I’m sure we’ve all heard the news in passing about how these times will affect our view of healthcare and how much we invest in it so I wanted to check it out. Let’s start with a big with a bird’s-eye view of the whole venture capital ecosystem. Here’s a historical look. I’ve plotted the amount of venture capital investment over time broken down by investment stage and then added the purple dashed line that notes the number of venture capital deals over time.
Looks pretty reasonable. I shaded vertical regions to correspond to recessions, which helps us check our intuition. Yup, looks like there’s a steep rise during the dot-com bubble followed by a sharp drop leading into the early 2000s recession, with deal flow finally stabilizing at the end of it. As for the Great Recession, it’s less obvious, but investments plateaued prior and then dipped during the actual recession. If anyone has a better sense of why the Great Recession looked far more different for VC than the early 2000s one, I’d love to hear. I’m looking at all of you–my econ major friends, especially those who wrote a thesis. I imagine it has to partially do with overvaluation during the dot-com bubble and with the Financial Crisis of 2007-08 not impacting non-traditional financial vehicles like VC as directly.
But back to what we care about. Venture capital–both in the amount invested and number of deals–has been trending down since 2018 or so. The most recent point on the plot corresponds to the first quarter of 2020. As we know, markets did poorly in Q1 2020 due to the COVID-19 pandemic. It looks like the number of deals has continued to fall, while amount invested saw a slight bump-up. Most of that bump-up is from expansionary stage investment so I wouldn’t say folks are exactly tossing in money wildly to new ideas right now.
Let’s dive a bit deeper and look at healthcare specifically. I chose to plot it against the Internet industry as well since it’s a good litmus test of how things are going in tech and venture.
Most trends look similar from our macro view–spikes in the dot-com boom, dips in recessions. It seems like healthcare is less volatile but also slower-growing overall. Internet industry investments look like they’re plateauing or declining. I wouldn’t say the opposite is necessarily happening in healthcare, but it does look like the amount invested has actually gone up as deal counts have remained consistent. I’d say that’s pretty solid for healthcare given the bigger-picture, macro trends.
So what’s happening in the healthcare industry right now?
Well, first, we turn to our favorite vocational school for some insight. Harvard Business Review has this short piece on what they call “The Consolidation Curve”, which is essentially the life cycle of an industry. I’m hoping it can be helpful to think about this life cycle as what it is–a loop. A lot of really complicated topics–circuit systems, the water cycle, Markov chains, my behavior at home–can be modeled rather elegantly in loops.
We’re seeing the simultaneous consolidation of healthcare systems and unbundling of healthcare services right now, and, if anything, this behavior that is further exacerbated by the coronavirus. In the last five years or so, we’ve seen small clinics absorbed by larger ones, university hospital systems buy up local ones, hospital M&As happening across the board. Coronavirus has resulted in closures of private practices and pay cuts among private equity-backed hospitals. On the other hand, we’re also seeing a gradual unbundling of healthcare services, oftentimes driven by tech–sometimes as simple as a website. We’re seeing direct-to-consumer brands like Hims, Curology, Nurx. Then there’s the rise of at-home testing startups–even gimmicky ones like 23andMe–that may one day disrupt how we use and apply our knowledge of the human genome. The healthcare startup, Elephant, I interned for was a true Swiss Army knife: consultations, diagnoses, prescriptions and so much more, all in one. The areas are endless: virtual primary care, telemedicine, healthcare payroll, radiology, etc.
This is all happening because these individual services provide a better product: better healthcare. These direct-to-consumer consultations are personalized and can all be done at your couch. These at-home testing companies provide products that can be used at, well, the ease and comfort of home. These startups that provide unbundled services ultimately provide more personalized, more efficient, and increasingly effective healthcare.
What does this mean for the future? It’s certainly daunting in some ways. We’re entering uncharted waters, where our lives and, scarily, our health will be increasingly quantified and turned into data. Whose hands will this data belong to? Will this data one day preemptively prevent us from seeking a job because of what it knows about us and our health? But it’s also an exciting time. These startups have the chance of, one day, informing us of underlying health conditions before they become fatal or locating the beginning of a pandemic before it becomes one. If anything, however, healthcare as we know it will change. The role of doctors, the purpose of hospitals, the definition of a patient will all change. We are seeing the fragmentation of healthcare, from a monolithic, viscous system to a nimble, personalized one, but these questions of privacy and transparency remain.