Xconomy New York — [Corrected 8/24/15, 12:40 pm. See below.] The booming field of digital health means different things to different people. Even the president of StartUp Health, a New York-based firm that wants to help build 1,000 digital health startups—yes, literally—acknowledges his company is a little tough to define.“We’ve had a challenge with how people bin us and bucket us,” says Unity Stoakes, who co-founded the firm in 2011.
That’s because StartUp Health is, in Stoakes’ own words, a “mashup.” It’s part accelerator, and part venture fund. It’s a mentorship program, a virtual classroom, a network of healthtech entrepreneurs, and a generator of industry reports, detailing things like which subsectors of healthcare are attracting the most money. Stoakes calls StartUp Health a “health innovation company,” but then quickly acknowledges how confusing that sounds.
However StartUp Health is defined, at least one large nonprofit healthcare provider thinks it’s doing something right. This past June, Aurora Health Care, a Milwaukee-based healthcare system, invested $5 million to become StartUp Health’s lead backer, says Stoakes. [An earlier version of this paragraph mistakenly said Aurora is based in Madison, WI. We regret the error.]
It’s not just the cash that’s significant. By forming a multi-year alliance with the entrepreneurial network, Aurora gets to scout new technologies coming through StartUp Health that could change its business and health practices.
Stoakes says, for instance, Aurora is testing a virtual product from Modesto, CA-based Direct Dermatology: snap a pic of a mole with your smartphone, mail it, and a clinician will check it out.
“[Aurora’s] got the ability to be a petri dish for our entire portfolio,” he says.
The firm that Stoakes (pictured above) and Steven Krein, both longtime tech entrepreneurs, founded four years ago now has about 25 employees. They launched with the help of high profile backers, such as former Time Warner CEO Jerry Levin, now the StartUp Health chairman, flamboyant basketball owner Mark Cuban, former AOL CEO Steve Case, tech investor Esther Dyson, and Foundry Group managing director Brad Feld. At the outset, Stoakes and Krein boldly predicted they would help launch 1,000 digital health startups in a decade.
They’ll have to pick up the pace. The syndicate invests up to $200,000 in 10 to 12 startups a year. To date, StartUp Health has nurtured 106 companies that have collectively raised over $200 million in funding. Stoakes claims it is the largest portfolio of healthtech startups, with companies from New York to the San Francisco Bay Area and even abroad in countries like Israel.
“Portfolio” is a key word, because StartUp Health takes equity stakes, anywhere from 2 to 10 percent, in young companies.
Once invested, StartUp Health begins a three-year “academy” for its startups, with coaching, virtual classes, quarterly in-person executive summits, exclusive reports and studies, all while connecting them to its entrepreneur peer network.
One example of the reports available: Stoakes says StartUp Health knows which venture investors and potential customers are not “entrepreneur-friendly,” and is happy to share that information.
“We have a whole database about who to avoid in the industry,” he says.
But the firm also helps makes connections. AdhereTech is a maker of smart pill bottles for drug adherence. CEO Josh Stein says that StartUp Health provided introductions to customers who are using his product, and investors who backed AdhereTech’s $1.75 million Series A last year. Stein wouldn’t name names or disclose how much equity AdhereTech gave up to join in 2013, but says what makes StartUp Health different is the length of the program.
“Continued support is a huge need for healthtech companies,” Stein says.
So far, four StartUp Health portfolio companies have been acquired—Avado Health (acquired by WebMD), Gritness (Under Armour), Basis Science (Intel), and Arpeggi (Gene by Gene)—but the terms weren’t disclosed for three of those deals. Intel reportedly paid in the $100 million to $150 million range for Basis.
Of those remaining, all but two are operating, and about three quarters are either out raising money or have already done so, according to Stoakes. He declined to specify StartUp Health’s returns or discuss how many companies are profitable, except to say that most of them are generating revenue and scaling and “our fund is way up, beyond our expectations.”
Stoakes says StartUp Health began with a $7.5 million microfund. The company’s bankroll is now getting bigger. A Form D filing shows that StartUp Health is looking for $30 million, and VentureBeat reported that the Aurora investment is meant to be the first of several $5 million installments, with the rest to come from big companies in retail, healthcare, and other sectors. Stoakes confirms that the $5 million from Aurora—which didn’t respond to requests for comment about its investment—is the first tranche “of a much larger raise with a [group] of strategic partners.”
This type of support is important for digital health. As my colleague Alex Lash wrote last year, the field badly needs clinical data that show their apps and gadgets improve outcomes and save money to match the hype and dollars going into them.
With that, and StartUp Health’s unique place in the healthtech ecosystem in mind, I spoke with Stoakes at length. Here are some edited excerpts from our conversation.
Xconomy: There are a lot of different accelerators, incubators and funds specifically devoted to healthtech. Where does StartUp Health fit in?
Unity Stoakes: We call ourselves a health innovation company, but people are always like, ‘Well, what’s that?’ We have this academy that helps grow companies and we have the largest portfolio of digital health companies, so we’re a mashup between an investor, an incubator, a business network like [Young Presidents’ Organization], and a school for entrepreneurs. We also track massive amounts of insights and data into where the money is flowing, what business models are working, who’s investing in what subsectors, and in what regions, and our companies can have access to that. So as they’re doing customer development [and] raising capital, they know in real time what’s going on in the market around the world.
