Wharton Pulse Interview with Oak HC/FT
Vignesh “Vig” Chandramouli is a principal at Oak HC/FT. The Pulse had the opportunity to have a wide-ranging conversation with him about how Oak HC/FT retains its position as one of the most attractive partners for entrepreneurs, what it takes to succeed in healthcare as an entrepreneur, where they see opportunities in healthcare today, and the reasons behind some of their recent investments.
How does Oak HC/FT differentiate itself vs other firms? Why do entrepreneurs work with you?
We are a venture capital firm with a focus on early to growth stage tech-enabled companies across healthcare and fintech verticals. Within healthcare we focus on companies who sell into with payers, providers, employers and pharma. Our differentiation is tied to our approach and the decades of experience that our partners bring as some of the earliest venture investors across both of our verticals. As investors, we truly partner with our entrepreneurs and work closely at the board level, on product strategy, recruiting, tactical execution, M&A, fundraising, etc. As such, we target fewer, concentrated bets compared to a traditional venture fund and work hard to provide each of our portfolio companies as much support as they require.
Given how much capital is out in the ecosystem now, how are you still able to attract high quality entrepreneurs to work with you?
There are a number of reasons entrepreneurs choose to preferentially work with us.
First, our sector focus makes it easier for entrepreneurs to engage meaningfully with us in a shorter span of time – instead of market size or need discussion, we focus on alignment on business model approach, cultural fit, etc. We have streamlined our investment process to make it efficient and entrepreneur friendly – after all, they still have to run their companies!
Second, our investment history and experience with all stages of companies (seed through buyout) allows us to help entrepreneurs address critical business issues with tactical guidance or connectivity to resources from our network (i.e. executives, third-party companies, etc.).
Third, we can be first to opportunities because of our focus. Everyone across our team spends time scoping out themes/areas of interest and proactively conducting primary and secondary market research. This helps us identify the leaders in categories we are looking to invest into.
Can you talk a bit about what types of opportunities you find attractive?
Sure- at the highest level, we like companies that create win-win scenarios by aligning stakeholders with an economic model to incentivize all parties to work together. In effect, every company we invest in will do some combination of (i) improving patient experience, (ii) reducing overall healthcare costs and (iii) advancing the quality/standard of care.
Great opportunities often have strong entrepreneurs with relevant experience with the problem they are trying to solve (whether personal or professional). They tend to build solutions from the ground-up specific to the use case vs. fitting a broad solution to a specific issue.
They also tend to have an anchor client with measurable ROI or are in process of measuring it – we understand that pilot economics are seldom optimal, but there needs to be a path towards better economics based on the pilot learnings. Aspire is a good example of a company in an expanding segment of healthcare with very high ROI. The unit economics of a business are key. Can the tech-enablement in this company drive to +40% margins over time? If it’s much higher, are we getting paid too much and thus driving too low an ROI for our stakeholders? Are our providers getting paid more in this model and hence won’t churn at the +30% rates that is customary with healthcare staff? Are we getting paid enough to provide the type of solution or access our patients need? What are the working capital implications of at-risk models (i.e. you can book revenue but cash flow timing might be over a year out due to the reconciliation process)? Good opportunities find economic models that balance these considerations and find the appropriate trade-offs.
How do you think about what ROI is attractive and over what time period?
Generally, if you are delivering at least 2x the cost of the program in value to the customer and doing so within 1 year, you have a pretty good starting point. Defining ROI and the measuring mechanism are probably the two most important parts of the initial pitching/contracting process. Stakeholders across healthcare have seen many iterations of solutions now and the pitch of “here’s technology for technology’s sake” doesn’t work anymore. It has to come with a clear ROI, which is part of the reason why we like tech-enabled companies that are responsible for the usage of the solution and the ROI that comes from it.
Does that point to the increasing importance of analytics in healthcare services companies?
It does - companies are now using data science to generate an estimate of ROI by taking in client data, giving a preliminary assessment of problem areas and how much money can be saved as part of the pitch. Data science shouldn’t be overlooked at the early stages of a company as it can be a catalyst for growth - large payers or providers often can’t quantify the size and scope of their problem because they are not focused on it – it’s a real opportunity as an early stage company if you can shine a light on the problem and present a path to address it.
