Building a Digital Health Unicorn: 4 Key Strategies

The Flourishing Digital Health Landscape

Currently, the digital health sector presents a particularly favorable environment for entrepreneurs. Startups are securing unprecedented levels of funding, achieving substantial valuations, and attracting significant investor interest upon entering public markets.

Data from CB Insights, as of March 3, 2021, identifies 51 healthcare companies valued at $1 billion or more globally – often referred to as “unicorns.” Furthermore, Mercom Capital Group reports that the first quarter of 2021 witnessed a record-breaking $7.2 billion in venture capital funding, encompassing private equity and corporate venture capital, directed towards digital health initiatives.

The Pandemic's Impact and Future Outlook

This substantial capital inflow into the healthcare industry is a logical consequence of the pandemic, which has unequivocally demonstrated the pivotal role of digital health in the future of patient care. Consequently, we can reasonably expect to see further healthcare company exits valued at over $1 billion in the coming months.

However, achieving unicorn status in healthcare remains a significant challenge. Founders require both a compelling vision and substantial operational expertise to succeed.

Leveraging Experienced Investors

Entrepreneurs frequently seek guidance from seasoned investors to formulate strategies for building the next major healthcare unicorn. Many turn to the Merck Global Health Innovation Fund (MGHIF) due to our extensive experience, robust resources, proven success rate, and well-established networks for achieving significant scale within the digital health space.

While the pandemic spurred a wave of new investors into digital health, we have maintained a consistent investment strategy for over ten years. Two portfolio companies, Preventice Solutions and Livongo, achieved unicorn status and were successfully exited last year, contributing to the $6.2 billion in digital health market value MGHIF has realized through exits over the past two years.

Investment Focus and Future Plans

We anticipate at least two more unicorn exits in 2021. Our investment strategy extends beyond current successes, with a $500 million fund dedicated to emerging technologies including drone-supported supply chain technologies, telehealth, AI, digital pathology, remote clinical trials, and the Internet of Medical Things (IoMT).

Key Strategies for Unicorn Development

Based on our track record, we have identified four crucial strategies for successfully building a unicorn in the digital health sector.

• These strategies have been consistently effective in our investment portfolio.

Securing Optimal Funding for Sustainable Company Growth

A frequent question posed to entrepreneurs is this: would you prefer to hold 20% ownership in a company valued at $50 million, or 5% in one reaching $1 billion? The preference is typically clear.

However, based on our observations, a common misstep is entrepreneurs prioritizing the avoidance of dilution over securing sufficient capital for robust development.

While rapid revenue growth generally commands a higher valuation, achieving this in the healthcare sector presents unique challenges.

The inherent complexity of healthcare, coupled with its numerous stakeholders, necessitates a longer timeframe to achieve substantial scale.

Considering a Realistic Exit Strategy

This extended timeline fundamentally alters the perspective on exit strategies.

Unlike other industries where exits commonly occur within two to three years, healthcare ventures often require a four to seven-year horizon.

Consequently, careful consideration must be given to the appropriate level of funding – and the strategic partners who can provide it – to effectively construct and nurture your company.

Insufficient capital raises can ultimately lead to a recapitalization event, potentially resulting in minimal or no equity retention for the founder.

This is a situation to be actively avoided.

• Strategic Funding: Prioritize securing enough capital to navigate the complexities of the healthcare landscape.
• Long-Term Vision: Adopt a patient approach, recognizing the extended timelines typical of healthcare exits.
• Equity Preservation: Avoid under-capitalization, which can lead to unfavorable recapitalization scenarios.

Ultimately, building a successful healthcare company requires a balanced approach – one that acknowledges the need for substantial funding while safeguarding founder equity.

Prioritize Key Hires: A CFO and Sales Leader

Founders often don't instinctively approach company building with a strategic mindset. We emphasize that even with a groundbreaking product and initial market entry, significant revenue scaling requires a dedicated team.

