“We are unlikely to see digital health investments doubling again this year”

Q. Justin, welcome to the show and tell us a little about the fund and how you got into launching it.

Justin: GSR Ventures is a health-tech focused venture fund based in the U.S. My partners and I share a common vision to transform healthcare through new technologies that really have yet, in our opinion, to disrupt the healthcare ecosystem. So, I can walk you through my own personal journey and we’ll see how that informs our investment thesis with the fund.

I started out as a computer scientist — my undergrad and master’s are in computer science and computational biology, where I focused on machine learning and genomics. The plan was always to be a physician coming from a family of physicians, and this was something that I always felt was such an amazing thing — getting to care for patients.

Through my journey, I ended up coming to Stanford for medical school, where armed with this computer science and tech background, I felt like I kept banging my head against the wall of “why are we not able to do things better with technology? Why don’t we augment what we’re able to do, augment the repetition, automate some of these processes and really spend more time with patients and deliver that better care?” Ultimately, I took some clinical detours, which ended in launching our Stanford Center for Digital Health. We’re doing some of the first telemedicine visits out of Epic, taking care of our ACO population.

From there, I left to join the team at Apple, where we were doing some amazing things at-scale. I want to talk a little bit more about what big tech companies are doing, today. You can’t spend this long in Silicon Valley without getting the startup edge, so I tried my hand a few times, as a founder of one of the companies focused on algorithm safety and trust. “How do we know what client is doing, what it’s meant to do?” Ultimately, I ended up selling that company to Waymo, Google’s self-driving car company, and then came to GSR Ventures where we just shared this common vision to change healthcare through technology.

Some of my partners here have similar backgrounds as physicians, former entrepreneurs or former technologists. And fundamentally, we saw this opportunity to take that technology into health care and make it happen. Now, it’s not easy, we know. Many of us have tried to do this for years but in the recent past, we’ve really seen transformational changes — with COVID, with adoption, with physicians finally buying in that this will be the future. We think that is really only going to accelerate.

So, for us at GSR Ventures today, we’re focused on companies that don’t offer incremental improvements, but focus on 2, 3, 10, if not 100x X improvements through the use of new technologies, such as, asynchronous telemedicine, digital therapeutics, and companies working in Medicaid, which have previously been ignored. These are things that really get us excited.

Q. Let’s now talk about the big picture. Last year, USD 30 billion or so was pumped as venture capital into digital health companies. The corporate sector and many health systems — Providence, UPMC, Kaiser, Unity Point — launched their own funds. So, what’s the outlook for 2022?

Justin: I just spoke with Matthew from Unity Point and Craig from Cigna Ventures at a conference in Chicago and I think, it’s really accelerated — more than doubled for the past few years — so, I don’t think we’re going to see that doubling again this year.

You mentioned a few of the parties who’ve come to the table in the past few years — health systems, payers who’ve jumped in but the other group that’s really jumped in from the investment standpoint is people who traditionally work outside of health care. There’s a lot of former technology investors, very big inventors, hedge funds and venture capital firms who previously had been on the sidelines for health care, but who during COVID said, “Hey, this is a market we should jump into.” It’s really all of these parties who’ve created this rapid acceleration in funding.

Is that going to double this year? No. It’ll be fairly close to where we were in 2020 to probably 2021 from a venture capital dollars standpoint, because there are many great companies and amazing opportunities, as companies have really good fundamentals, are growing and again, have the four trillion dollar health care market to go after.

What’s going to be different, though, is there were some companies that — especially of investors, who maybe weren’t as familiar with how health care works and had little idea how long it takes to sell into some health systems and payers — saw some overhype in certain categories and valuations and which looked more like software companies, when really some of these that were recently funded, were more traditional health care services with software on the fringes.

There’s just really going to be an awakening. It’s been seen on the public market-side of these companies that were valued like true tech companies, when in reality, underneath the hood they’re really more health care services companies that trade at very different multiples. That has already corrected some on the public market-side. Many of the companies that went IPO over the past few years went through SPAC mergers, however, have come down significantly as people realize, “Hey, health care is hard.” And fundamentally, these businesses look a little bit different than we expect. So, we’ll see that traction in valuations in the private market side, but there’s a lot of room for growth here, so we remain incredibly optimistic for our companies going forward.

