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The Parallel Journeys of Fintech and Healthtech
What the history of fintech can tell us about the future of healthtech
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The healthcare and financial services industries share many similarities. Both have legacy traditional institutions; most of the oldest banks, insurance companies, and health systems have been around for more than a century. Then there’s the systems’ complexity–the pain of sending a wire transfer or understanding personal finances feels analogous to trying to decode a medical bill or get records sent from one provider to another. And as far as customer experience goes, people rarely seem to enjoy visiting a bank branch or doctor’s office. Both industries have low customer satisfaction for clear reasons.
Healthcare and financial services are immensely important but complex. Each has detailed government regulations, opaque ways of operating, and established incumbents with entrenched advantages. In the earlier days of venture capital, it wasn’t clear whether either space would emerge as a viable area for startups. But emerge they have.
Today, fintech is certainly more mature. In 2021, venture capitalists invested~$132B into the space across ~5,000 companies. Healthtech companies raised $57B in 2021 across 2,900 companies, about the same amount fintech companies raised three years ago in 2018.
The parallels between where healthcare is today and where fintech was three to five years ago are striking. Respectively, 2021 and 2018 marked the first time venture funding in healthtech and fintech saw more than 50 percent year-over-year growth. And the implications for where the healthtech ecosystem will go, should it follow a similar path to fintech, are exciting.
Fintech Then and Healthtech Now
There are clear similarities between what’s unlocking the healthtech ecosystem today and what unlocked fintech three to five years ago.
For a long time, healthtech companies struggled with a conundrum: if they approached large health systems or payers early on, these entities were unlikely to allow them to build a broader set of services given their limited track record and size. Working with these entities required healthtech startups to build customized point solutions that were difficult to expand to other customers. But not working with these organizations meant there simply wouldn’t be enough revenue opportunity and perceived addressable market to raise a Series A or B. For these reasons, it was difficult to get early traction and build a broad product with clear expansion potential. But two things have changed in the ecosystem that were similar to what happened in fintech years before:
Change #1: There are enough startups to sell into.
In fintech, companies that did well sold to both incumbents and other startups. They could balance the shorter sales cycle, along with smaller contract startup customers who helped them iterate on their product, with working the longer enterprise sales cycles. And they could also tap into large contracts with incumbent behemoths for more than just a very specific point solution. This allowed for a smoother revenue growth curve and more opportunities to demonstrate initial proof points which, eventually, made selling to larger customers easier. Companies like Alloy, Plaid, Ramp, Brex, Vouch and Stripe are great examples of this.
With healthtech funding increasing 80 percent last year alone, the same is starting to be true of healthtech. Companies like Medallion, Canvas, Wheel, Candid, SteadyMD and Zus Health are scaling to their Series A, B, and beyond, and are largely working with other healthtech startups. These companies can grow with the startups they support. Their customers are more willing to allow them to provide a broader set of services, even with a leaner team. All the while they are building robust capabilities and case studies that should make their product even stronger for the incumbents to which they will eventually sell. When they do approach these incumbents, they are much less likely to be slotted as a point solution.
Change #2: Large early venture funding rounds allows for a quicker ability to serve larger, complex customers.
Fintech and healthtech businesses don’t always look like traditional software businesses. Oftentimes they have quite different margin profiles. They also have massive Total Addressable Markets (TAMs) given global payment flows and healthcare being over one-sixth of the U.S. economy. As evidenced by increased funding, venture investors have become more comfortable with investing in both spaces.
This has been crucial because some ideas in both fintech and healthtech require quite a bit of funding off the bat. A more classic Lean Startup approach–iterating product off a lighter Minimum Viable Product–is difficult to do when large end customers require end-to-end solutions from the get-go.
In fintech, larger funding rounds have enabled insurance, payments, and banking-as-a-service companies like Orum, Coalition, Fast, Check, Bond, Unit and Synctera to build broad products early.
Similarly large rounds are needed in healthtech to enable new care providers serving large employers, payers, populations, or health systems. As discussed above, these end customers typically require robust solutions before they’re willing to consider a startup for anything beyond a point solution. Payers usually only want to talk to companies that can treat a substantial number of their members. Health systems want solutions that span across the services they provide.
In the last year, we’ve seen many companies raise upwards of $30M early on, often more than $100M, in their first year of operation, enabling them to undertake more audacious offerings from the start. Examples of this include Transcarent, Waymark, Cadence, Commure, Belong Health, Sprinter Health, Elemy, Vori Health and Patina, among others. These large fundraises allow companies to go after incumbents in a real way, whereas years earlier, startups could not have tested these ideas on such a significant scale.
A third change I think has been crucial in propelling both ecosystems forward:
Change #3: A diaspora of talent from earlier startups who deeply understand the space and its problems are building companies
Both finance and healthcare intimidate outsiders with the complexities of payments flows or insurance reimbursement–and this has created opportunities for entrepreneurs who are knowledgeable about backend processes.
