Partner, Kapor Capital
Ulili is a Partner at Kapor Capital, she invests in seed stage digital health, medical device, and HR Tech start ups in the USA. Following her MBA in Healthcare Management Ulili joined Village Capital as the Director of Global Programs where she managed programs for entrepreneurs in healthcare, EdTech and FinTech. Ulili has over 5 years of VC experience and has been a board member across several early stage startups.
Section 1: DTx VC Investment Growth
1.1. How has VC investment in DTx grown in the last 5 years?
I would go back 10 years ago as the digital therapeutics industry was created then, and I would say 5 years ago was when we started seeing an uptick of usage in digital therapeutics. 2020 was a record year for venture capital investment in the space, and I think with the fact of COVID, people weren’t able to consult regularly with their physicians, and physicians couldn’t track patients in the way that they had become accustomed to, so digital therapeutics filled this gap.
1.2. Which DTx product channels have received more investment?
I have seen rapid growth, in the mental health space. All of our mental health digital therapeutics have just seen unprecedented growth. This is for a couple of reasons; COVID-19 is not just a disease that affects those who have become infected, but because of the regulations that have been put in place in terms of people having to shelter in place, there’s been an onslaught of mental health issues developing.
We are seeing an unprecedented number of individuals experiencing mental health issues, and companies have scrambled. We invest into two companies that cover this space, and they haven’t been able to keep up with the demand because they sell directly to companies. So Ginger.io hasn’t been able to keep up with the demand, they’ve hired extensively. Industry-wide, there’s been a lot of growth in that space.
The other area is remote patient monitoring. The COVID outbreak started in the care homes for elderly individuals. A lot of the children of the elderly individuals are trying to find alternative methods to keep their parents from going into those care homes because they’ve been a hotbed for the spread. They’re doing that help with kind of the remote monitoring products.
Lastly, I would say a big area which has seen a ton of growth is in pharmaceutical monitoring or patient adherence. It’s even harder during COVID for the physicians to check in on their patients to make sure that they are taking their medications as prescribed because they have less in-person visits, so it’s all moved online.
1.3. Why has VC investment grown?
From my point of view, we’ve invested into this space for the last 10 years, Omada being one of our first companies, Ginger.io being another one. The resistance we had seen from our peers was a hesitance to invest because of the lack of a reimbursement pathway. The majority of the companies that have been successful in this space, found different reimbursement paths besides just the traditional payers in the healthcare space, because they either refused to reimburse for digital therapeutics or are reimbursed at a lower rate than traditional therapeutics.
However, with COVID, all of the payers reversed their position on their reimbursement structure, and that fast forwarded us about 10 years in the space. This advancement is what we were hoping would happen where the biggest payers would see digital therapeutics as beneficial as the traditional options. It’s been great to see; and I think for venture capitalists that was a big factor that drove them to throw their VC dollars at digital therapeutics companies.
Our firm, Kapor Capital, focuses on technologies that can close gaps of access. For us, we saw digital therapeutics, telehealth, as a machine to have healthcare services reach people who live in rural areas, where there’s usually one doctor and no specialists. To go to a dermatologist or another specialist, they would have to drive at least an hour to another town. That was really why we decided to invest in this space because, it would improve access for patients, and in a lot of cases, the companies that we invest in earlier, specifically mental health services, they provided mental health services at a lower rate. The digital therapeutics around mental health services were provided at a lower rate than for your traditional in-person mental health services.
We saw this really as the future of patient care. The world was going digital. We felt like physicians can’t use fax machines for forever and as a VC, you are at the forefront of innovation, so we made that play, hoping that the future would be sooner rather than later, and COVID just accelerated things.
1.4. Has the growth of the USA healthcare market contributed to DTx growth?
I don’t know if they’re intricately linked. I think that if you look at the big players in the U.S. market, they have seen digital therapeutics as a lower cost way to serve their patients. Kaiser Permanente was probably one of the earliest adopters of digital therapeutics and that’s because they have such an intensive patient base that they weren’t able to serve them in a traditional way. In the U.S. if you look at cases where they have been sued by patients for not having enough mental health practitioners within their practice, and so they had to find a quick way to serve the patients who were in need of mental health.
That’s why I think that they chose to adopt it, but previously, I don’t think that the traditional healthcare market was driving the growth. However, this year, you are seeing more traditional health care services look for digital health solutions, and that has driven some of the acquisitions that we’re seeing from the larger traditional healthcare players in the space.
1.4.1. Did the Affordable Care Act impact DTx growth?
In theory it was supposed to. I think that it did have an effect on the digitization of healthcare. There were guidelines put into place and funding put into place to drive providers to digitize their medical records with the end goal of leading to this idea of interoperability. On that side of things, it did drive more digitalization, but I believe there were certain things that were put into the bill to help drive the growth of digital therapeutics, but I don’t think it made much impact. Overall, I don’t think it was a big driver.
Section 2: Managing Investment Risks in DTx
2.1. How important is it for a DTx company to demonstrate that it can obtain regulatory approval?
For us that’s the biggest part. We’re investing in early stage, seed stage companies, every company we’ve invested in has not yet received their FDA approvals. For us to invest, there has to be a clear pathway. Our preference is if they show that there is a similar digital company that received FDA approval, so that makes the approval process a little clearer. We won’t invest without the clinical trials or the FDA requirements, but if they haven’t conducted any studies of the efficacy of their devices or their therapies, then we’re not investing.