Q. Companies that have gone IPO have seen a drop in their overall market cap. No one’s making money. Privately held companies that are VC funded are operating perhaps at subscale, individually, and fragmenting the market. There’s a lot of risk for health systems betting on a startup that is unproven or surviving from one funding cycle to the next. For the startup, too, long sales cycles are fatal. How do you square this influx of capital here with growth in the number of startups?

Justin: You offer a fair assessment. A lot of money has gone into startups, ideas and some early traction but what’s really needed for them to successfully sell and partner with health systems is, proven ROI clinical validation of the solution. That’s something I’m hoping to see more of as we progress.

Take mental health, for example, one of the leading areas for investment the past few years. There’re so many solutions on the market, most of which have never published results that their methods are working, or that their patients are really getting better and instead, rely on some very soft ROI metrics. I think this is an area, in particular, that we’re going to see consolidation and companies moving around.

Have you really proven your results? Does your technology solution actually work to make patients better? Are people really seeing ROI from a health system repair result after implementing these solutions? We’re starting to see that. In crowded areas, this is a way that startups will break-out and the health systems will say, “Oh yeah, this startup has clinical evidence to prove this. This other one, doesn’t.” So, we’re going to go with that and I expect to see more of both this year and in the future — just how people pick and sift through the many options for certain conditions.

Q. Consolidation is definitely one path for many of these startups showing some potential and promise. Let’s talk about the big tech companies. They’re making big investments as well. What does it mean for your portfolio companies and the competitive landscape that they’re operating in now that Amazon, for instance, is getting directly into the business of healthcare services?

Justin: It’s exciting to have so much interest in the market. Fundamentally, we all chose health care, not because we were hoping to make a quick buck but because we wanted to make this better. It’s fantastic that we’re getting all of the big tech companies and people interested in doing that.

In terms of what it means for our startups, we need to figure out how to work with them. Take for example, CVS announced a large partnership with one of our companies, Marable, around making clinical trials better, creating an access point for those patients. As start-ups are really able to prove that they’re delivering their solution, these Big Tech companies become a wonderful partner to take that distribution channel and really scale it across the country. So, that’s the first example we’re really excited about as our startups really begin to prove that they’re winners in their field. These tech companies become a fantastic partner to really grow and continue to build that relationship.

In other areas, it’s always a joke. It’s the easiest thing to say, “What if Google or Amazon, you know, does this?” It’s real now, in this space. Know that if you’re trying to deliver medications to someone home, you are now competing directly with Amazon. It’s exciting and interesting to see that growth there.

Fundamentally, some things we think about as early-stage investors are — What is going to beat them up? How are you going to build a network proprietary distribution IP around what you’re doing? As long as you do a good job of those things, you’ll be able to compete against some of the big tech companies as you are growing able to be successful. It’s interesting partnership opportunities for if things go sideways, I’m assuming we’re going to see more acquisitions from some of these big tech companies. But fundamentally, it doesn’t change if you’re taking an interesting idea, figuring out a way we can really find this position in the market and grow from a position of strength, then, startups will just be fine. Health care is so big it’s going to take many, many hands to make this better.

Q. When you talk to your portfolio company founders and teams, what do you see as a one or two big challenges that they grapple with on an ongoing basis? How do you help them think through it?

Justin: So many challenges! It depends on the day of the week for what things are coming up but, one of the most important ones within health care is — How do you build real fundamental partnerships that are win-win?

As an early-stage company, this is one of those big challenges — Do you take strategic capital from a potential big player? Does that hurt your financing options, later? Do they have too much control so you can’t partner with one of their competitors? How do you structure a contract such that there’s real buy-in that they’re not just buying your IP, buying the option value with no kind of real guarantee that they’re going to deliver on their app?

These are fundamental things — How do you contract a partner with some of these bigger players so that, if it goes well, it can be a huge boon to your business but, if it goes badly, it could really hinder you from other potential partners without any kind of real upside. Navigating a few simple things like that whether it’s pharma payers or health systems, quickly, is something that comes up again and again, especially for early-stage founders.

