Bessemer Venture Partners Unveils State of Health Tech Report at HLTH 2023

2023-10-10

In its inaugural State of Health Tech report presented at HLTH 2023, Bessemer Venture Partners noted that despite a “perfect storm” of a market downturn coinciding with the trough of disillusionment in the health tech innovation life cycle, there are plenty of reasons to be encouraged by the progress technology companies are making in healthcare. The report also shared predictions for health tech trends in 2024. “Like any innovation hype cycle, there are peaks and troughs, and we’re now in a trough, and everyone’s feeling gloomy. It happened to be that the trough coincided with the market downturn, so it’s been doubly challenging. I think a lot of people are gloomy, and there are reasons to be gloomy.” said Steve Kraus, a partner with Bessemer Venture Partners, in a phone interview ahead of the report’s publication. “But I think you have to add some perspective. We only started 10 years ago. We’ve got a long way to run. So we want to also point to how far we’ve come and where we think we’re going…which is why we’re still super optimistic about the future.” Kraus acknowledged that while there are a lot of overvalued companies in healthcare, currently, there are plenty of companies providing real value, helping to reduce costs and improve patient outcomes. Among them are physical therapy business Hinge Health, part of BVP’s portfolio, and mental health support apps such as Headspace and Calm. The companies that will succeed and make it out of the trough of disillusionment will have five major characteristics in common, according to the report: Hair on fire problem: Solve a mission-critical problem for your customer. Hard ROI and clinical outcomes: Demonstrate clear and fast return on investment for your customer. Large and growing market: Take advantage of tailwinds and systemic shifts for adoption and regulation to articulate a strong ‘why now’ for your opportunity. Attractive unit economics: Focus on high margins and recurring revenues, which are strong signs of attractive and enduring business models. Strong multi-disciplinary teams: Build a team that marries industry and technical knowledge to accelerate distribution, and build best-in-class product. Looking ahead to 2024, the BVP report makes a few predictions for 2024 health tech trends. Among them are: The rise of Services as Software Advancements in generative AI and large language models (LLMs) are spurring a new generation of software applications providing a service as the final product. These developments have flipped the traditional SaaS model, creating a new “Services-as-Software” paradigm. It provides an opportunity for founders to gain market share by reimagining how they can provide solutions that were not possible in the past. One example of Services as Software cited in the report is payments workflow automation, where AI/machine learning products help buyers drive revenue growth and make informed decisions based on clinical and financial data. Revenue cycle management companies aligning incentives The current challenge of revenue cycle management is that it’s characterized by inefficiencies and misaligned incentives. The report notes that there’s a great opportunity for software to become the connective tissue between payers and providers, enabling a more transparent and efficient payment system. “In order to succeed at this task, business models must intricately follow the money and align incentives between the stakeholders. We are excited about companies that can harmonize and deduplicate antagonistic systems, such as prior authorizations and utilization management, claims adjudication, payment integrity, and quality audits.” The report also sees promise in companies facilitating the transition to more risk-based payment models, such as payers exploring individual coverage health reimbursement arrangements, and consumer directed healthcare. Health tech businesses leverage indirect monetization for a distribution advantage Companies that can earn a distribution advantage provide cheap or free software and service to their customers, shortening their sales cycles. These companies are positioned to leverage indirect monetization strategies. Among the companies illustrating these trends cited by the report are Verse Medical, Rupa Health, HouseRx (a BVP portfolio company) and Doximity. Making the biopharma value chain more efficient Software and AI could transform drug discovery and commercialization. Among the companies that exemplify these trends are Peptone (a BVP portfolio company),Seismic Therapeutic, Generate Biomedicines, Evozyne and Profluent.