2.1.1. What evidence gives you confidence to invest?
It’s really down to those studies that they have done, and what were the outcomes from the studies? What has been the outcome for people who have utilized it? Given that we’re investing very early, if DTx companies have done studies, it’s been very limited to small groups, usually under a hundred people unless they’ve done studies in collaboration with a university. Again, we’re looking for that outcome data, and then if they’ve actually launched the product, what we look for is momentum in terms of how many people are coming onto the platform, and then also retention, how likely are the patients who are using the platform or the doctors who are prescribing it, how likely are they stay with it over time?
2.2. What factors affect the commerciality of a DTx product?
For us, the biggest thing is reimbursability. Unlike in the UK or other countries that are a little bit more advanced than in the USA, we have a multiple payer environment. So, it’s about looking at if the DTx company are taking the route of having health insurance covering the digital therapeutic. Is there an approved pathway for reimbursement? Is there a CPT code? It’s our billing code for the therapeutic that’s reimbursed. If not, then it’s direct to consumer product, we’ve actually seen that a lot of our companies have gone direct to consumer in order to build the data that they needed to then get their FDA approval.
Our big thing is, if it is available at a cost that would that be prohibitive for our consumer base? That’s what we’re really looking for; is there a pathway for this to become a billion dollar business? Usually we don’t think you can get to that scale without being reimbursable.
2.2.1. What factors impact profitability of the DTx product?
For our companies, the ones who are most profitable are the ones to achieve FDA approval and have been found to be reimbursable. We have had some of our companies who have been able to show enough value to self-insured employers and have gone that route, and they’ve been able to reach profitability that way.
It’s interesting because in the startup world profitability is usually not the goal. If you are a company that is profitable, investors will usually look at you and say, ‘you’re not growing fast enough.’ Investors, even later stage investors, are looking more towards growth versus profitability, but there have been companies within our portfolios who do not want to raise numerous rounds of funding, and so they have prioritized profitability over growth.
If you look at the healthcare companies who’ve gone public recently, the ones that I know of intricately, none of them are profitable.
2.3. What are the different business model options for DTx? What works well?
Reimbursability from payers is our number one goal when we’re looking at potential digital therapeutics, just because that way you can reach the most patients. We’re focused on increasing access. Reimbursement and health insurance are how most people pay for any sort of healthcare service. If a product is reimbursable, it’s just going to reach the most people. That’s what we’re looking for and that’s our preferred pathway.
2.3.1. What business models have not worked well?
I think the hard thing is if you go straight consumer in terms of the consumer is buying the product. I’ll use Fitbit for an example, which is not a true digital therapeutic.
Did they reach scale? Yes, but there was only a certain level. The smartwatch market is very crowded. If you’re playing in a market that is more consumer heavy, you’re likely to have increased competition.
We don’t invest in products which might serve people who run marathons and they want to increase their time by 30 seconds for example. Versus someone who may have type two diabetes, and the doctor has told them that need to watch their sugar intake, or they need to be eating better type of foods and who may also have mental health issues.
For us, we’re going more towards the direction where it’s ‘a need to have product’ versus it’s ‘a nice to have product,’ because if you need to have it, then you’re continually having to purchase it. Retention and potential financial growth will continue to be there versus a Fitbit style product where you don’t need to have it. So, when COVID-like situations happen where your income may be cut, the non-essential products are usually the first thing to go versus, the product that is essential for your wellbeing. It’s kind of like investing in aspirin versus vitamins.
2.4. What competition is a DTx company up against?
We’ve seen more competitors this year, I think I’ve taken more pitch meetings this year than I have had in any year of my 10 year career. Especially now that startups are seeing such attention in this space, it’s just driving more individuals to create businesses in this space. I would also say that there’s a lot of early stage companies in the seed category where I invest, and there are less investors in the later stage categories.
What is happening, is at each stage, companies who haven’t met certain metrics are finding it harder and harder to raise follow on spending because there’s just so much. It’s kind of like a funnel. It’s very wide at the end, there’s a lot of money, there’s a lot of opportunities to receive investment, but as you go through, the barriers get higher and the competition is more significant so you just have to see the best of the best to receive investment at the next stage.
2.5. How can venture capitalists support their DTx portfolio companies during COVID?
One, is funding. We help them, not only by investing in them, but also helping them find follow on investment cap. In the U.S., there’s something called the SBIR grant, phase one and phase two, so it usually is a pretty tedious process. We’re helping them go through that process and find the other grants that may be available, which would give them more runway to build the product.
The other thing that is an issue is actually navigating the FDA process. We have regulatory consultants that we work with, who work with our companies to help make that path a bit easier.
Then the biggest thing is going into the world that is the payers and the providers. How do you sell to hospitals? How do you sell to insurers? The companies that we have found to have been most successful in this space have had previous experience selling into those different institutions, but for those who haven’t, that is a big part of what we do where we are making those introductions to potential customers.
I think we’re lucky because we’ve invested in this space for a while, so there’s a lot of peer to peer learning where startups we invested in 10 years ago and who have managed to navigate the market can share their wisdom with new DTx companies we invested in just a week ago.