Q. Are you saying that taking on more risk is something that start-ups should be prepared for when contracting?

Justin: Not necessarily; it’s just being really smart about how you’re thinking about a distribution channel. So, it’s about ensuring that there’s real skin in the game and that they’re excited that you’re going to move through a procurement process, quickly, and not going to get stuck in a two-year cycle.

This future version that you’re talking about around value, is every digital health company’s dream of saying, “yes, we’re going to work with a payer and take on value when ensuring the cost savings.” But, in reality, it’ll take you multiple years to get there.

We work and talk with our advisors at many of the big payers and often, find that you’re going to have to start in a fee-for-service world. But, make sure you have those conversations upfront so, in the next 12 months, you’re going to move from fee-for-service to a bundled payment and then, ultimately try to move towards capitation or something else, if you can do that with your patient population.

There’re many versions and ways to do this. One of the things that’s just so important is ensuring we set expectations correctly with our founders. When we connect them with someone on the other side, we’re making sure everyone’s ready and prepped for the conversation and not just talking past each other, which happens just too frequently when Silicon Valley tries to interact with some of the legacy health care players.

Q. Fairly or unfairly, I hear the criticism that technology startups tend to look at everything through a technology lens. You’re both, a technologist and a physician and healthcare is a people business workflow. So, how would you respond to that on behalf of your founders in your portfolio?

Justin: I would say, at large, as a field, I mostly agree with that criticism. And that’s part of our job, especially, when we have founders who don’t come from the healthcare industry. To coach with them and work with them, get them to understand that health care is a people business, that health care is more risk-averse — it is going to take longer to build that trust because that’s how health care works.

I teach at Stanford — for medical school – and work with early students. So, sometimes, we tell them, often physicians are the last players to build trust and move towards a new solution. That’s something we work with our founders on, on a daily basis to make sure they know that and understand what’s happening.

Yes, technology does have this potential to absolutely transform what we’re doing. But I thought myself, both, going through school as a clinician and then, again as a technologist, understanding it is a different world sitting in the hospital, taking care of a patient and, writing lines of code on your computer. We need to bring people closer together if we’re ever going to make it work.

Q. Let’s talk a little bit about Medicaid. There’s a lot to be done there and some real challenges as well — Medicaid members rely on their caregivers and their hospitals to actually offer rideshare because they can’t afford Gas to drive themselves to their appointments, can’t afford the bandwidth or data plans for their mobile devices. Plus, this being a government-run program, there’s a whole reimbursement component to it. What is your piece on the Medicaid space? Where do you see an opportunity to serve the population but also make money?

Justin: Absolutely. Every complaint you just mentioned is a challenge in Medicaid, today. But I would argue almost in each of those categories, that things have got better and the opportunity has got closer for the past few years.

So, why is there an opportunity here? Historically, Medicaid has been mostly ignored by every player in the health care system. For the payers, hospital systems are losing money. It’s just a question of how much. So, they need to think of how few Medicaid members can be served, but making sure they keep their nonprofit status. None of the digital health companies has, for the most part, save a few exceptions, targeted Medicaid early because why would I take a third 20% of the reimbursement I could get elsewhere? It just doesn’t work. That’s where technology has come into play and there’re a few trends I’ll point to. I’ll speak to why it’s so exciting.

So first, from a mobile standpoint, for over the past five years, the amount of Medicaid members and just even the US population as a whole that is connected now to High-Speed Internet and has a smartphone, has gone up considerably to the point where it can be more of an expectation rather than a reality. From a mobile connectivity standpoint, things are fundamentally different than they were five years ago.

Two, from a technology standpoint, this is where technology can make a difference in health care. When if you’re traditionally giving services or even just a pure telemedicine visit, yes, the economics don’t work. If I’m a psychiatrist doing a telemedicine visit, I fundamentally just don’t make the same money per hour seeing a different patient. That’s where technology solutions can come in. All of a sudden, when I can deliver an application, an FDA-approved digital therapeutic for a treatment, it can be done at a fraction of the cost and I can treat these patients at-scale. This is where software has the potential to deploy things across millions or billions of phones; an opportunity to deliver asynchronous telemedicine. That’s a tenth, if not a hundredth, of the cost to reach these patients. Fundamentally, the technology tools are now available to treat these patients for a fraction of the cost.

