We have seen that first generation of digital therapeutics have failed, either because they succeed in the regulatory pathways but fail to gain reimbursement or because they succeed in securing reimbursement but ultimately encounter a lack of trust in their product on the part of the clinical community. For this reason, it has always been important to us to consider potential investments from technical, clinical, regulatory and business angles, and to ensure that a target’s founders fully appreciate the interactions between these four key areas.

What are the most significant technology trends you are seeing in the Digital Health industry, and how do they influence your investment decisions?

Our fund has two primary focuses for investments, deep tech and platforms. When it comes to deep tech, our portfolio comprises three key areas. The first is next generation diagnostics, typically involving new innovations which may be 100% virtual but may also have a hardware component. The second is breakthrough smart devices, either purely software-based or a hardware/software combo. The third area, an extremely important one for us, involves everything related to AI.

Our platforms portfolio chiefly comprises distribution platforms and modelling of how deep tech technologies can reach end users. This includes software as a medical device, healthcare SaaS, Digital Therapeutics (DTx) and anything related to communications between the care provider and the care receiver or their family members.

We see a paradigm shift on the market happening right now – provision of healthcare services is moving out from hospital walls. Patents take a more important role in preventing, diagnosing and treating the conditions and rehabilitating from acute care episodes. This is fuelled by an aging population and advancements in various technology bundles (cost of genetics, cost of computing, consumerization of patient expectations).

What specific trends or innovations in digital health and AI are you most interested in funding currently, and why?

We are interested in any tech solutions that have the potential to remove decisions from the province of physicians and hospital wards – where care can be episodic and expensive, unaffordable or inaccessible – towards individuals and their family members. We increasingly see care being pushed away from doctors, and we have recently observed a number of market players exhibiting anxiety in relation to investing in this area of healthtech because the route to approval is so complex in Europe. Indeed, it can also be complicated in the U.S. However, we feel excited and bullish about it!

It is important to remember that in healthtech– particularly when medical devices are involved – the focus of product development should not only be on the technology. Three additional perspectives are also relevant: developer must be able to generate the clinical proof needed to demonstrate the product’s strength to the medical community. At the early stages of product development, it is also important to ensure that there will be a viable regulatory pathway for the technology and its ultimate reimbursement.

We have seen that first generation of digital therapeutics have failed, either because they succeed in the regulatory pathways but fail to gain reimbursement or because they succeed in securing reimbursement but ultimately encounter a lack of trust in their product on the part of the clinical community. For this reason, it has always been important to us to consider potential investments from technical, clinical, regulatory and business angles, and to ensure that a target’s founders fully appreciate the interactions between these four key areas.

What are the biggest challenges/concerns you see for startups and how do these concerns impact your investment strategy? How do you mitigate these risks?

Reimbursement remains a significant challenge. The past 18 months have been brutal in the venture capital and startup worlds, including for healthtech. Fewer companies have been able to raise funding. They have, instead, been bootstrapping and growing off non-diluted rounds. The result has been the departure of many “tourist” or non-sustainable startups from the scene.

Though total funding is down significantly, valuations have not fallen so drastically and round sizes have recently increased to a certain extent. Given good fit and solid, good conviction from the fund investing, bigger bets and a longer runway for companies can still be secured. As a result, although the scene overall has shrunk, the highest performing startups are now benefitting from increased funding.

However, time-to-market remains a concern, with healthtech portfolio companies typically taking two years to mature compared with 1-2 years for non-healthtech companies. Nevertheless, the regulatory frameworks that are developing in a number of different jurisdiction shave demonstrated an increased understanding, at a government level, that healthcare costs to society may be usefully decreased via the tools being developed by healthtech companies. Procurers, insurers, and governments are also now smarter about procuring for and reimbursing healthtech. At the same time, the clinical community has become more receptive to healthtech products. It is, therefore,likely that cycles of securing “market clearances” will now start to become shorter. But all this is still far from ideal.

In the current economic climate, companies are putting increased focus on enhancing the robustness of their “clinical strength,” a quality which is best assessed by combining the impact of the areas that demonstrate the clinical robustness of a piece of tech; clinical trials, patent applications and peer-reviewed publications. Clinical strength is, in turn, being increasingly tied to “certification topics.” Companies are looking holistically at the way in which unmet clinical needs feed into clinical strength and how this in turn feeds into the areas of regulation and certification. Investors are also actively seeking, and noticing, early signs of product market fit, typically demonstrated by the fact that revenue is already coming in for the product or that a product’s regulatory pathway has been clearly determined at an early stage.

In addition, investors are now recognising the value of a target possessing high quality data. They increasingly appreciated that if a target cannot trace back the source and validity of the data generated or collected by its product, that product risks being in contravention of the law and, therefore, becoming useless. BTW – we are seeing a certain amount of protectionism amongst the regulators in this regard, with the result being that even if a company has demonstrated the rigour of its data in the EU, it may be required to repeat the process elsewhere, for example in the U.S. In some countries, this repetition of data testing is mandatory; for example, in Japan, regulators will not accept any data testing that has been conducted in other jurisdictions. Testing data in multiple jurisdictions does, however, have the benefit of helping to avoid algorithmic bias. We are also now seeing real world evidence (RWE) being taken more seriously by regulators who, in the past, may have chiefly looked at the evidence generated by randomised clinical trials (RCT).

What qualities or strategies do you look for in a startup to ensure they remain innovative and competitive in the market? What makes a startup stand out as a promising investment?

Our philosophy is that there needs to be a clear unmet clinical need for the product of a startup, as this increases the likelihood of a clear market strategy. We also consider the strength of a startup’s team, whether the team members fully understand the technical, clinical, regulatory, and business aspects of their product, and whether team members appear to clearly know what lies ahead. We are, of course, also looking at the transaction terms (valuation) to make investments which we judge likely to be lucrative for Verge.

How was this different from your focus six months ago?

The market has been pretty flat for the last six months. In general, we are not yet seeing much upturn in healthtech, with the exception of a couple of late-stage outliers. This slow rate of grow this not restricted to the healthtech industry, it is part of a challenging global climate to which interest rates and geopolitical tensions also contribute. However, we remain confident that the healthtech market will pick up over the next few years and that it has the ability to generate solid financial and social returns.

What changes/improvements would you like to see in the regulatory space to support the growth/sustainability of the industry?

It is particularly important for us to consider what we as investors can do to improve the receptiveness of the clinical community to healthtech. Clinical communities often have a conservative mindset, perhaps due to their origins in university hubs. Healthtech can help to shake things up in this regard, by enabling individuals to better manage risk from an earlier stage. Exciting technologies already exist on the market, and we are seeing a great willingness by patients to engage with these. The primary challenge for healthtech companies is, therefore, not to win over patients but to convince the clinical community to try a different way of doing things. Physicians can be cautious about deploying new tools, due to concerns about both initial upfront costs and a perceived reduction in clinical oversight. The latency of reimbursement and an impulse to protect current reimbursement systems may also be a factor in physician conservatism. The adoption of high-tech solutions in any sphere can, of course, also be politically sensitive, and for this reason, it would be unrealistic to expect a fast pace of adoption for innovative healthtech. However, we ultimately expect the financial constraints currently affecting the healthcare space to hasten take-up.