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Venture Capitalists Keep Digital Health Products Flowing

Rate of capital infusion into digital health companies during first half of the year didn't match previous year's, but far outpaced that of healthcare overall.
This is an example of a "care anywhere" model that offers convenience and flexibility to providers and patients, he noted. "Patients may be out somewhere and the physicians are in a fixed location, or patients are in the hospital, and doctors can get access to what's happening with the patient wherever they are."

Similarly, he pointed out, Airstrip provides physicians with mobile medical data feeds, including data from fetal, cardiac and vital signs monitors. And Watermark Medical's Web-connected mobile device lets physicians treat people with sleep disorders at home instead of in sleep labs.

All of these products are already in demand, which is why a significant amount of capital is going into them, he said. "These aren't early stage rounds [of investment], where people are taking a risky bet. These are pretty good companies."

On the other hand, Rock Health's report points out, seed money for startup digital health firms is hard to come by. Gandhi explained that, in this space, "angels" (wealthy individuals) and "micro-VCs" (venture capital firms that specialize in startups) are the traditional sources of funding. But in digital health, there are few angels, compared to the number in the tech industry as a whole, he said.

Micro-VCs are typically capitalized, he said, at under $100 million. They focus on early-stage investments, providing anywhere from $100,000 to $1 million to a particular company. But there's no micro-VC designed specifically for digital health, he said.

Some digital health companies start with family or personal money and, when they grow large enough, go public. Those are mostly firms that sell services to healthcare organizations and can build a customer base quickly enough to sustain themselves, Gandhi said. "But Internet companies need outside capital to grow their business while they figure out a business model," he pointed out. Hence they require venture capital to make it until they're big enough to attract public investment.

Gandhi believes there's a lot of upside potential in digital health, largely because of healthcare reform. "A lot of infrastructure is being put in place now," he said. "And you can build large companies on the basis that we have payment transformation and technology transformation. These are things you need in place to create valuable new companies outside of the traditional health services area like insurance and large hospital chains."