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Digital health is just ecommerce all over again
We’ve already covered how healthcare services businesses aren’t venture backable and won’t produce large, sustainable compounders. Accepting that, what is the end state for digital health? We think software will power an unbundling of care and a revival of private practices; we’ll see an emergence of lots of small ($1-10 million topline) mostly online practices led by providers and financed without venture dollars. How do we know? Because that’s exactly the arc of history in ecommerce.
DTC ecommerce companies used to raise lots of money to build software even though they were in the business of selling shoes or mattresses or snacks. They built their own front ends, and subscription management, and CRM, and A/B testing, and checkout pages, etc.. All of that cost time and money but didn’t make the actual product - shoes, mattresses, suitcases, dog food - any better. It didn’t differentiate the company but it did completely change its trajectory by requiring these businesses to raise venture financing.
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Ecommerce had the same revenue and gross margin as brick and mortar with the same or worse opex because of all the new product and engineering headcount. If there’s no increased equity efficiency just by putting something online why would it call for venture capital?
There was no other way to finance it but also no way to satisfy the requirements of venture capital. Ecommerce was damned either way.
That’s changed and ecommerce has evolved. With Shopify and its app ecosystem, 3PLs, contract manufacturers, and the general proliferation of commerce enablement tools, the way ecommerce is structured and run (and financed) is totally different than it was 10 years ago. The good companies don’t raise venture capital dollars to finance perpetually unprofitable, large platforms with fruitless public company ambitions. The long tail is thriving. It worked!
The exact same story is going to play out in healthcare and the long tail will (re-)emerge.
Online doctors offices (venture backed digital health startups) need lots of venture money to hire engineers and build custom platforms and tooling (messaging, scheduling, payments, prescribing, EHRs, workflows, etc.). But all the work is duplicative and low ROI; everyone is building versions of the same commodities. And just like a clothing store, putting a doctor's office on the internet doesn’t improve its financial profile. All the new product and engineering headcount/opex makes it much worse.
But we are slowly getting to the point where there are enough high quality, lightweight tools that digital health companies will soon no longer need to replicate expensive, low ROI engineering work. To realize this vision, we’ll need more and better applications/services/tools to service this new model and build out the enabling suite. And there are a few key pieces missing altogether 1) the integration layer that will make all these services easy to implement and manage on an ongoing basis 2) a unified, configurable UX on the front end 3) avenues for new practices to attract patients, either directly or through referrals and 4) opportunities for upstart providers to contract with payers on a more equal footing/with more leverage.At that point, digital health care delivery companies can transition from large, venture backed, cash-consumptive businesses to something more akin to old-school private practice - this time with a strong online presence.
The thesis of digital care delivery was never wrong; healthcare will continue to be transformed by technology and care will become more personalized and more accessible. The error to date has been in the capitalization and operating structure of the companies. But history shows us a better way. Ecommerce works without venture backing. Private practices work without venture backing. Once the real product (delivering healthcare outcomes) can be decoupled from bloated software engineering teams, the next gen of healthcare provider startups will thrive. The pieces are there and the future is coming.
Many thanks for feedback and revisions from Mel van Londen, Sumit Kadakia, Reshma Khilnani, Harry Ritter, and Kristin Baker Spohn.
In contrast to the Shopify of it all, there is also likely an opportunity for someone to become the Amazon of digital health: the one player that got big enough fast enough to survive and wring out margin while renting infrastructure to other, smaller players. We think that will be Ro.
Of course med student debt and provider burnout are major barriers to private practice formation. Ultimately we think small practice/self employment will be the solution to burnout from working in large, investor owned groups.