That last part you mentioned, yes, now, we’re working with government and the states. It’s even worse than Medicare Advantage, where we have to work with one plan. We have to figure out how we’re going to contract with 50 states and the MCOs that work with those states. But more and more dollars have gone from state-funding to MCOs, which really allows for more creative options. So, when I’m responsible for the total cost of care, I can do the rideshare, the food delivery, and other things for those highest cost Medicaid patients.

All these things have really pointed to an area with less than a total of a billion and a half dollars flowing into Medicaid startups. Contrast that with almost $20 billion in Medicare Advantage. I focus on that market, whereas Medicaid’s almost twice the size of an annual spend. This has been an ignored area, but the tools are coming together as is the climate and there’ll be some huge winners that we’re going to see over the next few years.

Q. Let’s talk about your startups and your own business. You’re investing in all these startups where a big factor is talent. There’s an acute talent crisis in the tech sector, so how does that factor into your investment decisions? How are your startups working through this challenge?

Justin: I absolutely agree that is such a challenge to hire the best right now in terms of how it factors into our investment decision. The most important thing from our investment decision at any stage is the team — Is this a founding team? Is the management team one that can succeed in the market? Are they on top of their game?

And such an important part of that is, are they going to be able to recruit those most talented employees at cheaper than they’re going?

Every one of our startups, the top engineers, could make double or triple their salaries by jumping over to Big Tech. So, question is, do they believe in the mission of the company that they’re going to help people? Do they believe in the trajectory of the company that has become a unicorn or decacorn and from a financial side, give them upside as well?

That’s the most important thing. A key component of that is how they, as leaders, managers and recruiters, are able to attract talent. That’s what we think about from an investment decision. That has always been one of the most important criteria, if not the most important criteria, as we think about investments and that really just carries over to the tough hiring landscape, today.

In terms of what we say to our startups and how we work with them, we tell them — talent is important and if they need to make a hire, they need to go above what they have to do to attract and get those people. Talent drives everything and so they have to compete in whatever way to get them.

What we’ve seen with most companies, today, is that people maybe have a historically geographic constraint but that’s loosened across almost all our startups so that, that best engineers with us even if they don’t want to come into office, even if they aren’t in the city where the majority of employees are. That’s something we’ve seen just very tactically across the board.

Q. If I were a startup founder with a great team of engineers, a great idea to serve the Medicaid population and listening to this podcast, how would I be able to appeal to you?

Justin: If they said those things, sent me a cold email, I’d definitely be inclined to respond. In that meeting, when I’d be speaking to them – through a recorded pitch or a 10–20-minute practice pitch — the real key would lie in how they’d respond to questions when you started digging in — Why are you doing it this way? How does this happen?

That’s when the real magic would happen. In terms of, at least for me, I’d pitch in evaluating the founder of the team to kind of see if they’re ready for it.

Q. We’re coming up almost to the end of our time here. What is your advice to founders listening to this podcast, wanting to build a digital health startup and make a difference?

Justin: There’s never been a better time to jump into digital health. For many years personally, I found myself banging my head against the wall. We have to use technology. It’s got to be this way. But I felt mostly ignored by my peers within medicine, who didn’t believe that technology would ever make a change.

Fundamentally, that has shifted across all stages of a company with more people saying, “I want to work on something meaningful. I want to work on something that can really change the world and make a mark.” Digital health is the perfect place. So, in terms of advice, I’d say, if people are thinking about this, this is the perfect time to jump in. There’s so much room for growth. It might be not as frothy or as high a market as it was for the past few months. That doesn’t matter. There’s so much room and capital available to fund good ideas and good teams, so, I’d love to work with you.

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Disclaimer: This Q&A has been derived from the podcast transcript and has been edited for readability and clarity