital health companies because testing of an application or platform takes time; physicians can’t just open up an app store and try out his product.
Through RxRevu’s Series A with UCHealth, the company has had luck engaging and working with physicians, enabling its team to shadow physicians, and getting engineers into the clinic to observe workflow, but that is something Huntress said will continue to be a challenge for digital health companies.
“To see how someone is going to use a digital health tool and be able to make it effective and efficient is still very rare. Health systems are reluctant to reconfigure patient care, and most are trying to survive the environment,” he said. “We’ve lived through it and are glad to be on the other side, but this definitely is not for the faint of heart.”