Edward Kliphuis: “Archaic business models are cutting out the divesting potential for certain sectors, but this will change in the coming years”
The eighth year of Health 2.0 Europe was held in 2017, making it one of the top digital-health conferences in Europe. Over three days, it brought together more than 600 international digital-health stakeholders and decision-makers for sessions including inspiring keynotes, thought-provoking panels, lots of rapid-fire live technology demos, high-level quality networking and lots of fun. Edward Kliphuis participated in the EC2VC Investors Forum & Pitch Competition and he analyzed the investment trends from different stakeholders, starting with exits.
Venture capital investing in digital health has gone up in recent years but what’s your opinion about the possible exits in this sector from both a corporate and VC point of view?
The challenge here, I think, lies in the definition of digital health. We define it as something that improves patient outcomes, which means that we only look at things that are clinically relevant. There has to be an impact on the clinical outcome for us to be interested, and then there has to be an earnings model. For example, there must be a payer that buys into it for the project to be feasible.
Now, for this kind of companies, I think the majority would probably be acquired by big data and tech players. You'll very rarely see a pharma player and I reckon there are two reasons for this. Firstly, pharma companies don’t have the in-house capabilities to help the company flourish. If, for example, you are licensing a drug or buying a drug company, you can obviously add the product to your pipeline and develop it further. Those capabilities do not exist yet for digital health within pharma companies.
Secondly, pharma companies are still relying on archaic business models. Nevertheless, I think this will change and in the future there will be more exit potential for these companies. If you look at the patient journey, a lot of companies already have solutions to impact or guide patients in the way they take their meds, addressing conditions associated with chronic diseases, such as depression or stress. If we can find reliable solutions for that, I suppose they will be the target of either licensing or acquisition deals.
What are you mostly investing in right now and which investment trends would you highlight?
To describe our goals in one sentence, I would say we're focused on anything that can enhance patient outcomes in chronic diseases. For us, it's all about outcomes, so we establish a number of core areas of interest, such as oncology or autoimmune diseases. Then we think about what we could target with technology that can currently only be targeted with molecular entities. So, if you look at stress or depression, we have not been able to target them effectively with small molecules or antibodies. For example, we are investing in Akili Interactive Labs for the sole reason that they can target cognition very sharply, while other companies have tried and failed. So, if we can target cognition and induce neuroplasticity to change the way patients perceive or process information, that could be really interesting in guiding the patient’s journey or helping with early diagnostics for conditions such as Alzheimer or multiple sclerosis.
Another of our investments was a medication-adherence platform, Medisafe. If you look at how people fail to adhere to medication instructions and the impact that has on their condition, it is very concerning. So, the ultimate solution we are looking for is basically a way to empower patients so that they are not only in charge of their own information but can also see their progress with a sense of ownership, being part of the outcome. With that, they also have the ability to impact their own health by taking their meds, as well as allowing for a passive detection of depression or stress.
What are the main challenges facing start-ups in trying to attract investors?
There's a big difference between what happens in Europe and what happens in the US. It's very difficult to find teams that have knowledge of both sides of the coin: they have knowledge of either the medical side or the tech side. If you combine those two, you may also face the challenge of a highly fragmented market in Europe. Regulation is all local here, so I would say the macro-environment is the biggest challenge we find: people only look at their local market and don't expand.
In the US, it seems to be easier because you have a larger market, but you also have much more competition. So, you can go the traditional route, which has clinical barriers to entry and requires a lot of capital because you have to do trials. Or you have to make sure you have a wide enough user base and measurable, quantifiable outcomes to use in larger population studies and then be able to make claims to use in advertising and to get the ball rolling. The third option would probably be to just use acquisition outright, but this is an area where we have less expertise.
Could you highlight some best practices to attract VC attention?
The team is much more important in this field than, for example, in therapeutics. In other areas, after you lead the selection of candidates, you basically offer money. Here, however, you can pivot the business model but it is the team that must execute it. Plus, at the very least, the competition must be mapped and understood. Before we invest, we have to have a clear vision of the main advantage and how we can capitalize on it. And, finally, I would say there must be a clear route to market. The challenges that will come along this path may not be addressed, because it's venture capital, but at least the questions that need an answer have to be identified.
How is corporate venture capital different from venture capital?
There are two fundamental things to note. I think most corporate venture funds are structured as evergreen funds, which means the fund is open-ended so there's no exit pressure. The second thing is the ability to provide beyond-the-door services. If you take us as an example, if companies want to get in touch with relevant functions within the Merck group, we will allow for that and we will basically grow with those connections. But we will not be the business development department, so we are a completely separate VC fund in the sense that we operate independently. However, we do allow for basic connections with the larger firm to be established. So, I think the value and the level of validation it brings to the outside world is what is definitely a differentiating factor.
What do you think of Fred Wilson’s criticism of CVC?*
I’d say make sure you have shorter timelines if you invest and make it truly worthwhile for your LPs to be a venture capital investor. If you look at the spectrum of venture capital investment, about 50% of assets are allocated to bonds, roughly 40% to equity and only 10% of all capital is invested in alternatives. Of that 10%, maybe 20% or 30% goes into hedge funds and another 20% to private equity. The rest is invested in alternatives, such as real estate. If you look at the private equity market, we are already talking about only 2% of the total. Then, only 2% of that 2% is venture capital. It's super small. So even if you get ten-fold return for your fund, it will only be a drop in the bucket compared to what the investment arm of your fund is expecting in earnings. So, you aren’t really doing anything.
If you look at what venture capital does, it is mostly establishing innovation. So, you can see it as a service that corporations provide in order to make sure there are enough possible targets for them to strike a deal. And if they don't want to strike a deal, they don't want to lose their investment, and this is where we come in: we create and facilitate innovation in areas of a parent firm that are relevant. So, in that sense, we are investing for profit. If we do our job well, we create potential targets for acquisition at zero cost to the parent firm.
So, to his point, I understand where he’s coming from but I think it's very obnoxious and quite naive because he will not be able to fulfill that role. And I don’t think many private investors will be able to fulfill that role either. If you are asking that, either you are holding innovation or you should give capital to people to do it.
* “[Corporate investing] is dumb. I think corporations should BUY companies. Investing in companies makes no sense. Don’t waste your money being a minority investor in something you don’t control. You’re a corporation! You want the asset? Buy it.” (Source: https://www.cbinsights.com/blog/corporate-venture-capital-investment-disadvantages-fred-wilson-usv/)