One of the hottest segments during the beginning of the pandemic was telemedicine. The conditions that arose from the pandemic caused there to be a surge in the use and investment of these technologies. But now, with a turbulent recession and Covid-19 restrictions waning, does telemedicine still have the same gravitas?

Nathaniel (Nate) Lacktman a partner and chair of Foley & Lardner LLP's national Telemedicine & Digital Health Industry Team, and member of the Board of Directors of the American Telemedicine Association, weighs in on the issue. In his role, he advises entrepreneurial health care providers and technology companies on business arrangements, compliance, and corporate matters in telemedicine, digital health, remote patient monitoring, and click-and-mortar services.

Season 2, Episode 5 Transcripts

Omar: Hello and welcome to let's Talk Medtech, the premier podcast for the medical device and diagnostic industry. My name is Omar Ford, and I'm the host for this episode. I'm also the editor in chief of MDDI, an online publication owned by Informa that covers the medical device and diagnostic industry. On this episode of let's Talk Medtech. We are speaking with Nathaniel Lackman. He is a partner with Foley and Lordner LLP. And today it's all about telemedicine and digital health. And we're asking the question, are these segments still interesting or still hot to investors, to VC investors? So it's going to be an incredible episode. Can't wait for you to hear. Without further ado, let's talk medtech with Nathaniel Lackman. Well, good morning and welcome to the program. How are you, Nate?

Nathaniel: I'm well, Omar. Thank you for having me here.

Omar: Sure, anytime, anytime. I know we have a lot to talk about, and first I want to go back in time a little bit. I want to go back to 2018 as we start this conversation out, and I want to talk about what happened before the pandemic, and I want to kind of get a sense of venture capital's interest in telemedicine companies back then.

Nathaniel: Sure. We're getting the wayback machine five years ago.

Omar: Yeah. More than a couple now, right? It's hard to tell with time after COVID.

Nathaniel: I will say that as I've been doing practicing law about 18 years and the last ten of which have been almost exclusively telemedicine, digital health. And I think one takeaway is that the PHE and COVID did not create the telemedicine industry. It certainly accelerated the pace that the technology was being adopted and widespread public awareness. But even back in 2018 and earlier, there was a lot of interest among venture and startups to create new telemedicine companies and digital health companies, and we were representing many of them. So, I don't think it was just COVID or PHE. During that period of time, you had a significant amount of waivers of rules and restrictions. You also had a lot of people with fear of having in person contact. They turned to online ecommerce across the board use shot up. You had a lot of government stimulus monies. So, folks had a lot more like free income available, interest rates at zero. And so, the LPs at funds wanted to put their money somewhere with a return to say nothing of like crypto and these other just like, new wealth being created and then deploying it. So, I think that the confluence of all of those different events really led to the significant explosion in valuations in digital health and telemedicine ventures. But even pre-COVID, there was a lot of interest and competition was heating up.

Omar: Well, now we're in 2018 now, but I want to fast forward just a bit to 2021, [to discuss] everything that we were talking about, everything that was going on with digital health and telemedicine at that point. Can you gauge the interest then compared to 2018? And can you discuss where the interest is now in 2023?

Nathaniel: Yeah, sure. I'll even [go back] a little bit further. So around 2014, 2015, a lot of the potential clients I was getting, they're asking, do you, Nate, or your colleagues know any venture funds you can connect us with for fundraising? And then around 2018, it was like most of the companies who were reaching out to us already had some funding, maybe, let's say Series A, because they had raised something. By the time 21 came around, companies were just like, I have a slide deck in an idea and I'm going to do a $10 million pre-seed round, or we'll get a Series A at like $100 million plus valuation. They would do little to no regulatory due diligence on a company. They just wanted to stroke the check and get in onto the cap table before the round closed. That's just a natural progression of an industry where it starts nascent and gains traction and then venture turns its eye to it. Now, in 2023, some things have changed, primarily driven by interest rates and the illiquidity of the capital markets. It's the primary function. Secondarily, I do think a lot of venture investors, because they were competing against each other for the opportunity to invest in a limited cohort of companies, created the higher valuations. And so now if we have a bit of a level reset with the market, namely if you're inflating a raft and you need to take a breath once in a while, we take a look at saying we may have priced these as the individual deploying the LP's capital. We may have priced these like a SaaS company or a software company rather than a tech-enabled professional services company. They have different multipliers, different growth patterns, and both can be really great businesses. So that is, I think, the heart of the reality is that some of these might have been ambitiously priced as a software only company, whereas they were really technical professional services. What does that mean? It means that they're going to try to change their PNL by cutting cost, moving from a growth acquisition focus to what they kind of call sustainability. I don't know if they really need to show profitability in the sense of versus an immediate pathway to profitability.

Omar: There are a ton of digital health and telemedicine companies out there right now, and I'm guessing that many of them want to become noticed, some of them that are looking for funding. But the space, right? It's so crowded, right? And I imagine an even tighter pressure would come from the recession or the current state of the economy. I know there's some debate on where we're at right now. I don't want to get into that conversation, but what do these companies need to do? What do these telemedicine companies need to do to become noticed by DC investors? Yeah.

