The federal shutdown may be over (for now), but President Obama’s new healthcare law continues to be one of the nation’s hottest topics. In this week’s edition of Elevator Pitch, we ask health-tech investor Lisa Suennen what the law means for Silicon Valley.
Suennen is a co-founder of Psilos Group, a 15-year-old firm with some $600 million under management. Based in Corte Madera, she focuses on healthcare IT and writes a blog about investing in health technology.
Q: HOW’D YOU GET INTO THIS RACKET?
A: I worked at a healthcare company that delivered and managed mental health and substance abuse care to over 35 million people. I joined when it was a start-up and left when it had grown to $800 million a year in revenue, and we sold it to a competitor. The focus of the company was taking a non-traditional model that emphasized matching people to the right care at the right time, regardless of benefit design etc., to minimize cost and maximize clinical outcome.
It worked. We saved our clients an average of 15 to 30 percent on these healthcare costs, and patients got better care. After we sold the company, we decided that this approach of aligning the incentives of patients, payers and providers could apply to all of medicine, not just behavioral health. Psilos was started by several of us who had worked together to implement that philosophy at a time when it was considered a particularly strange idea. Today it is the story on everyone’s lips.
Q: WHAT DO YOU LIKE ABOUT VC?
A: I like being around innovators and people who are constantly looking for new ways to do well by doing good, which is possible in the healthcare system. I am constantly learning new things as entrepreneurs bring new ideas to the table. When you find really good ones, it’s gratifying to be part of helping them succeed.
Q: WHAT KINDS OF PITCHES ARE YOU LOOKING FOR NOW?
A: We are particularly interested in products or services that reduce costs while improving quality. It is a uniquely transformative time in the healthcare system. The combination of stress on the economy, Obamacare and readily accessible cheap technology makes new solutions possible to help us remove the waste, error and poor quality that is too often the product of the system we have come to know.
Healthcare technology and service solutions that enable these great leaps forward in quality of care, value of care delivered and engagement of consumers in a changing system are very attractive to us. Also we want to see revenue-stage companies; we don’t do Series A/early stage.
Q: WHAT’S THE BIGGEST MISTAKE ENTREPRENEURS MAKE?
A: Thinking that the status quo will change much faster than it really does. Sometimes being far ahead of your time (and the market) is not a plus if you can’t get customers to leap onto your vision spaceship while in flight. One must balance vision with practical realities, in order to ensure the cash lasts through the market’s inertia.
Q: WHAT’S THE NEXT BIG THING GOING TO BE?
A: In healthcare, it is going to be the dramatic changing role of the consumer with respect to purchasing health insurance and health services. In the past, people with health insurance had no role in purchasing it, by and large. Insurers sold to business and consumers spent the money, usually not caring much about how much things cost or what value was being had for money spent.
As the world shifts towards consumers purchasing through health insurance exchanges, combined with the significant cost-shifting that has happened as employers put more and more of the cost burden on employees, the payers are going to have to think of themselves for the first time as B-2-C companies, not B-2-B companies. And the patients/consumers have to get savvier about how their own money is being spent, by having access to information about how much care costs and what they are getting for their money.
This opens up a whole world of products and services that facilitate the transition and, hopefully, get consumers to think more proactively about their health … although that last part isn’t easy.
Q: TALK ABOUT THE CHALLENGES OF FOCUSING ON HEALTHCARE INVESTING. ON THE ONE HAND, LOTS OF VC FIRMS HAVE SHUT THEIR LIFE SCIENCES PRACTICES IN THE RECENT PAST. ON THE OTHER HAND, IT’S BEEN A GOOD YEAR FOR BIOTECH IPOS. ARE YOU STARTING TO SEE THE PAYOFF FOR STICKING WITH IT?
A: Unfortunately, healthcare investing has become very unpopular among the institutional investors. They view it is very risky, given the changing market dynamics, reimbursement pressure, regulatory complexity, health reform etc. Their view has too often become, “Why take a chance on healthcare when the next Instagram may be around the corner?” It’s a shame, because the type and amount of transformation going on in our healthcare system has created a rich opportunity for innovation to support those changes, and that innovation needs capital.
Fortunately, there are a number of strategic investors — mainly companies in healthcare and adjacent sectors — that see the opportunity and are helping fill the capital gap for an industry that represents 20% of our national economy. I simply cannot understand how people can avoid this large an opportunity out of lack of industry knowledge or out of fear of risk — it is a profoundly missed opportunity.
This is particularly so in the areas of healthcare IT and healthcare services, which are much different than biotech/medtech investing. There is legitimate pressure on those sub-sectors, as drugs and devices come under pressure for not really contributing much to better health in many cases. Interestingly, many VC firms that traditionally invested in biotech and medtech are trying to rebrand themselves as healthcare IT and healthcare services investors, since that is now where the good action is.
Healthcare IT and services are the necessary ingredients to completing the transformation of the healthcare system from one based on volume to one based on value. And the opportunities are massive, as evidenced by the increasing capital going to these sectors — and, more importantly, the big exits we are seeing here as well.
Because there was such a lull in biotech investing, and because the drug company pipelines have suffered as a result, there is now resurgence in acquisitions, and that is helping drive the biotech IPO market. We may see the same phenomenon in 5 years for medtech, as investment has now all but dried up in that area; that will negatively impact the pipelines of large medtech companies that acquire their innovation, like the biotechs do.
Q: IS THE PRESIDENT’S NEW HEALTHCARE LAW GOOD FOR SILICON VALLEY?
A: Absolutely yes. Obamacare, love it or hate it, has been a catalyst for changes we simply must make in our healthcare system if the nation is going to remain competitive as an international player. We cannot continue to spend money in the healthcare system the way we do and get very little to show for it.
We spend more than twice what the next closest nations do on healthcare and rank way down the list on actual health. It is time to bring efficiency, quality and consistency to this system that is so essential to our quality and way of life. Innovators with both healthcare and technology backgrounds have realized this, and increasingly so has everyone else engaged in the system.
This creates huge opportunities to build meaningful companies that deliver on the promise of healthcare value for dollars spent — and that deliver outsized financial returns to investors who are brave enough to wade into the swirling healthcare sea.