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In conjunction with our Q1 Venture Financing Report, I sat down with Julie Yoo of Andreessen Horowitz to get her take on the state of venture capital investing.
Key insights from Julie Yoo
On predictions about the healthtech industry: “Software is (finally!) absolutely eating the healthcare world. In fact, the nature of the major challenges that the healthcare industry has faced in the last couple of years … are so conducive to software-based transformation that we have more conviction than ever on our core thesis.”
On why we are seeing a downward trend in investments in technology and life sciences companies: “Many growth-stage companies raised large enough amounts of minimally dilutive capital in 2021 and early 2022 that they had enough runway to live through this window without having to raise.”
On why deal terms remained stable while invested dollars, deal volume and up rounds are on the decline: “Early-stage deals tend to have less deal term structure, so we’re most likely seeing cleaner terms since most of the deals that got done in Q1 were in the earlier-stage zone.”
From Generation Health to Kyruus to Andreessen Horowitz, much of your career has been spent in the healthtech space. Why have you stayed in the industry for so long, and what impact do you hope to have through your investments?
I’ve stayed in the industry for so long because I’m a masochist! In all seriousness, healthcare is and has been one of the toughest industries to penetrate with truly transformative software-based solutions, so the heft of the challenge motivates me to continue trying to crack the codes of this space from multiple angles.
Our team’s investment theses focus on using technology to transform the way we access healthcare, pay for healthcare and experience healthcare, including clinical outcomes. I believe adoption of technology at the core of the healthcare system is the only way we’re going to be able to make a dent in some of the industry’s grand challenges around making healthcare more efficient, affordable, sustainable and accessible to those who need it, and more measurably valuable.
The first wave of healthtech solutions demonstrated the potential to improve access through national-scale, virtual-first clinics and home- and community-based care models. The next waves of companies will need to demonstrate the potential for tech to significantly reduce the cost structure of care delivery, and ultimately deliver care at the same or better quality than traditional means – especially by helping reduce variation and improving system-level performance, e.g., giving all front-line workers augmented intelligence embedded in their workflows to consistently deliver evidence-based care, while also generating the real-time point-of-care data that feeds back into improving those standards over time.
Before joining the team at Andreessen Horowitz, you served as the co-founder and chief product officer of Kyruus. Could you tell us what inspired you to start your own healthtech company, and share some of the challenges and opportunities in growing a healthtech organization?
I’d always been amongst the first 25 employees at the startups I joined post-college, and at some point, my switch just got flipped to founder mode, and I knew I had to start something on my own.
We founded Kyruus in 2010. The inspiration for me started from having built software products to solve a string of supply-demand mismatch problems across various industries (e.g., ecommerce, manufacturing, molecular diagnostics). I stumbled across the specific supply-demand mismatch problem that became the basis of Kyruus’ product in my personal life: being told to wait four-plus months for a specialist doctor’s appointment, while my friends who were hospital administrators told me that they were operating at only 70% to 80% capacity in that department. We coined this problem as “The Patient Access Paradox” and built a software platform to match patients to the right providers in such a way that optimally utilized the available capacity across health systems’ providers.
Many of the company-building challenges we faced during my founder journey related to our timing of market entry – we founded the company in what was the dark ages of digital health. Most people still called it “healthcare IT” back then, and there were only a handful of peer companies (see graphic below as a case in point), a small set of investors in the space, and huge barriers to entry for technology solutions trying to insert themselves into the traditional healthcare system.
For instance, systems like Epic didn’t have any published APIs at the time, so we had to fight to get custom interfaces opened up for us to build against. Hospital IT systems were still mostly on-premises, so we were oftentimes the first cloud-based vendor to contract with a given health system, and we helped many IT teams write new security review questionnaires from scratch to ask relevant cloud-oriented questions. We were amongst the first cohort of EHR-overlay products to be deployed to physicians post-Meaningful Use, so we had to learn how to do workflow integration and change management with users who were still neck-deep in getting up to speed on their massive, new EHR systems.
