The normal venture cycle isn’t fit for the healthcare industry

The US healthcare system is a huge beast. Anyone who’s paid attention to US politics over the past 20 years will know how central it’s been to policy debates. But where policy is too slow, innovation and improvement can come from other places.

It’s that potential for impact that got Rob Coppedge, CEO of Echo Health Ventures, interested in healthcare investing in the first place. But the progress that has already been made is nowhere near enough.

“It’s kind of a crazy notion that the impact agenda that we started with in the late ‘90s –  lower costs, increased access, increased quality – on all of those vectors in the US market, we’ve moved backwards while we’ve made billions of dollars of investments into those spaces and made a lot of money,” says Coppedge.

“It’s a systems-level challenge because you can’t solve one thing without having implication of variety of other spaces.”

A lot of it has to do with misaligned incentives and knock-on effects. Maybe it would be better in terms of outcomes, for example, to have more care delivered in the home rather than in hospitals, but money talks.

“One reason why we have so much infrastructure is because we get paid more for the infrastructure. It’s the only industry where supply drives demand.  You build more beds, you fill them – you fill them, you get paid. That’s a perverse way to run a business, especially one that is so socially important,” says Coppedge.  

Corporate backing gives an edge

Echo Health Ventures, which invests on behalf of the Echo Innovation Alliance, itself a network of healthcare plans from around the US – including Cambia Health Solutions, Mosaic Health Solutions, USAble Corporation and BlueCross BlueShield of Tennessee – has access to the reach of its members, covering around 11 million people across seven states in the US. The feedback cycles, more knowledge of what happens in the market and how people respond to them, becomes much easier than it would be without corporate backing. The process of adopting a technology at scale, then, becomes faster.

“What we’ve seen is a really virtuous cycle by having multiple stakeholders like this. The first sales cycle may still be as painful as every other healthcare sales cycle, but the second, third, and fourth sales cycle become shorter and shorter because there’s shared learnings between these four trusted partners,” says Coppedge.

The typical 10-year VC fund cycle, says Coppedge, is not fit for purpose in healthcare innovation. In an industry where it already takes a long time to get proofs of concept and product-market fit, having shorter fund cycles can lead entrepreneurs to adjust what they’re doing and make changes to their strategy – not always in a good way.

That venture model is not going to change any time soon, though, so having corporate backing such that you’re not beholden to fundraising and exit cycles can translate to real impact.

“That’s the reason why I’m so drawn to corporate venture, and why I continue to advocate that we should not be trying to be a third-rate financial VC,” he says.

“There are lots of great healthcare venture capitalists, I’m not disparaging any of them. I’m just advocating that corporates feel some confidence about being corporates and lean into it,” he says.

Value-add over capital

The main advantage corporates can bring to any table, of course, is the value on top of capital. But even then, the metrics in a sector like healthcare are insufficient, according to Coppedge, and the willingness to self-impose more of them is sparse.

“None of us have an incentive to put new targets on our head and be like, ‘assess us on this’ and we don’t control it fully, but I think we have to because at the end of the day, that’s what’s going to differentiate us as a group of managers [CVC investors] from the rest,” he says.

“There is no need for more venture capital in healthcare. I said it. The world does not need this. What the world needs is better “value-add”. That’s why a company would take our capital over somebody else’s.”

Finding out what the best metrics to use are is not simple, though. There’s no industry standard metric that everyone can benchmark against – that would be the grail, according to Coppedge. Everyone says there should be one, but ultimately they all create their own standard, which tend to be ones they know they will achieve.

While not perfect, though, at least it serves as a starting point pending a better way to measure impact.

“If there is a unified measurement set – which I’m sceptical of – or if there’s just a rigor, or discipline, or a validating approach to bespoke measurement sets, that could at least give us some confidence as a starting place that any of us are doing this right.”

Around a third of investments Echo Health Ventures makes are in areas out ahead of its constituent health plans – the startups are not quite ready for primetime and the plans are not quite ready to take them on board. The rest, however, is in areas where there’s a lot of need in the US healthcare market.

These include things like behavioural healthcare, lab services, women’s health solutions, professional assessment and other specialty management like home assessments of care.

Around 80% of Echo Health Ventures’ portfolio companies establish some kind of commercial agreement with one of the corporate partners within 18 months of investment.