VC's Are Flocking to Healthcare Startups

The healthcare services industry is ripe for disruption. The introduction of the Affordable Care Act and the increasing affordability of technology are bolstering dramatic changes in this more than $7.2 trillion industry, the likes of which we haven't seen since 1965 when President Johnson signed Medicare and Medicaid into law. And venture capitalists are taking notice.

Startup Health recently called 2014 "
," and when you look at the numbers, you can see why:
  • Digital health startups received $6.5B in funding in 2014, up 125% from 2013.
  • Total venture investment for U.S. healthcare companies clocked in at $11.93B in 2014, composing nearly a quarter of all venture capital investment for that year ($48B).
  • 2015 is on track to be a record year for venture investment in healthcare: through Q3, we've already seen $11.67B invested in healthcare companies.
  • The number of healthcare venture funding deals grew 200% between 2010 and 2014.
  • Startup data aggregator Angel List shows there are some 10,230 healthcare startups vying for the attention of 29,102 investors in that space.

Healthcare startups have always been attractive to venture capital, but where did this sudden interest come from? Quite simply, healthcare is overdue for disruption, and tech startups are in the perfect position to modernize the industry. The technologies we're developing can and will overhaul how healthcare providers, workers, and families work together -- so naturally, venture capitals want to get in on the ground floor.

After working many years in this industry, I can point to three reasons why we're seeing record investment levels in healthcare and a shift towards leaner, more tech-oriented models.

First, many parts of the healthcare industry still rely on technology that's either outdated or inefficient. For example, earlier this year 40,000 home-care workers in Los Angeles County -- many of whom only earn $9.65 per hour -- had to wait weeks to be paid because the physical timesheets they used were lost in the mail. These are workers who struggle to make ends meet even when they're paid on time. For a city that's home to Silicon Beach and some of the brightest minds in both tech and healthcare, this is an embarrassment.

Second, healthcare startups that tap into the marketplace model are gaining credibility in the public eye thanks to the rise in the sharing economy. Companies like AirBnb taught us that it actually can be safe to rent an apartment from a stranger. Lyft taught us the same thing with ride sharing. We're also seeing startups successfully challenge unfavorable regulatory climates.

In July 2015, Uber embarrassed the Mayor of New York, Bill de Blasio, after he tried to limit the number of Uber drivers in the city.

Lastly, startups offer the unique opportunity for everyone involved in the healthcare system -- healthcare providers, workers, and families -- to have improved experiences at lower costs. Insurance startup Oscar Health, for example, raised $350 million in its bid to use data and technology to make the insurance business work as smoothly as an internet service. Online pharmacy PillPack is using robotics and machine learning to help people avoid waiting in lines at drug stores; they've raised over $60M to date.

Other notable funding rounds in healthcare in the past two years include Privia Health ($400M), Nant Health ($320M), Doctor on Demand ($50M), PillPack ($50M) and HomeHero ($23M). All these companies are positioning themselves as technology-enabled companies that are increasing access to healthcare services while lowering the costs.

Healthcare startups are making it easier for consumers to avoid slow and costly bureaucratic processes. The challenge for these companies is knowing where to interject technology in the user experience and where to interject a warm touch. At HomeHero we learned that nearly 90% of our customers want to talk to a person on the phone before sending a caregiver into their parent's home, but an even higher percentage prefer automated timesheets and billing over manual invoicing. Understanding this balance is imperative.

With the introduction of the Affordable Care Act and an elderly population that will double by 2050, our society is holding the healthcare industry to a higher standard than ever. And venture capitalists are taking notice.