How Investors Evaluate Digital Health Startups
In a landscape as complex and consequential as healthcare, perhaps the most meaningful compass is one that points toward problems that genuinely matter.
I wanted to share the framework I personally use to invest in digital health companies, which forms the foundation of my course at Columbia Business School, Investing in Digital Health Startups. This article might be helpful if:
You are a founder about to pitch investors and want to best prepare
You are a potential angel investor looking at an opportunity
You want to get into venture capital and know how investors think
You’re looking to join a digital health startup as an advisor or employee
Disclaimer: No investor, including myself, gets it right all the time. We invest in companies that fail to do what they set out to do. And we pass on founders that go on to prove us wrong. Our attempts to predict the outcomes of these early stage ventures are as fallible as they are earnest.
Frameworks help us feel organized and calibrate our judgments on if a company will succeed or not. But no rubric—no matter how nuanced or sophisticated—can entirely neutralize the inherent risks and unpredictabilities of a startup. Only time, that most merciless of judges, will deliver the final verdict.
No rubric—no matter how nuanced or sophisticated—can entirely neutralize the inherent risks and unpredictabilities of a startup.
So with that in mind, the following exploration aims to offer some semblance of organized thought in a domain where certainties are few and far between. It’s a starting point for a conversation. A cheat-sheet for dissecting the anatomy of a digital health startup. This is not about providing a yes/no answer etched in stone but rather guidelines sketched in pencil, susceptible to erasure and rewriting as we accumulate wisdom from both our triumphs and our failures.
I hope it’s helpful.
What do investors look for? It depends on when they’re looking
It makes sense that investors appraise startups through different lenses at various stages of a company’s life cycle. At the pre-seed stage, the spotlight is on the founder’s vision since the venture is little more than an idea and some market research. (Unfortunately this is also where systemic sexism can seep in, as research shows men are more likely to be evaluated based on their potential, while women are evaluated on past performance.)
The seed stage is also most about the team, but investors will spend a little more time understanding the product and market as well. If there’s a beta product, an investor will try it out.
By the time a startup is raising a Series A, investors will ask more about traction. What has the team accomplished with minimal resources thus far? Have they found product-market-fit? If they've spent $2.5M from their seed round, what do they have to show for it?
As the startup matures into Series B and beyond, the equation is then around economics, and how the current model scales. By this point, there’s more data available, allowing for a more nuanced and empirical analysis of the venture's long-term viability.
Market, product, execution
Most investors would bucket their assessment of a startup into these three categories: Market, Product, and Execution. The amount of weight in each category depends on the investor as well as the stage of the startup.
The "Market" pertains to the external environment—the demand, competition, and economic conditions—in which the startup aims to operate. "Product" is the core offering, the solution to a problem that the market ostensibly needs. Finally, "Execution" is all about the human element—the team's ability to bring the product to market, scale the venture, and adapt to unforeseen challenges.
Together, these three facets form a nice lens through which one can assess the viability and promise of a digital health startup. So let’s dive in to the questions investors think about:
Market risk
Solving a real problem in healthcare (cost, quality, access)
Clear value proposition that addresses an unmet need
Well positioned for where healthcare is going
A payer that has been identified and validated
A strategy that creates a moat to protect company from competitors and new entrants
A strategy that is not at risk of regulatory changes
Favorable unit economics, including low cost to acquire a customer compared to LTV
Execution risk
Team is capable and driven
Team has the right skills to build and sell this product
Team is coachable, but not coaxable
Team can likely hire the missing pieces on the team
Team has high commitment to ethical standards and building a positive company culture
I also love seeing a personal tie to the mission that will keep the founder(s) motivated when things get hard
Product Risk
Demonstrated efficacy through clinical trials and/or real-world use, creating a compelling ROI for user (i.e. the product works as advertised)
User-centered (e.g. patient, clinician) experience, easy to use, and integrates into existing workflows
Unique IP that creates tangible enterprise value
Switching cost is in favor of company
Offering is scalable
It’s all about assumptions
A founder's pitch, no matter how polished, is just a collection of assumptions. Assumptions about the market, the customer's willingness to pay, how the competition will respond, and countless other variables. So you should always ask, "What assumptions is the founder making?" and subsequently decide whether you buy into those assumptions or not.
Investors generally perform better when investing in a domain they know intimately (this is true for me). This is largely because domain expertise allows for a nuanced evaluation of the assumptions a founder is making.
At the end of the day, bet on the jockey not the horse
In venture capital, it's often said that you should "bet on the jockey, not the horse," meaning the founder(s) are the most important element to a startup’s success. Especially at the early stage, the capability of the founder(s) to execute often serves as the most reliable indicator of a startup's future success.
Products and market dynamics can change, especially in a field like healthcare. But the aptitude and agility of a solid team can make or break the venture. This isn't to say that the product and market are irrelevant—far from it. However, a capable team can pivot the product to meet market demands or even find a new market altogether. The point is that the individuals at the helm need to have the skills and flexibility to navigate the myriad challenges that will certainly come their way.
We’re all just pretending we know the answer
As we evaluate these companies—armed with frameworks, metrics, “pattern recognition”, and a dash of audacity—it's worth pausing to acknowledge a fundamental truth: we're all just pretending (and wishing) we know the answer. Investors yearn for the comfort of certainty in an endeavor that is, by nature, completely uncertain. These evaluative questions provide some structure, a way to help us feel a sense of order. But let's not delude ourselves into thinking they're prophetic.
Only time will tell whether the product genuinely solved a problem, if the market was indeed willing to pay, and whether the team could successfully execute on the vision. No amount of due diligence can fully preempt the unpredictable variables that might catapult a startup into stratospheric success or plunge it into obscurity.
Given this, my closing piece of advice is simple: find companies working on problems that genuinely matter to you. Something you believe should exist in the world. Back ventures that align with your vision for a better future. Healthcare is replete with challenges that have significant social, ethical, and human implications— so you shouldn’t have to look too far.
By focusing on problems that you find intrinsically meaningful, you align your time and resources with a deeper sense of purpose. This doesn't mitigate risk, but it does offer a form of existential insurance.
By focusing on problems that you find intrinsically meaningful, you align your time and resources with a deeper sense of purpose. This doesn't mitigate risk, but it does offer a form of existential insurance. Even if the startup doesn't achieve the commercial success you envisioned, you've still invested into a cause that holds intrinsic value. You took a calculated risk for something that matters, not just to the market but to you as an individual.
In the end, whether you're a founder, an investor, an employee or advisor, let's remember that in the quest for finding the next big thing in healthcare, our frameworks and metrics are merely tools, not oracles. Their utility lies in their ability to guide and inform, not to prophesy. And in a landscape as complex and consequential as healthcare, perhaps the most meaningful compass is one that points toward problems that genuinely matter. Because even if we can't predict the future, we can at least choose where we invest our present.
If you’re interested in getting to know how investors think, check out my podcast Closing Time, where listeners get to be a fly on the wall during startup pitches.