Platforms in Digital Health: 2020 Market Report Shows 420% Funding Increase Over Past Four Years
Updated: Jan 29
We’re all familiar with the rise of technology platforms in our everyday lives, and healthcare investors are surely familiar with the “We’re Uber for X”-style pitches. The reality is that few multi-sided platforms (hereafter simply ‘platforms’) have succeeded in healthcare. But because of their unique business model and ability to create new, novel, targeted networks, platforms are arguably best positioned to address the systemic, complex issues that continue to plague the healthcare industry and all who interact with it.
As detailed in Summit Health’s inaugural Platforms in Digital Health: 2020 Market Report, investment in healthcare platforms is taking off, representing the fastest-growing business model and outpacing any other digital health investment category over the last four years (2017 - 2020). This report includes data on funding, market progress, insights and analysis of how digital health platforms are evolving and the trajectory of the investment landscape.
By sharing data about platform growth, development and investment trends, and analyzing the progress, investors and entrepreneurs are armed with the information they need to begin or continue utilizing platform concepts to help solve critical market problems in healthcare.
Digital Health Platform Investments Grow 4X Over Four Years
Investment in digital health platforms has grown a whopping 420% from 2017 to 2020, representing a 74% annual percentage growth rate, whereas investments in non-platform digital health businesses grew 65% overall, 18% annually, during the same time period. Investment in digital health platform businesses has also seen consistent growth over the past four years, whereas investments in non-platforms dipped in 2019, with early-stage investments continuing to shift to digital health platforms.
Four of the Top 10 Funding Deals in 2020 Were for Platforms
When looking at the top 10 digital health platform deals specifically, they represent $1.5 billion of total capital invested in 2020 alone, including Olive, Amwell, Grand Rounds, Lyra Health, Babylon, DNAnexus, Medable and Doctor on Demand. (For a detailed breakdown on funding and deal size, please request full report.)
It’s worth noting that the level of digital health platform investment is still significantly lower than that of platform companies outside of healthcare, which see the lion's share of funding in their respective verticals. For example, FoodTech (e.g., instacart, Postmates, GrubHub, etc.) saw the majority (87%) of its funding going to platform companies in 2020, up from 53% in 2017, and EdTech (e.g., Chegg) saw 68% of its funding go to platform companies in 2020, up from 43% in 2017.
It’s no surprise that healthcare is notoriously slow when it comes to technology adoption versus other verticals, given the complexity and uniqueness of the industry, its economic structure, misaligned incentives, and lacking technology infrastructure.
The key takeaway for investors and entrepreneurs is that digital health platforms will continue to command healthcare’s investment dollars and represent a significant opportunity for increasing returns -- able to deliver value and solve foundational problems in a way that hasn’t been possible before, and that is unique to platform technology capabilities.
Platforms Achieve 2.7X Higher Post-Series C Valuation Premium
Valuations of digital health companies that raised capital during the 2017- 2020 timeframe varied significantly based on company needs, position and prospects, and macroeconomic conditions. But the data shows that while digital health platforms saw similar valuations as their non-platform counterparts through series B funding rounds, they tend to see a 2.7X higher pre-money series C valuation premium. (See full report for a detailed breakdown.)
What is driving the premium?
The valuation premium is likely explained by network effects, which refer to the fact that a platform's value to its users increases (and decreases) according to the number of users on the network.
Such a phenomenon can create a virtuous cycle, as adoption and use by one group of users increases the value to another, and vice versa in a 'flywheel' like manner.
Platforms Addressing Healthcare’s Greatest Challenges
Digital health platforms are uniquely suited to address challenges endemic to healthcare, where most issues ultimately stem from a lack of uniform data and the massive fragmentation that exists both within and among different stakeholder groups, impacting everything from care coordination and care quality across the spectrum.
Platforms are perfectly suited to address healthcare’s systemic challenges for many reasons, including their ability to:
Effectively and efficiently match supply and demand: Allowing users on different sides to interact directly with each other increases transparency, reducing search times and associated costs on both sides, reducing or eliminating the role of antiquated and ineffectual middlemen.
Increase access to knowledge and information: Platforms allow people to tap into a network of expertise far beyond their own, increasing access to and the speed of expert knowledge and information sharing.
Reduce transaction costs: Virtually all commercial transactions include common components, including contracting, payment, legal uncertainty, risk mitigation, and post-transaction policing. Platforms can standardize these ‘many to many’ processes and leverage economies of scale to bring down costs.
Aggregate the “long-tail”: Many “long tail” segments are unattractive to traditional pipeline businesses due to unattractive unit economics. Platforms can subsidize and aggregate the long tail to make technology, information, and tools available to those who have not had the time or resources to make investments.
Reduce information asymmetry: Problems of information asymmetry--specifically, differences in access to relevant information between buyers and sellers--have long plagued markets. Platforms can bring radical transparency by increasing supplier competition and allowing buyers to share feedback with others.
