Jeff Goldsmith

These are grim days for innovative healthcare companies. In the ongoing market correction, health technology and care innovation companies mature enough to enter the public markets were eliminated. As of January 29, 2022, One Medical (down 83% from peak), Oscar (down 83%), Bright Healthcare (down 85%), Teladoc (down 77%, but still selling at 6x revenue!) and AmWell (down 90%) is just the tip of a larger melting iceberg. Dozens of digital health unicorns (such as pre-IPO companies valued at over $1 billion) with investors pouring more than $45 billion in 2020-2021 and their less-secret brethren are taking refuge in the VC/PE balance. Relatively secure sheets. Until their limited partners revalue their portfolios based on the market value of their publicly traded comparable assets, they are shielded from investor wrath.

However, the next steps these innovative companies and their shareholders take will determine whether these companies realize their full transformative potential or gradually become insignificant. The Gartner Group, which tracks the technology industry in general, popularizes the concept of a hype cycle—the seemingly universal trajectory that technological innovations and the companies that produce them follow (see below).

Gartner Hype Cycle

Everyone seems to be focused on the colorful first phase of the cycle — the inflation and deflation part — where innovation rises in a wave of flattering media (and gasping futurist pundits), and then slumps shamelessly into despair. A typical example is the star uncle of Apple’s iPhone, Apple Newtonwhich was launched in 1993 and crashed shortly thereafter.

For founders and investors as well as customers, however, it is a less obvious follow-up phase that determines whether innovations will survive and the companies that produce them become a ubiquitous and integral part of our lives. The initial phase of the uptick in the Gartner hype cycle was driven by the following questions:cool“?, mediated by hyperactive media and internet buzz. The inevitable collapse, on the other hand, is almost always driven by thorny real-world issues,”Does the product really work as advertised? Analysts, writers, and most importantly, customers ask troubling questions about not just functionality, but reliability, affordability, stickiness, and “value for money.”

How can businesses survive a crisis and climb Gartner’s “Slope of Enlightenment”? This is the tedious “pick and shovel” part. If the thorny question of “product integrity” (does the product actually work?) is addressed, a series of important questions will challenge companies, founders and owners to answer key questions: Is it a real businessYear:

1. Product-market fit (eg, how exactly does innovation create value for customers and for whom?) Who are the actual customers of the product? Does the product need to be modified to meet their needs?
2. business model (eg, can these customers pay enough for what we make?),
3. Scalability (can we actually deliver at scale to return investors’ capital at some magic moment?), and crucially,
4. Management (do we have the right people in key positions?).

Investor wisdom and judgment are key elements here. At this point, if investors act decisively, Adam Neumann and Travis Kalanicks could be kicked out of the company they founded and hired more experienced and capable management to manage the complex process . If the owner cannot satisfactorily answer the final existential question— is this a real business?- Shareholders may decide to exit and sell the business and its problems to someone else.

Teladoc and AmWell started the roll-up process long before the 2020/2021 digital market cap explosion. It remains to be seen whether they have cleaned up the issues they inherited in the acquisition. Private equity-funded startups are now aggressively competing to become the dominant full-stack players. Multi-product platforms, this space can quickly become incredibly crowded. It’s possible that no one really wins the platform wars that are going on right now. There is tremendous dynamism and promise in the digital health space, not only in digital care delivery, but also in automating or streamlining payment transactions, facilitating hard connections to care systems, and coordinating different modalities including AI-assisted chatbots, avatars, and other communications. Infrastructure tools.

Identifying the digital health integrators that will emerge during this classification and reassessment is not challenging. The first and most important of these is the Optum subsidiary of UnitedHealth Group. United has nearly $70 billion in cash, piling up at a staggering $2 billion a month. United/Optum’s management discipline is to wait, choose carefully, and don’t overpay. But other large existing healthcare players will play a key role, including CVS/Aetna, HCA, Anthem, CIGNA, Ascension Health, UPMC in Pittsburgh, Intermountain Healthcare, and more. All with cautious forays into areas that are currently being corrected — digital health, Medicare Advantage and at-risk primary care.

In another promising approach, Intermountain teamed up with two other large care systems to create a nonprofit “market-making” business called Graphite Health.https://www.graphitehealth.io), which will act as an “app store” for digital health solutions. Graphite is designed to fill a critical gap – the lack of digital health performance standards – effectiveness, safety and cost-effectiveness – which makes it difficult or impossible for institutional buyers (let alone patients) to make rational choices amid a plethora of competing options .

Of course, there will also be outsiders eager to expand healthcare — notably Amazon, Walmart, and Microsoft — who have made recent investments in key healthcare industry sectors — pharmaceutical supply chain, urgent care, voice recognition, such as transaction costs The complexities of the integration will create huge revenue streams for bankers, the legal profession and advisors who will win regardless of returns to founders and equity holders.

Falling into Gartner’s trough of disillusionment is not the end of the game.

The tedious but vital Darwinian process of weeding out the opportunists and the illusory from the real businesses—those that will change our lives—is just beginning. This process will continue for the remainder of the decade.

Jeff Goldsmith is President Health Futures Company.