There was a lot of rudimentary work like this that we and other founders had to do back then to make it feasible to deploy modern cloud-based technologies into the care delivery and administration setting. Based on seeing our current founders execute things that used to take us years in a matter of months or even weeks, it’s clear to me that our industry has come quite a long way in the last decade, though there are still plenty of forests full of wood to chop!
It was considered a major milestone to raise $2 million back in 2011 – and only 35 digital health companies had done it that year.
We’ve noticed a downward trend in investments in technology and life sciences companies from Q4 2022 to Q1 2023. Why do you think this is occurring? Is it something you’ve noticed at Andreessen Horowitz?
It depends on which slice of the market you’re looking at. At the seed stage of healthtech, we’ve had one of the busiest two quarters on record in terms of deal flow volume. At the growth stage, things have been much slower. Many growth-stage companies raised large enough amounts of minimally dilutive capital in 2021 and early 2022 that they had enough runway to live through this window without having to raise. That said, we expect that a bolus of those growth companies are likely to come to market in the next six to 12 months, so the expectation is that we’ll start to see rising volume in the venture growth markets in the next few quarters, in addition to the continuous drumbeat of early-stage deals.
To zoom out the lens, though, I’ve been saying that if you were to look at the VC fundraising charts for the last 10 years and simply remove 2020 and 2021 from these charts, we are still relatively on track compared to where the market was in 2019. So, one interpretation is that the VC markets haven’t actually crashed – it’s just that 2020 and 2021 were such outlier years that it feels that way, in relative terms.
What predictions do you have about the healthtech industry in the next few years? What innovations can we expect based on the companies Andreessen Horowitz is investing in? Is software is eating the healthcare world?
Software is (finally!) absolutely eating the healthcare world. In fact, the nature of the major challenges that the healthcare industry has faced in the last couple of years – whether it be rising medical costs, increasing gaps in access or labor shortages – are so conducive to software-based transformation that we have more conviction than ever on our core thesis. Recent advances in generative AI also add to that conviction, given its relevance to labor-intensive industries that require complex information synthesis on large swaths of esoteric data, like healthcare. And after two to three years of being too distracted to take on anything new, provider and payer enterprises are finally starting to refocus on solving their fundamental P&L challenges to stay relevant in the post-pandemic environment.
But category building takes a long time, and timing is everything – especially when there are regulatory tailwinds that many healthtech companies are taking advantage of, whether it be around value-based care, interoperability, ACA and ICHRA, or telehealth. Those initiatives oftentimes have multiyear time horizons to bake enough before winners start to emerge. So, getting the timing right on new ideas is always the hardest thing.
That said, it is far easier and cheaper to build a company from scratch today relative to five to 10 years ago – e.g., there are now a set of “clinic in a box” type companies that enable a digital health company to stand up a full-stack medical practice in a few months, interoperability engines that enable access to a network of EHRs versus having to build bespoke interfaces one by one to obtain patient data, and a whole ecosystem of security and compliance products and services that can help startups get all the proper guardrails in place quickly to be able to operate in this hyper-regulated environment. So, we’re optimistic about the fact that companies can now run far more cost-effective experiments to validate product-market fit and get more shots on goal within a given fundraising cycle than ever before, which means both success and failure should be cheaper – a net good thing for the whole industry.
Do you see the trends in declining investments in healthcare and technology firms continuing through the next quarter and, if so, how do you feel Andreessen Horowitz is positioned for this? Have you seen any potential opportunities or positive trends because of this market disruption?
Per the above, we’ve seen a steady clip of early-stage deals in the last quarter, which has continued into Q2, so we anticipate potentially having a reasonably busy summer – especially when you overlay the expectation that a lot of the later-stage companies that raised approximately two years ago will be back in market in 2H 2023.
The caliber of new entrepreneurs is very strong, particularly in light of layoffs at many of the larger-scale healthtech companies. We’ve always had high conviction on “digital health native” founders who have grown up in this industry and have seen what it takes to build a technology-native business in healthcare, and that cohort is a large portion of whom we see starting companies these days.
