Why 2015 could be the year Silicon Valley fully wakes up to "digital health"

By Michael Carney , written on December 26, 2014

From The News Desk

It’s said that the most investable ideas are those with a large market and where incumbents are inefficient or fail to deliver great customer experiences. Sound anything like the US healthcare market? Some of the most prominent VCs are starting to think so.

Speaking at a Le Web conference in early December, Union Square Ventures’ Fred Wilson said that if he could invest in only one sector for the next five years it would be healthcare. He explains: 

We all need it, and people will pay for it. When you’re sick, you want to get well. It’s not an expenditure that you can think about making, it’s one that you have to make. 
This marks a major turnaround from a few years ago when Wilson wrote:
When we look at healthcare, what's wrong with it, and what needs to happen to fix it, we can't see as clearly how the web, technology, and large networks of engaged users can impact healthcare in a positive way. 
Google Ventures already made a major shift in that direction, directing more than one-third of its capital into health and life sciences in 2014, up from just 9 percent in each of the last two years – a strategy it plans to continue. A year ago Andreessen Horowitz* added its eighth and most recent partner, Balaji S. Srinivasan, a relatively unknown healthcare data expert from academia. And Benchmark’s Bill Gurley spent much of the year publicly professing his interest in the category, and looking to get smart on the opportunity.

Across the Valley, prominent investors are putting their money where their collective mouths are in this sector. For example Social + Capital’s Chamath Palihapitiyah once told an audience at Fenwick & West’s Digital Health Investor Summit: 

Every interaction in every area related to health is just so shitty. The software is crap, the services are crap, the people are crap. So there is a lot of value that people like us can add because you have a very different perspective on how the system should work. 
His firm has now backed Propeller Health, Neurotrack, Simplee, Breakthrough Behavioral, Syapse, Flatiron Health, and Better. PayPal co-founder and Founders Fund* partner Peter Thiel echoed similar thoughts in a recent Reddit AMA, responding to a question about the prohibitive costs of the American healthcare system: 
We would never design a system like this if we were starting from scratch. 

If technology involves doing more with less, than US health care (like US education) is the core of "anti-technology" in this country: For the last four decades, we have been spending more and more for the same (or even for less).  Founders Fund is an investor in Neurotrack, Stemcentrx, ZocDoc, Counsyl, ResearchGate, Emerald Theraputics, Misfit, Glow, and dozens of healthcare-focused Thiel Fellows. 

Healthcare represents nearly 18 percent of US GDP (and rising), making it perhaps the biggest market opportunity anywhere. Moreover, healthcare in this country regularly ranks as the most expensive and worst performing among industrialized nations. But healthcare also represents one of the thorniest problems you can tackle. Not only are there endless regulations to deal with, but also, the stakes – both economic and in terms of patient wellbeing – are incredibly high. 

In other words, it’s not a “move fast and break things” kind of sector. 

Many generalist VC firms have lost their shirts in prior eras wading too deeply into bio-tech. But this generation of investors seems less interested in funding the development of next-gen therapeutics or medical hardware, and more interested in using software and the Internet to better connect people, data, and services within the sector. 

Consumers in general are becoming more sophisticated and more demanding. Some call it the Apple-effect, but the success of companies like Tesla, Nest, Instagram, Snapchat, and Slack reinforces the notion that consumers know good design and user experiences when they see them. Moreover, they're beginning to vote with their feet and their wallets by boycotting services that don't offer these kinds of experiences. Like most things the government touches, the healthcare sector is badly in need of a refresh when it comes to user experience. But this fresh coat of paint is just the beginning of the deep problems that Silicon Valley hopes to solve.

Where many VCs and entrepreneurs seem to be looking for opportunities is in the consumerization of health and wellness. That means everything from wearables and quantified self, to electronic medical records, modernized doctor-patient communications, crowdsourced diagnosis and treatment, and insurance. In that sense, a better way of defining this sector is to call it “digital health,” rather than healthcare. And according to a recent report, digital health investing is hot, with 2014 more than doubling 2013 in terms of dollars deployed through just the third quarter. 

As Gurley tweeted in January 2014, his interest is in avoiding much of the regulation traditionally associated with the sector – a desire that was surely hardened by Uber (a Benchmark company)’s challenging year:

— Bill Gurley (@bgurley) January 10, 2014 This is not entirely surprising, as even non-health sectors like transportation, housing, and media have seen promising investments derailed by regulatory challenges. Put simply, Silicon Valley has never played nicely with government. Perhaps this explains Gurley telling his Twitter followers that he has no interest in partnering with current industry players, a theory he may have borrowed Vinod Khosla’s controversial believ in disrupting healthcare from outside the system:

A few months later, Gurley told Re/Code’s Kara Swisher, in March, that he wasn’t sure the complexity of the healthcare system was a problem that could be solved:
I’m spending a lot of time looking at [healthcare]. I think there are a lot of ways that these tools that we’ve learned from social media and mobile platforms could have a huge impact. The unfortunate thing, the more I learn, is that it is one of the most messed-up industries you could possibly find. And the way our government has gotten involved with the practitioners, over a very long period of time, has created a hornet’s nest that may or may not be possible to disrupt.
Difficult as this sector may be, it’s a critical area of innovation and one which will receive a massive amount of attention from VCs and entrepreneurs alike. It’s still not clear how many of the problems facing healthcare are ones that can be solved with algorithms and code alone, but there’s no question that there is an opportunity to deliver better data and improve communication and accessibility within in the sector, all things in which the Valley excels.

Silicon Valley often gets criticized for backing too many photo-sharing apps and solving too many first-world problems, like having underwear delivered to your doorstep. Digital Health is anything but this kind of sector. It may take time for the Valley to find its footing in this market, but the fact that so many prominent voices and large checkbooks are looking at it closely is a hugely positive sign. Indications are that 2015 could be the year we see the floodgates fully opened.

[Disclosure: Founders Fund is an investor in Pando, as are Andreessen Horowitz partners Marc Andreessen, Jeff Jordan, and Chris Dixon.]