Digital Health: 4 Key Trends Driving Funding Activity and How to Capitalize on Them

Digital Health: 4 Key Trends Driving Funding Activity and How to Capitalize on Them

September 28, 2021

Employer healthcare costs have been on the rise in recent years. Between 2020 and 2027, healthcare spending is expected to grow at an average rate of 5.5% a year — outpacing the expected GDP growth rate of 4.3%. That is why cost containment is a key objective for virtually every large company today.

Healthcare costs have been soaring for two decades and show no signs of stopping. Most employers now see unchecked rising costs as unavoidable. And they are focused on solutions that can offset future increases, while still providing quality care to employees and their families.

And that is where digital health solutions can play a critical role. In 2020, the COVID-19 pandemic prompted a massive acceleration in the adoption of digital health solutions, with digital health use now at 38 times its pre-pandemic baseline. Employers are increasingly turning to digital health solutions to mitigate rising healthcare costs while providing high quality, accessible care to their people.

Successful solutions do not just cut costs. They deliver superior outcomes, offer a positive member experience, and minimize disruption. Effective digital health solutions enable employers to deliver a better healthcare experience and achieve higher utilization across their entire workforce.

Which is why we have seen a flurry of funding activity in this market. Through the first half of 2021 year-over-year funding was up by 138% compared to the first half of 2020. Including more than 50 digital health companies who raised $100 million or more in the first 6 months of 2021 alone.

“Product efficacy is essential, but alone it is not enough. Effective digital health solutions are successful in finding a market, and then determining how to access that market through the most effective and efficient go-to-market channels.”

 

Major trends in the digital health space

With projected annual growth of 31% over the next five years, the digital health market is booming — and upending traditional ways of delivering care. Look at successful digital health offerings, and you will see four key trends driving investment.

 

1.  Product efficacy

First and foremost, your solution needs to be able to demonstrate tangible results — to both employers and consumers. While each solution must focus on improvements in outcomes, changes in behavior, costs or delivery mechanisms, without utilization, it is impossible to drive value or return on investment (ROI).  As a result, utilization is one of the key metrics companies can use to measure and demonstrate a product’s efficacy.

Utilization is also the single biggest hurdle that almost every digital health solution faces. No matter what, your solution will not deliver value to employers if members do not use it. Successful solutions focus on driving value with a clear utilization strategy.

While benefits like patient engagement and satisfaction are important from the perspective of employers and providers, a key criterion of a successful digital health offering is the purchaser’s ROI — the quantifiable benefits that can be gained through the innovator’s solution. For example, what is the financial impact of superior outcomes realized with top-quality providers, or of steering members to lower-cost sites of care?

 

2.  Go-to-market success

Product efficacy is essential, but alone it is not enough. Effective digital health solutions are successful in finding a market, and then determining how to access that market through the most effective and efficient go-to-market channels.

The fastest-growing digital health solutions tend to achieve success with indirect go-to market strategies, like being sold by a healthcare plan or an industry aggregator as a sub-vendor. This strategy is particularly effective with digital offerings that can be treated as a provider by a health plan. Fast-growing companies across a variety of healthcare specialties like diabetes management and virtual physical therapy have used this approach to achieve growth.

In order to build momentum in the early stages, solutions often have to build credibility through more direct go-to-market strategies. At Employer Direct Health, we have built direct relationships with hundreds of employers across different verticals and geographic locations. Building these relationships early can position a startup for later successes through indirect relationships with aggregators, consultants and brokerages, administrators or health plans.

 

3.  Compelling economics

In addition to efficacy and profitability, successful digital health solutions need to show potential for future growth. Prospective investors look at current and medium-term gross margins and future top-line growth rates to assess the potential for long term profitability, with the most attractive opportunities showing growth in the high double or triple digits and gross margins above 50%.

 

4.  Opportunity scale and scope

The most attractive digital health startups realize long term growth potential by addressing a significant need. Prospective investors look at the total addressable market, the depth of competition, and current market penetration to determine the overall opportunity. At Employer Direct, our core SurgeryPlus product covers 20% to 25% of the commercial health spend in the US. And while we are the largest player in our space, we still have less than 1% market share.

“The winners in the digital health space focus on delivering a better member experience through consistent, incremental improvements.  Speed of evolution is important and results matter; focus on practical over perfect.”

Keys to growth in the digital health space

Here are four of the key strategies today’s top digital health companies are using to deliver patient satisfaction, keep healthcare costs in check — and position themselves for future growth.

 

1.  Create integrated solutions

The digital health space is rapidly growing. More than 100 new startups have formed in the mental health space alone. With the explosion of digital health services, it’s no surprise that health plans and employers are suffering from vendor fatigue. Most clients already have large portfolios of vendors. And they are inundated with a vast array of new services coming onto the market. These days, most clients are looking to get better results… but do it with fewer vendors.

Digital health companies can better serve clients by offering cohesive, integrated solutions that provide services to address a wider range of healthcare needs. Consolidating services through reseller agreements, commercial partnerships, product expansion and acquisition will enable companies to deliver solutions that are more effective and less fragmented.  This is a key area of focus for us at Employer Direct, we have entered into a number of strategic partnerships in 2021, with more on the horizon.  We are also very actively looking at acquisition opportunities, in our core surgical space and beyond.

 

2.  Adopt a continuous sales cycle

Increasing healthcare costs have led to an increased desire on the part of employers to drive change. Employers are more willing than ever before to adopt creative, innovative approaches to contain costs. And with this increased urgency comes a faster sales cycle. The traditional calendar year-based sales cycle has given way to a continuous sales cycle, in which digital health companies are consistently engaging with prospective clients throughout the year.

 

3.  Iterate quickly

Just as in any other vertical, failing fast is essential. Every digital health startup faces challenges delivering services, engaging members, and minimizing disruptions. While the problem is often clear, finding solutions is a time-consuming, iterative process. The winners in the digital health space focus on delivering a better member experience through consistent, incremental improvements.  Speed of evolution is important and results matter; focus on practical over perfect.

 

4.  Find the right growth partner

With the growing importance of expanding and consolidating services, it is more important than ever to find the right capital partner. Far too many CEOs resist taking capital in the hope that they can retain more control and maximize their ownership. But a capital partner gives you much more than an infusion of cash. The right partner can provide guidance on everything from product development to recruitment priorities to M&A and they can help you take your business to new heights.  At Employer Direct, we view our capital investors as key thought partners.

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The digital health space offers unprecedented opportunities for companies that pair a great member experience with an effective go-to-market strategy. By building integrated solutions that serve a wide array of healthcare needs, embracing a continuous sales cycle, and iterating rapidly to improve your offering, you can create a solution that both members and providers love. And position yourself for future growth in 2022 and beyond.

 

Learn More About Serent’s Healthcare Investments

 

 

Serent Capital invests in growing businesses that have developed compelling solutions that address their customers' needs. As those businesses grow and evolve, the opportunities and challenges that they face change with them. Principals at Serent Capital have firsthand experience at capturing those opportunities and navigating these difficulties through their experiences as CEOs, strategic advisors, and board members to successful growing businesses. By bringing its expertise and capital to bear, Serent seeks to help growing businesses thrive. Learn more about our portfolio companies.

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