Many of the deals we’re seeing are generative AI-oriented, and we benefit both from being one of the first AI-focused funds in healthcare since our origins in 2016 (and thus having one of the largest portfolios of AI-native bio and healthtech companies), as well as being investors in some of the most important AI platform companies through our enterprise software fund, such that we have a unique value proposition to offer to entrepreneurs using AI and wanting to stay on the cutting edge of this technology shift.
For our portfolio companies, the talent markets have normalized to some degree, with the bid-ask spread on compensation having collapsed quite a bit, in addition to the talent market just being more liquid overall than they were in the past few years when it was hard for early-stage companies to compete against larger, more well-funded entities. Candidates are, however, more discerning (rightfully so) about asking all the hard questions about a startup’s viability before jumping in.
Our data shows there was a decline in invested dollars, deal volume and up rounds. However, deal terms in Q1 2023 continued to be generally favorable for companies. Why have deal terms remained stable while invested dollars, deal volume and up rounds are on the decline?
Early-stage deals tend to have less deal term structure, so we’re most likely seeing cleaner terms since most of the deals that got done in Q1 were in the earlier-stage zone. We do see that slight uptick in recaps in your report for Q1, which indicates that we’re probably already starting to see some of those companies that struggled to raise on clean terms either due to poor performance, high valuations from prior rounds, or no longer having line of sight to the liquidity path that they may have been planning for.
Are there any other observations on this quarter’s VC data worth noting?
As I alluded to in describing my own founder journey, the characteristics of the healthtech funding market today rhyme a lot with those of the 2010 – 2015 era. But the healthtech capital markets are so much more mature – more funds, different flavors of funds and more individual investors with a long-term, dedicated thesis in the healthtech space.
I’d specifically call out the relative shrinkage in amount raised per round as a potential net benefit for companies to help them focus more and not be able to fund infinite numbers of unprofitable projects. We also see companies getting into much better shape to do more with less – as the basic premise of a startup company implies to begin with! – such that they’re much more likely to be world-class at the one thing they do really well, and only double down on the things that are really “working.”
About Julie Yoo
Julie Yoo is a general partner at Andreessen Horowitz (also known as a16z), where she leads investments in healthcare technology, with a focus on companies that are modernizing how we access, pay for and experience the healthcare system.
Prior to joining Andreessen Horowitz, Julie was the co-founder, chief product officer and board director at Kyruus, a venture-backed healthtech company recognized as a market leader in patient access. Before that, she was vice president of product at Generation Health.
Julie studied computer science and pre-medicine as an undergrad at the Massachusetts Institute of Technology and obtained a Master of Science in genomics from the Harvard-MIT Program in Health Sciences and Technology and a Master of Business Administration from MIT Sloan School of Management. Julie is a Young Global Leader with the World Economic Forum and serves on several portfolio company boards, including AKASA, Bayesian Health, Firefly Health, Patina, Ribbon Health, Season Health, Sprinter Health, Tomorrow Health, Turquoise Health and Zus Health.
About Andreessen Horowitz
Founded in Silicon Valley in 2009 by Marc Andreessen and Ben Horowitz, Andreessen Horowitz is a venture capital firm that backs bold entrepreneurs building the future through technology. The firm is stage-agnostic – investing in seed to venture to late-stage technology companies, across bio and healthcare, consumer, crypto, enterprise, fintech, gaming and companies building toward American dynamism – and has $35 billion in assets under management across multiple funds.
Andreessen Horowitz aims to connect entrepreneurs, investors, executives, engineers, academics, industry experts and others in the technology ecosystem. The company has built a network of experts – including technical and executive talent, top media and marketing resources, and Fortune 500/Global 2000 companies, as well as other technology decision-makers, influencers and key opinion leaders – and uses this network as part of its commitment to helping portfolio companies grow their business.
None of the above should be taken as investment advice; please see http://a16z.com/disclosures for more information.
Last modified: March 6, 2024