Securing a skilled CFO is paramount. Investors rely on responsible financial management, demanding professional oversight of their capital. Simply employing a bookkeeper or accountant can lead to complications when seeking funding and pursuing growth.

A seasoned CFO is essential for proficiently handling profit and loss statements, balance sheets, cash flow, expenditures, investments, and reporting. This individual should also possess expertise in capital acquisition and commercial agreement structuring.

Equally crucial is the recruitment of a high-performing sales leader. This entails finding someone with established connections and the ability to cultivate a team of effective sales representatives.

A deep understanding of healthcare sales processes and the challenges of product adoption is also vital. Revenue generation is fundamental to a startup’s survival, yet many entrepreneurs underestimate the complexity of achieving it independently.

Most founders believe they can personally drive sales, but this is rarely the case.

Why These Roles First?

• Financial Accountability: Investors require demonstrable fiscal responsibility.
• Scalable Revenue: Sustainable growth demands a dedicated sales organization.
• Strategic Leadership: Both roles provide critical expertise beyond product creation.

Focusing on these initial hires sets the stage for long-term success and investor confidence.

The Importance of Integration for Healthcare Technology

The healthcare landscape is notably fragmented and intricate. Consequently, isolated, single-purpose solutions often struggle to achieve widespread implementation.

For successful scaling, new technologies must demonstrate seamless integration into established clinical workflows and existing reimbursement processes.

Moreover, adherence to current regulatory guidelines and privacy protocols is paramount. Essentially, a comprehensive, integrated approach is typically essential for your technology’s success.

Building a Holistic Solution

We actively encourage our portfolio companies to collaborate with organizations possessing complementary expertise. This collaborative strategy focuses on addressing the complete challenge, rather than merely a portion of it.

Consider this analogy: would a consumer purchase a product incompatible with their primary operating system? The answer is almost certainly no.

Adopting an ecosystem-based perspective significantly lowers obstacles to adoption within the healthcare sector.

Integration is key to overcoming these barriers and ensuring long-term viability.

• Seamless workflow integration is crucial.
• Compatibility with reimbursement models is essential.
• Adherence to regulations and privacy standards is non-negotiable.

By prioritizing integration, healthcare technology providers can maximize their impact and achieve broader market penetration.

Strategic Partnerships: Investors and Companies

The composition of your investor group is critically important – it’s a key element for success. Achieving scale within the healthcare sector relies heavily on established distribution channels and a thorough grasp of their operational dynamics.

While funding is undoubtedly necessary, the connections and board-level influence of your syndicate members often prove more valuable. Securing access to vital channels necessitates selecting partners with pre-existing, direct access.

The Value of Expertise

Furthermore, you’ll require seasoned experts possessing a deep understanding of the market to offer insightful guidance on business expansion. Understanding the factors that drive scalability and enhance exit potential is crucial.

Corporate Venture Capital (CVC) investors frequently provide both the necessary market access and specialized knowledge. They can be instrumental in accelerating your growth trajectory.

The landscape of corporate venture organizations has expanded considerably over the past decade, a trend first observed when Merck GHI Fund initiated its investment activities. The substantial influence wielded by corporate backers is projected to increase further.

CVC Advantages

CVCs are frequently invited to participate in diverse investment opportunities and possess the ability to rapidly assemble syndicates of leading investors. Their investment approach differs significantly from traditional venture firms, often involving larger capital deployments.

Corporates also utilize varied capital strategies to foster an ecosystem around a company. This is particularly important in healthcare, where scaling typically occurs at a slower pace compared to consumer technology sectors.

Despite the current favorable conditions for entrepreneurs in digital health, not every promising concept or innovative technology will achieve significant scale or attain unicorn status.

Building a Successful Company

To even approach the possibility of creating a unicorn company, entrepreneurs must prioritize building a robust business foundation. This includes securing appropriate funding, assembling a skilled team, and forging strategic partnerships.

This endeavor demands considerable effort, but the abundance of opportunities to enhance healthcare ensures the potential for numerous future unicorns. The potential for positive impact and financial success remains substantial.