Nathaniel: Let me ask you a slightly different question. Why do they need to be noticed by venture capital as opposed to be noticed by the end users of their products or services, the patients. Right. Venture capital really should be a means to an end. You can accelerate growth at a faster rate than if the company were to be bootstrapped and grow slowly. Right. The result of that, all of that extra money is sometimes you choke on it. We've seen in the press examples of companies going hard in the paint on marketing and advertising and then not actually able to hire enough clinicians to fulfill the demand side of their client base. And you had mentioned sort of oh, where there's so many companies, too many telemedicine companies. Is anybody saying there's too many doctors? There's just too many medical groups. United States. Too many dermatologists. What's going on here? They say that about lawyers. They don't say that about doctors. Right. There is a fundamental supply demand imbalance in America, in healthcare, period, hard stop. And so that means whatever the size of the tam is, there is absolute opportunity to create new medical practices, technology enabled and otherwise. But that's typically, like a medical practice is typically a private equity interest right. Rather than a venture because of the horizons and the ability to optimize via management services. So, what I think we're going to see is a change. Some of these companies, which is great, they took venture money, used it to grow, because instead of setting up signage and referral relationships in your local town, they just did it online, right. Gaining market share like planting flags in the online presence, adding a bunch of patients.

Now it's the time for the founders to make good on that promise and actually deliver meaningful quality services that their patients enjoy using. Then it will continue to grow and flourish on a more organic basis as opposed to being turbocharged by venture in the sense of excess advertising budgets and subsidized operating costs have a lower retail price point. When that stuff goes away, a lot of these companies may go under. But you know what? That is part of the thesis of venture. Everybody in venture capital, as long as you know anything about it, realizes that 80% to 90% of these companies will fail. They compete with each other, but in the process, those survivors will actually have made the world a better place, will have changed health care for the better by experimenting with these new models. LPs, like their money is highly liquid. They put it into a venture fund and they can't tap into it for ten, sometimes twelve years. That's a really long horizon. I feel like some of the venture capitalists aren't.

They need to give the founders time to fulfill their mission and goals of the type of the company that was invested in in the first place. So, if you're sitting on a bunch of capital or cash that has already been raised, I feel like the founder should have the opportunity to execute upon that strategy rather than being forced to have extreme austerity measures to show a profitable PNL, even if it harms the actual company's core product and service. That's not a good thing. All that will do will give the impression of a profitable company. Why? Not for long term sustainability, necessarily, but just to make it easier to do another fundraise? Well, that's mostly just a shell game of who's going to be the next investor taking the responsibility for the valuation, as opposed to saying, can we use the money that has been previously raised to really create something new and different that is better for patients and better for people?

Omar: Yeah, makes perfect sense. You said something very interesting and there's this conversation going on right now about who these companies are serving. Are they serving patients or are they serving end users or customers? And there's this interesting discussion. We've been banding this around MDDI for a while now, but we're seeing the patient actually take more ownership of their health through these devices. This technology, the telemedicine in the digital health space. And I'm wondering if you've kind of seen that or what your insight is on that as well. I know we're veering a little bit off from talking solely about VC activity, but just curious about your thoughts on that.

Nathaniel: No, I love that because again, the VCs are just turning their lens have turned their lens to healthcare, where previously it was ecommerce there's crypto. Just VC is a means to accelerate a concept or theme or an offering. And so, the offering here is what you're talking about. So, the term changing patients to users or members is kind of like an ecommerce oriented tech play rather than a traditional healthcare play. But what I do like about it is that it recognizes that a lot of these tools can be created using AI and software that's been through the FDA oversight process to eliminate the need of a doctor, or B, significantly reduce the amount of time that the doctor has to spend. That allows access by a greater number of patients to have the service. And when it comes to device digital health devices, it allows the individual to have greater responsibility of their own personal health and management.

At the end of the day, it's like eat healthy food. Not too much of it, mostly vegetables. Get exercise and pay attention to your vitals. Right. Easier said than done though. Some of these devices that make it easier to monitor your blood pressure, push that up to the cloud automatically so a doctor can look into a dashboard and see that once a month. Captures the spaces in between when you're not like sitting in the waiting room at the doctor's office. That's the important stuff. We can turn put that in the hands of patients, even if it means we need to kind of make it consumerized or gamified some way where our psychology will get a little dopamine hit to actually use the tool. In my opinion, better, so long as it still has that evidence based, clinically validated backbone and we're not deceiving ourselves by essentially playing with Fisher Price Toys toy stethoscope when we're thinking it's these reference numbers are legit when they might not be dialed in.

Omar: Let's jump into 2023 for a minute. Yeah, I know we're in 2023 right now, but we've been all over the place with time right during this conversation. But what we're having now are a lot of layoffs in big tech. And I won't say the names people can Google if they're interested in it, but some of these companies have their hands in the digital health space. And I'm wondering I know these are public companies, but I'm wondering how VCs are reacting to this news when it comes to looking at potential digital health companies to invest in. When they see the layoffs, they see the struggles. Is VC becoming skittish or are they kind of embracing it? What's the feel like, what's the tone?

