How Not to Step in It When Pitching and Investing in Healthtech

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At the center of every tech controversy is a big, steaming pile of … facts. Facts that were hidden, facts that nobody thought to look for, facts that were misrepresented and facts that, when ultimately exposed, just stink.

When it comes to healthcare tech, headline-grabbing debacles often also come with glitzy distractions that draw attention away from all those odious facts, at least at first: Big personalities. Star-studded boards of directors. And fantastical promises to change the world.

The lesson to be learned — though it hardly ever is — is that startups and investors alike need to peel their eyes away from the shiny promises and pedigrees and take a hard, serious look at the facts.

If You Don’t Ask, They Won’t Tell

The latest spectacular story dominating the headlines involves Clover Health, an insurance company for Medicare Advantage customers that touts its proprietary software platform as “best in class.” It attracted the attention of “King of SPACs” Chamath Palihapitiya, who merged Clover with his SPAC — Social Capital Hedosophia Holdings Corp. III before taking it public. Chelsea Clinton sits on Clover’s board of directors, and Clover ended its first day of trading on Jan. 8 with a valuation of $7 billion.

Like the many cringe-inducing stories that came before it, the facts surrounding Clover Health were not hard to find: Clover’s proprietary software wasn’t all that popular with healthcare professionals, Clover allegedly gave doctors and medical office workers illegal perks for promoting Clover Health to patients, most of the insurtech’s customers came from a single source (who then went onto Clover’s payroll), and the Department of Justice thought something smelled fishy enough that it started asking questions.

All of these suspicious circumstances were ripe for the picking (or offering) before Clover went public. Rather than make any of these disclosures, however, Clover took a “nobody asked, so we won’t tell” approach, until a short seller’s reportlaid the facts bare. This mountain of omissions made it seem as though Clover Health intentionally “misled investors about critical aspects of Clover’s business in the run-up to the company’s SPAC go-public transaction,” according to a federal securities class action suit filed against Clover.

Palihapitiya, the person who was supposed to do the due diligence on behalf of investors, either didn’t go looking for the facts or knew the facts perfectly well but didn’t mention them to investors. The super-star billionaire explained that he didn’t tell investors about the DOJ’s requests for information because such requests are fairly routine. He’s not wrong. But omitting the information does look suspicious. It also runs counter to what investors likely thought the SPAC king’s job was, namely, doing due diligence and protecting their investments.

Due diligence is where a lot of scandals start. Startups pitch a vision. The further away from reality that vision is, the more likely investors will either walk away (if they’re savvy) or get hoodwinked (if they’re not). Because a SPAC’s sponsor stands to gain 20% of its equity, there is a real danger that they will mislead investors. It’s a danger that every startup fundraiser faces to a certain degree, and it’s one I caution against constantly: If you are fundraising for a startup, resist the urge to overpromise at all costs. Don’t tell investors that you will deliver the sun and the moon and the stars, when most of them would be perfectly happy with glitter.

Transparency is particularly important today, when nearly every half-truth or omission can be dug up by anyone with a vendetta or too much time on their hands. Disclosure allows a company to control the narrative, rather than having the narrative control them. Clover is learning this the hard way, with stocks falling precipitously and late-night expletive-riddled phone calls making headlines.

If you’re a startup, put together a solid data room to share with investors. Disclose and be transparent. You’ll control the narrative and gain investors’ respect. And if you’re an investor, ask the hard questions, cold-call customers and make sure you’re investing in a viable company, not just a dazzling CEO.

What to Ask and How to Ask It

A healthy counterbalance to Clover is One Medical. Yes, the concierge medical company has had its own set of headline woes as of late. But before it went public in January 2020, One Medical had taken a heads-down approach, done the hard work of figuring out its business, secured a strong customer base and had a service that really worked.

CEO Amir Dan Rubin is not a name the average person would know. The board of directors does not include Washington luminaries, their investors do not include rappers or athletes. Rather than make flashy plays for customers or overpromise what their solutions could mean for the healthcare market, One Medical focused on the problem they were trying to solve and came up with a viable, marketable solution. They went public the same month as Clover, and had a good exit for their investors.

There is a clear lesson to be had here for investors hoping to find the next Teledoc while avoiding the next Theranos: knowing the right questions is key.

  • Ask for a customer list. If the company won’t give you one, that’s a red flag.
  • Talk to former employees about why they left (some might have signed an NDA, but relying on an NDA for discretion is like trying to stop a dam with a Kleenex).
  • If the company is in the Medicare Advantage space, talk to doctors who take MA patients and ask them for their opinion of the product or service.
  • Look under the hood to see the state of the company’s technology. I can’t tell you how many AI companies are actually built on Google Sheets and Macros (or worse, nothing at all.)
  • Get into the dirty laundry. This includes messy cap tables, self-dealing or suspicious transactions, massive revenue misses and lawsuits. (Startups often face lawsuits, so lawsuits alone are not red flags. But when any pending lawsuits aren’t in the data room, that could be a sign that a company is hiding other things as well.)
  • Talk to colleagues and stakeholders. Patrick Soon-Shiong became the “richest doctor in the history of the world” by buying and selling drug companies. But his medical colleagues don’t mince words: “Every time I hear his name uttered by an academic oncologist, it’s with an eye roll,” said Dr. Vinay Prasad, an oncologist at Oregon Health and Science University. “If you asked a dozen oncologists what they think of him, his general reputation is that of a shameless self-promoter.”
  • Google it. It’s amazing how little effort it would have taken for investors and board members to find out that Clover CEO Vivek Garipalli was tied to questionable hospital billing practices and was fined by CMS for misleading seniors about their health plan coverage. But it’s equally amazing that anyone would fail to read company websites, press releases or news clippings before investing millions in a company that this guy was heading up.

Healthcare is hard. Companies that promise to “solve healthcare” should be considered wearily, particularly if the pitch is coming from a billionaire who purports to “do well by doing good.”

The idea that an investor can reap tons of money and simultaneously help the world is an amazing notion. But before startups make these promises, and before investors buy into them, both parties need to make sure that the vision is realistic, attainable and not just full of … regrettable facts.

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Healthcare Entrepreneur | MD/MBA | CEO, Starlings (https://starlings.co), a healthcare startup advisory | Director, Society of Physician Entrepreneurs (SoPE)