Unlock innovation: Platforms that successfully bring together users from different sides and reduce existing transaction costs can unlock “shadow markets” by adding other sides to the network or opening up access to the platform to third party developers.
Platforms Returning Value at Scale:
Early stage investors looking to solve for some of the most pervasive, dysfunctional areas of healthcare may be considering how to apply blockchain, AI, genomics, or other forms of hightech to accomplish. But the truth is that, to fundamentally solve for a majority of these systemic problems in healthcare, it requires linking disparate parties together, better matching supply and demand (whether for goods, services or information), and enabling people and organizations to tap into networks beyond their own, allowing for transformation at scale.
Platforms are uniquely capable of driving value at scale, a critical consideration for investors and startups alike, and can do so in a number of ways, including:
Realizing “demand side” economies of scale: Investors look at lifetime value of a customer (LTC) versus customer acquisition cost (CAC) to understand a firm’s ability to realize attractive per unit economics. For most tech firms, LTV is a function of price (which is static) and churn rate; platforms, however, can realize increasing revenue per customer over time, however, leading to increasingly attractive per unit economics. Platforms increase demand-side economics which increases per-unit economics.
Outperforming operating margins: Of the top 20 Fortune 500 technology firms, those with platform business models realized EBITDA margins 12% higher than that of non-platforms.
Consistent, faster growth: Platforms outperform their non-platform peers in YoY revenue growth, with a 10% higher CAGR -- a huge difference when looking at projected growth and returns.
The $1 Trillion Opportunity for Platforms in Healthcare
Our analysis suggests that there is a $1T+ total available market (TAM) opportunity for digital health platforms to address healthcare’s greatest challenges, given platforms’ business model, capabilities and operating structure. These types of problems are systemic and pervasive, and won’t be solved alone by AI, blockchain or any of “the omics”; they will be solved by connecting parties together.
Platforms are incredibly efficient at bringing disparate parties together to transact, and to do so at scale. They are also capable of solving problems in healthcare that historically couldn’t or haven’t been solved, frequently because nobody has been willing to pay to fix them.
By creating efficiency and bringing it to asymmetric relationships, matching supply and demand, and facilitating connectivity and information sharing, platforms create targeted marketplaces that previously didn’t exist, capable of solving problems in new, effective ways. This includes employing efficient solutions to longstanding problems, such as platforms’ ability to tackle drivers of waste that cost the industry billions of dollars each year:
Platforms solving the problem of “Who pays?”
In the past, companies may have brought valuable healthcare technology to bear, seeking to solve critical problems in the industry, but these solutions were ultimately not adopted because of a lack of incentives and unclear path to pay for the service. Clinical decision support solutions are a great example. Alert fatigue is a huge concern, but very few doctors and clinicians would invest in or appreciate the value of high-quality, in-workflow diagnostic support or alerts to help them provide safer, quality care.
Why? The main issue thwarting adoption is lacking or misaligned incentives.
Who pays? Historically, doctors haven’t gotten paid to deliver higher quality care (the continuing shift to value-based care still being in its relative infancy), so it’s been hard for providers and delivery systems to make a case for technology investment, without understanding how it will help the bottom line.
Platforms, however, are solving for this fundamental misalignment because of their ability to provide digital solutions and technology access to multiple constituents, where many parties benefit from the problem being solved.
One company leveraging platform concepts to improve healthcare efficiency and deliver value is CoverMyMeds (CMM), a platform that streamlines the typically painful prior authorization (PA) process, which has plagued pharmacies, doctors, and patients alike for decades.
CMM knew there wasn’t a market for them to sell to doctors or pharmacies directly. But they also knew if they gave these parties access to the technology anyway, by monetizing it elsewhere, they could deliver a tremendous amount of value and drive widespread adoption. This strategy paid off, where CMM was acquired by McKesson in 2017 and continues to see growth, adoption, and value realization today.
Similarly, GoodRx, a platform that helps consumers shop for the most affordable prescription drug prices, is solving a fundamental problem for consumers by giving them the information they need to make the most informed, cost-effective choice, and efficiently connecting the various stakeholders required to make that possible.
We’ve Reached the Tipping Point: Learn More About Digital Health Platform Growth and Investment
Seven of the top 10 valued companies in the world today are platforms, with a combined market cap of $7 trillion. Healthcare may be behind other industries, but if FoodTech and EdTech are even a directional indication, digital health platforms will continue to see growth, with platforms serving as the dominant business model to create value and provide a triple win for consumers, providers, and digital health investors alike.
Digital Health Platforms Paving the Way, and Seeing Success
Both startups and legacy stakeholders are starting to see success and doubling down on platform development and optimization, including hospitals and health systems looking to leverage the benefits of platform concepts (e.g., Mayo Clinic Platform).
The consumerization of healthcare, alignment of incentives, and achievement of value-based care requires platform innovation and a better understanding of why platform concepts are increasingly becoming the (primary) vehicle to effect change, solving for fundamental issues in healthcare delivery, connectivity, interoperability, and information transparency.