Investments in digital health increased in 2021but funding has since dramatically dropped.
Bill Taranto, President of Merck Global Health Innovation Fundrecount MobiHealthNews what Merck cares about when it comes to investing in digital health and what health tech companies need to focus on to raise venture capital in 2023.
MobiHealthNews: What do you look for in a digital health company when considering investing?
Bill Taranto: So our investment thesis is kind of split into three parts. The first is that we have this kind of concept that data is commonplace… in the future healthcare market. And so we want all of our businesses to be sort of data businesses, broadly speaking.
The second is that ad hoc solutions don’t work in healthcare. We think it really needs to be interconnected, where companies work together to try to provide a more integrated solution. So we are looking for companies that help us think about this integrated solution.
Finally, we start with a use case. Maybe that’s something Merck is trying to solve. For example, they want to identify more patients, or it’s something else in health care that we’re trying to solve, like… how do we prevent strokes and heart attacks? But the theory starts with the use case, and then from there we say, “Well, can we find a digital health company that helps us solve this use case?”
But the problem you have with digital health is that no company can solve this problem 100%. So what we’re trying to do is identify something that we call a primary tenant – a company that can solve a lot of this use case – then we try to make that investment.
MNH: Have the recent economic uncertainties and banking problems affected Merck’s investment strategies?
Taranto: This does not directly affect our strategy. It more strictly affects portfolio companies. We’re like anybody else, and we sit on 38 portfolio companies, and not all of them are raising capital. We did a pretty good job of making sure we had a good cash trail.
But what’s going on with the market today, and SVB [Silicon Valley Bank] is just one piece of the puzzle, but where they play an important role is that they were our industry’s friendliest bank, but their bankruptcy is going to cause problems around the debt that exists.
You may remember in ’20 and ’21, companies raised capital at really huge valuations. And they found out in 2022 that they couldn’t increase. P&Ls [profit and losses] did not support these assessments. So that forced the company to do one of two things: it could incur insider debt or it could incur bank debt. The problem caused by SVB is that the industry is going to tighten the screws on companies regarding the covenants associated with this debt.
MNH: Many companies went public through a merger with a special purpose acquisition company in 2021, and some of those companies are now in deep trouble. Was it a bad idea for some companies to make a SPAC public?
Taranto: I think that’s because part of the problem is kind of the general structure. So I don’t blame the companies. Look, when you’re desperate for money, if there’s capital available, you go for that capital. But the problem is, it’s another way to get into the stock market, but it doesn’t solve your problem of not having, maybe, a good P&L. You are not making the income you would like to make.
It doesn’t fix your business. It just gave you access to capital. That’s the first thing you really need to do, part being honest with yourself and what your situation is, but part fixing your business.
Then try to understand, what is your story to come? What makes me believe in you that you have an inflection point? It’s about getting the narrative right. That’s what companies need to do better is tell their story. When they’re not honest about their P&L and the situation, they’re telling the wrong story.
So part of it is fixing the fundamentals of your business, which a lot of businesses don’t think about. And part of that is because they don’t watch their money well. They are not good stewards of the money invested in them. They spend very quickly. They hire too quickly.
But this is evident from what companies are doing. They don’t quite look at their burn rates and cash flow in a way that preserves it and takes it to the next level. And that’s what you really have to do in this market is embrace the downside. Dilution does not cause bankruptcy, lack of liquidity causes bankruptcy.
MNH: Would you like to add anything else?
Taranto: I am always optimistic. Yes, we are in a bit of a bear market, but it’s cyclical, isn’t it? And you should embark with optimism. There are things you can do to position yourself for a raise and that’s part of the story.
The second is that digital health is a great place. We really do a lot. We reduce costs, we create efficiencies, we create efficiencies, but most of all, we save and improve the lives of patients. It’s part of your story. It’s not just about your P&L.
Howard Rubin will offer more details during the HIMSS23 session “Increasing Access to Care for Rural and Underserved Communities”. It is scheduled for Tuesday, April 18 from 3-4 p.m. CT at the South Building, Level 1, Room S105A.