In the mid-2010s, strong founders emerged from companies like Affirm, Nubank, Square, and Stripe. These founders built products based on what they’d seen in their previous roles. The SentiLink team built fraud products from a gap they’d seen at Affirm; the Middesk team took learnings from Know Your Business (KYB) problems they’d seen while at Checkr; and the Embed team took their insights from when Square launched stock trading.
A few years later, sets of digital health companies with talented teams interested in their own future entrepreneurial ventures began to emerge from larger startups such as Oscar Health, Clover, Flatiron Health, Bright Health, Ro and Trialspark. Entrepreneurs at these companies had seen healthcare problems firsthand and had a deep understanding of how to solve them. They also had the connections to bring in clinical and sales expertise so they could sell into the industry. For example, the Uno Health team is addressing enrollment hurdles they saw at Clover and Oscar, the Firsthand team is addressing issues in Serious Mental Illness treatment they saw at 1DocWay, and Garner Health is tackling the care navigation issues they observed at Oscar.
This diaspora of talent will only further grow given the number of digital health unicorns has doubled over the last 18 months. There are more talented entrepreneurs who know the nuances of Fast Healthcare Interoperability Resources (FHIR) standards or how to negotiate risk contracts. There are more clinicians who have experience working with startups. And there are more tech executives with impressive healthcare rolodexes.
Implications for the Future of Healthtech
So what can the last few years in fintech tell us about the future of healthtech?
Prediction #1: As U.S. opportunities become more specialized, international healthtech companies with broader focuses will become increasingly attractive to investors
Today, Latin America represents 7 percent of all fintech funding but only 2 percent of all healthtech funding. As business models get proven out, international markets, specifically emerging markets, are particularly attractive to investors. Why? Because while the crowdedness of the U.S. landscape might necessitate a company to do one specific thing well, international companies can have the opportunity to do more things. This is apparent in the relative contrast between Nubank, which offers credit cards, bank accounts, insurance, e-commerce, and investments and similar consumer fintech efforts in the U.S. M2P has a similarly broad set of services in India. “Superapps” like Rappi, Grab, and Gojek offer food delivery in addition to lending and trading. Ambitious international companies such as Babylon, Osana Salud, PingAnDoctor, Pharmeasy and Dr Consulta are now serving a broad set of patient populations with a variety of care models and enabling technologies.
If anything, the success of fintechs in these markets should make it easier for investors to be comfortable with this next wave of healthtech companies in the same geographies.
Prediction #2: The next few years will see a set of successful IPOs that dramatically shift investment to certain sub-categories while other heavily funded areas today fall out of favor
Five years ago, it was not clear how valuable fintech companies would prove to be.
In the last few years, the IPOs of Marqeta, Affirm, Coinbase, Adyen, Bill.com and Upstart have traded with market caps over $10B. This plus the large public market appreciation of Square and private market appreciation of Stripe have made clear the attractiveness of the category. This in turn has propelled massive later stage investment in leading fintechs like Bitso, Checkout.com, Coinswitch Kuber and Rapyd that have similar business models.
Healthtech doesn’t yet have the same long tail of massive outcomes, with Veeva the only healthtech name trading above $15B (at ~$25B). With relatively few public companies, it is not yet clear where the most massive outcomes can be created. There are many heavily funded areas of healthtech vying to join Veeva in the set of most successful outcomes.
As the relative results of public fintech companies have played out, not all fintech subcategories have fared as well as others. While payments companies have traded strongly, consumer companies like Robinhood and Coinbase–along with insurtech companies–have struggled in public markets. While many areas within fintech received investments before, private investors are using more discernment in their investment choices.
The same should happen in healthtech over the next few years. A host of categories are receiving investments, but I expect the focus to narrow as public markets favor certain spaces over others. Risk-based providers have traded above expectations while insurers have struggled relative to their last private rounds. It will be interesting to see how employer solutions, next generation clinical trials and tech-enabled at home care companies trade given the sparse amount of public comparable companies today.
Prediction #3: Today’s healthtech startup trend of increased specialization will reverse as these companies build out much more holistic offerings over the next few years
In the mid-2010s, fintech companies came to market with specific offerings. Neobanks offered savings accounts exclusively, Robinhood focused on investing, and Square focused on payments. But in the last few years we’ve seen a “great rebundling”--businesses have started layering on new product lines and capabilities, looking a lot like each other.
Similarly, in healthtech today there’s been a trend of more companies targeting specific conditions, patient populations, and geographies. In the coming years, I expect these companies to converge and offer a much broader set of services, in many cases through M&A. This makes sense given how many patients have multiple chronic conditions and how many large health systems and payers are suffering from vendor fatigue.
If fintech’s past serves as a good indicator of healthtech’s future, then the next three to five years should certainly be interesting!