Nathaniel: I think it depends how senior you are, how long you've been in the venture game. Right, yeah. Venture itself is, what, not 30 years old or something in the US as we know it. The amount of money. I think I read some weird stats where the amount of money invested in venture, like last year was equal to all the amount of money invested in venture in the prior couple of decades. Right? Wow. Just the sheer scale and the enormity of these dollars is significant. B, we've come off what, like ten plus years since the Great Recession of just like, great economic growth. So, everybody it's very easy to win, so to speak, or to get returns and succeed. And now that we have a slightly different market, the attitudes are shifting. So, I do think some of the folks on the VC side are concerned. However, the LPs, again, like I said, they invest their money into a fund and their capital calls for that money usually occur in the first two to four years of the fund's life cycle. That's because that's when the VCs are obligated contractually and fiduciarily to deploy the money that they raise into companies that fit the target purpose of the fund. So, if we have all of these billions of dollars raised in digital health venture funds, those funds have to deploy it unless they just want to return the money to the investors, which isn't likely to happen. So, if you're a startup and in the space and you look like maybe the valuation isn't going to be that great compared to your last round or you want to weather the storm.

I think that's what a lot of folks are doing, right? Sizing the balance sheets, making it look better, slowing down on the growth. They'll go through the remainder of 2023 and recognizing that the clock is ticking for the VC funds to invest. Right. There are still like, there's a multi hundred million dollar fundraise round announced for a telemedicine company in the last month. And I think that stuff is going to continue because that's the job of the venture capitalists. So, I wouldn't worried about that. I don't think you're going to see a ton of activity in 2023. But they're still looking for deal flow, they're still looking for the opportunities to invest. And what might happen is this year some companies will go under, they'll merge and combine, get a little bit larger, feel out, like what is their core competency and what are they really good at. And then by 24, then they'll be able to do B's and C's and D rounds using larger amounts of capital, right, in fewer companies. Maybe that's what's going to happen. All of which is a natural progression of a new industry. Create some movers in the beginning and then they get some success. And everybody's like, oh, I want to do that too. And then you have a huge uptick in like smaller ones and then they consolidate, get fewer, and those ones who remain are pretty powerful.

Omar: I remember years ago when I first started covering the industry, it was around 2008, but in particular around 2009, 2010. The joke was that the Series A was now the Series C round. You had to have so much due diligence in just to get a Series A. I'm wondering where are we at now? If we could apply that same metaphor. Where are we at right now in terms of funding for digital health companies and telemedicine companies? What is the new the new Series A is a Series C. So, what would it be for 2023?

Nathaniel: That's hard to say. I do think that in the space, the healthcare space, there's a ton of venture and founders who are not familiar with healthcare at all, who are creating companies. But now that there's been enough of them, I think they're starting to realize, okay, here are some of the structures you need to do. Here are some of the pain points, here are some of the rules. Because unlike just regular tech or some other spaces that they applied, tech healthcare is so highly regulated, it is so entrenched. Consumers do not have the ability, by and large to speak with their own wallet. It's intermediated by health plans and employers and whatnot. So, it is not only confusing, but the sales cycle can be long and it can be challenging. I think some of that has been smoothed out where companies and founders are able to share this information with each other. So, I think they'll have a higher degree of confidence. I don't want to say that the due diligence, maybe the regulatory due diligence will still be the same again.

And these are early stage companies too when they're getting some of their founding dollars. So, at the end of the day, I think it's going to continue on. And some folks may have placed bets that were really ambitious, and they were betting that the market would continue to rise even if their specific company that they were investing in was just mediocre. And I don't blame the founders for any of that and I don't blame the macroeconomics. You don't have to blame anybody. It's just the reality of the risk of venture. Risk and reward are two sides of the exact same coin. And you cannot possibly expect to have significant returns without the potential for a loss. Either a total zero loss or down returns. That's just the space that these folks are playing in. Well, that's okay.

Omar: Are there any particular digital health sectors of healthcare or telemedicine sectors that you're interested in now? Anything catching your eye?

Nathaniel: I'm always on the market. I've probably seen almost 2000 pitch calls with potential companies and we worked hundreds and hundreds of telemedicine digital health startups and academic medical centers. It's very robust practice. We have 1100 lawyers and 35 on our telemedicine digital health team. So, what I'm looking for is the new weird stuff that'll be like, oh, I never thought of that. What's coming down the pipe? I think what we're likely to see is you're going to see more AI use in real meaningful ways with generative AI. I'm waiting for someone to get approval from FDA to have the front facing cameras or tools already built into smartphones to be able to read blood pressure and heart rate just through visualization. So, the less we need like peripheral devices and the more we can pack it into like a tricorder Vibe Star Trek for your phone. We're going to see more of that. That's exciting. So, I do think this is going to be a bit more on the software side. At the end of the day though, this is a clinical service that currently is delivered or oversight by human beings. So, to the extent we can make doctors and other clinicians lives easier and more efficient, those tools are going to have some real appetite for adoption.