Can you speak to any recent investments that illustrate the types of companies you like to work with?
Cricket Health is one of our earlier stage portfolio companies focused on end-stage renal disease (ESRD) patients. It’s a space with massively misaligned incentives and stakeholders who are all unhappy with the status quo. Patients often crash into dialysis at the ED because they don’t know they have later stage chronic kidney disease (“CKD”) and once they are on dialysis, they survival rate decreases dramatically. Commercial payers don’t like the cost of dialysis with large players controlling a huge part of the market, but ultimately they deal with it because patients get moved to Medicare fee-for-services after 3 years. Nephrologists are required to provide primary care like services to patients with CKD to delay progression and avoid crashing but are not incentivized or paid to do so.
Cricket is trying to redesign the process with a focus on early identification and engagement of patients with the goal of delaying the need for dialysis. They partner with nephrologists and provide them with remote care teams to better manage their population, they educate patients on their options (home dialysis vs. in-center) and the path ahead and ultimately also provide dialysis services at lower costs to the payer. This is a service that reduces unnecessary healthcare costs, improves patients’ quality of life (and length of life), and helps providers practice at the top of the license.
And I saw that at times you will partner with entrepreneurs to launch companies.
Yes, so one of our partners, Chris Price, has just started a company called WithMe to disrupt the pharmacy benefit management space. He’s previously worked with numerous PE-backed PBM’s and he knows where the deficiencies of the model are. This project was really borne from our frustration at not being able to find a company focused on addressing these deficiencies, so we decided to start it ourselves. WithMe goes right at the heart of the PBM business model and realigns incentives. Chris is creating a company that is incentivized to get customers to the right drug and focused less on which particular drugs drive rebates or margin. Choosing which medicines a patient receives or takes should be a function of efficacy for that individual and not profit. So WithMe is creating a full-transparency business model which doesn’t exist in the PBM space today. In fact, it’s the reason why he likes to call it a “medication navigation” company.
Are there any areas you are actively looking at for investments?
As I mentioned we are interested in opportunities in the digital therapeutics space, particularly because there are more conditions that used to just be treated with medications or surgery but now you have clinically validated solutions that are digital and don’t have the side effects of a pill. For example, if you want to treat sleep disorders you would probably prefer people use a digital-program instead of taking a pill that may make them drowsy or have other side-effects. These companies also have interesting economics in that you can scale software pretty easily. The sector is early, but we think we will get involved at some point.
Dual-eligibles are also an important area of focus as the size of this high-cost, high-complexity population is growing every year. These patients are often quite sick with multiple chronic conditions issues and require targeted, but cross-disciplinary solutions to address the need.
Value-based care models that enable providers to take risk are also interesting. Specifically, it’s the companies that find ways to do this with minimal disruption to the current workflows. Re-engineering workflows to drive value takes time.
What do you think about the moves by big tech into healthcare and how is that impacting the outlook for the sector?
I think it’s largely positive but each of the big tech companies is taking a different approach. Google is moving into healthcare by getting companies on their cloud product and using analytics to figure what people are doing. They have impressive visibility into what you and I are actually doing in real-time through google maps, consumer data, and search terms. You can imagine a world where they know when you are on the way to the hospital and they have shared a preliminary diagnosis with the staff before you even get there (because you searched for it a few times prior to using google maps to find the hospital you are headed to).
I think Apple is more likely to build than buy. Their DNA is not to acquire very many companies and if we see more innovations from them it will likely be from their internal teams. They clearly have a device-first strategy and they are searching for ways to engage patients via those devices (i.e. the EKG’s on Apple Watch). Stakeholders generally like working with Apple, because of the strength of their brand name and that is a valuable advantage. My guess is that they will lead with hardware into healthcare as they have into every other sector.
Amazon is also a fascinating player in this space – they have a distribution bent to what they do and that will likely proliferate into their healthcare initiatives. AWS is already becoming an industry standard and that will only continue.
Whichever way you look at it, these large tech players entering healthcare is a good thing. They have core competencies and will eventually need to acquire other skill sets to help them deploy those competencies in a healthcare friendly manner. It’s good to know that these companies with large balance sheets might acquire healthcare assets in the future, it’s a good exit path.
Thank you for your time Vig.