X: How do you compare that approach to other organizations trying to help digital health startups grow?
US: We’re now seeing a fragmentation of [these entities]. Some programs, their customer is really the hospital or industry. Some accelerators are working just with idea-stage companies on these eight-week programs to help get an idea off the ground and maybe help get a little seed round. The same month we launched [in 2011], Rock Health launched as an accelerator. They’ve since abandoned their accelerator program and have basically become a VC firm, a seed investor.
Then you have organizations like ours that work with a little later stage companies. We’re focused much more on commercialization over several years, on really building scalable growth companies.
X: Why that approach?
US: When we launched, in the tech world there was Y Combinator and Techstars, which are tech accelerators: 12-week programs that give you a little bit of cash and a demo day. That model just did not work in healthcare. You need a long-term construct in order to get anywhere. We launched with the vision of helping build 1,000 companies over the next 10 years. There isn’t going be one Uber-company that’s going to fix healthcare, it’s going to be hundreds or thousands of companies that each fix a different aspect of the system and, combined, becomes what transforms the whole industry. If we can be the organization that brings it all together, and makes it very easy for industry and investors to tap into, then we see that as not only a great business, but one that makes a big impact.
X: So it’s an all-comers approach?
US: It’s almost around the charter school model, which is no entrepreneur or student left behind. Rather than focus on one or two hits, how can we use the network effect to pull everybody forward? And even if it’s a double or a triple or home run, and not a grand slam, that’s meaningful to us. That’s a different philosophy than a VC would operate under.
X: Isn’t that much riskier and cumbersome?
US: We just believe a smarter way to do it is to not walk past a company just may need a little more nurturing. A lot of venture investing today has become derisked, they’re doing it at later stages. We’re going the other way which is going very early, developing a methodology and network to nurture these companies through the dips and valleys, get them over the hump at a time when nobody else from the venture community would look at them.
X: What are some of the lessons you learned, the mistakes you made, developing that process?
US: We learned that it’s very important not to be 100 percent virtual, and also not be 100 percent in real life because people are spread out everywhere and they’re traveling. We learned that being location agnostic is absolutely critical. You have “doctor-preneurs” that may have practices in Los Alamos, NM; they’re not going to move their practices to come to Silicon Valley or New York for three months. Also, companies that aren’t paying attention to their business model from day one, chances are they’re going to fail in healthcare. You can do that in the tech world and scale up and figure it out, but in healthcare you really have to understand the business model much earlier in the lifecycle of your company. Lastly, if you don’t have a full-time entrepreneur leading your startup, it’s just not going to work.
X: What mistakes do young healthtech startups make?
US: They confuse their users with their payers. There are a lot of people building widgets versus more comprehensive solutions, and [the latter is] what the market is really yearning for. There are companies we’re seeing that just do not know how to package their story. And it’s amazing to us how many companies don’t know the competitive landscape. I don’t know if they just have blinders on, but there are a lot of me too-type things. Which I guess is normal—there were 200 Youtube type companies when Youtube launched.
X: How would you say the dynamic between startups and large companies is changing?
US: In the tech world, the disruptors just go around the established players. If you’re Facebook, you don’t go partner at the beginning with the big media companies, you eat their lunch and you go around them and destroy them, and then later they have to advertise on your platform.
In healthcare, it doesn’t work that way. Because of how much of healthcare is controlled by the government, payers, providers, and the care systems, you have to collaborate with them to get anywhere. The industry is realizing it needs to collaborate with entrepreneurs in order to innovate and drive costs down; to prevent hospital readmissions from spiraling out of control; to transform the care delivery process; and to implement home healthcare, telehealth, and digital health solutions.
Not only are we interested in their capital to back us, but also their ability to either further invest in our companies or commercialize and help strategically grow them.
X: There’s been a lot of hype with digital health. There’s a long way to go before it’s integrated into society. What has to change?
US: There’s a transformation underway to focus on data. We still need to turn that data into actual insights that are going to change outcomes and behavior, and to be able to prove that. That’s why you’re seeing so much investment in platforms to analyze the data now. That was the largest [digital health investment] category in 2014 and in the last 18 months. Companies are saying, “We can track someone’s entire genome, we can get all this information, but now is there a platform that can make that data meaningful to me as a consumer or a patient?”
Can we also look at an entire population and make those data useful to the insurance company, and to the hospital, and start looking at macro-trends and population health trends? That’s where things are going.
X: Have you found healthcare organizations willing or resistant, to try new things?
US: With hospitals and the provider landscape, there are three categories. One group is focused on financial engineering, M&A, and consolidation. Another group is literally doing nothing, they’re pretending like technology doesn’t exist and they’re going to keep operating the way they are until they go out of business or someone disrupts them. And then you have the very progressive group :organizations that realize they need to reinvent and focus on earlier stage innovation. Every week new organizations fit that bill, they’re realizing if they don’t do this, they’ll be the dinosaurs that go extinct.