Latest / CareTalk: Healthcare. Unfiltered. / Why Health Tech Startups Get Stuck in Pilotw/ Dan Galles, Partner, Allumia Ventures

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Why Health Tech Startups Get Stuck in Pilotw/ Dan Galles, Partner, Allumia Ventures · CareTalk: Healthcare. Unfiltered.

• 0:00
  David: Health tech startups often die in the pilot graveyard.
• 0:03
  David: They get stuck in endless proof of concept cycles inside health systems that never really planned to buy in the first place.
• 0:10
  David: Meanwhile, Alumia Ventures has built a top track record in healthcare venture by attacking that problem from the inside.
• 0:17
  David: Alumia started within the Providence Health System before being spun out last year.
• 0:21
  David: They've recorded 16 exits, including the recent sale of Press Ganey to Qualtrics for almost seven billion dollars Welcome to the Health Biz podcast on the Care Talk channel.
• 0:37
  David: I'm David Williams, president of Health Business Group, a strategy consulting firm serving healthcare technology and services companies.
• 0:44
  David: My guest today is Dan Gallus.
• 0:46
  David: He's partner at Illumia Ventures.
• 0:47
  David: He's devoted his career to investing in healthcare.
• 0:50
  David: We actually met 20 years ago when I was evaluating a diabetes care investment alongside Dan.
• 0:56
  David: Dan, welcome to the show.
• 0:57
  Dan: Uh, thank you, David.
• 0:58
  Dan: Uh, it's great to be here.
• 1:00
  Dan: Uh, great to reconnect with you, and, um, I think we, I think we missed a good one on that one together, so that was-
• 1:06
  David: Yeah… Dan: I appreciate, I appreciate it.
• 1:07
  David: Thank you.
• 1:08
  David: You helped us with that.
• 1:09
  David: No, it's good.
• 1:10
  David: So you've been a healthcare investor for a while.
• 1:12
  David: I'm wondering, how did you get started, uh, with healthcare specifically?
• 1:16
  David: You know, what drew you into that?
• 1:19
  Dan: Yeah, for, for me, you know, as, you know, some things in life are planned, others, uh, just happen.
• 1:24
  Dan: Uh, this is one of those that just happened.
• 1:26
  Dan: I came out of school, uh, undergraduate, uh, at, at University of Pennsylvania and got… Everybody was doing investment banking, which I didn't know what investment bank was, and ultimately, uh, got a job at a, a, a firm called Alex.
• 1:39
  Dan: Brown & Sons.
• 1:40
  Dan: And, uh, they liked the, the, the Wharton people because they, they knew business right out of the, the undergraduate, and they stuck us in the, stuck me in a, one of their tougher groups, the healthcare group.
• 1:50
  Dan: Uh, that was a really great group of people and kind of set me on my way.
• 1:54
  Dan: Um, so I kind of fell into it and, uh, really loved it from the outset.
• 1:59
  Dan: Um, and, and, uh, you know, wake up 30 years later and, uh, are still, still doing that every day.
• 2:07
  David: Yeah, I remember, you know, being in healthcare for a long time as you, as you've been, and I remember, you know, some recessions and you say,"Well, gee, I'm glad I'm not working in, you know, fiber optics or something like that with all the dark cable." There's still, you know, room in, in healthcare.
• 2:18
  David: And now I think about, you know, not that I'm gonna retire anytime soon, but you know, there's still gonna be all these problems in healthcare.
• 2:24
  David: There, there's still plenty of things to invest in is what I'll, is what I'll say.
• 2:27
  David: Plenty of problems yet to be solved.
• 2:29
  Dan: Yes.
• 2:29
  Dan: I, I think it's, uh, in, in healthcare, healthcare is, is, is, is really interesting.
• 2:33
  Dan: I think it is a, it's a very challenging market.
• 2:36
  Dan: I think it's a challenging, uh, from a venture capital perspective, a challenging market to figure out how to do well.
• 2:45
  Dan: Uh, the reality is we don't have… And, and I'm not, b- biotech and pharma I think are different angles.
• 2:50
  Dan: We, I really haven't done that in my career.
• 2:52
  Dan: We're doing more digital health, tech-enabled services, services, and little medical devices.
• 2:56
  Dan: Um, but you, you look at company creations there, and unlike traditional technology outside of healthcare, we don't have the multi-billion dollar exits every day, let alone, you know, you get a couple of those and you're really, really happy.
• 3:10
  Dan: So I think it takes a little different, uh, approach to figuring out how to invest well and build companies, uh, and what your, your out- ultimate outcome and strategy's gonna be.
• 3:22
  Dan: Longer sales cycles, longer time to build.
• 3:25
  Dan: The beauty of it is that one, when you, it is sticky, so when you do it and do it well, you can be longstanding.
• 3:31
  Dan: And the other part, which is really why I've ended up doing it, is just the, the passion for what healthcare is and, and the impact that it has on all of us.
• 3:39
  Dan: You're able to, uh, be investing in things that are very personal.
• 3:43
  Dan: Um, I think all of us, even in the early ages when I first got involved, everybody had, uh, you know, whether it was myself or family members or seeing aging family members, you saw, it, it really touched you, the different kind of businesses that, uh, are in healthcare and, and how they can impact you from a personal perspective.
• 4:00
  Dan: Um, and the intellectual challenge of, of trying to figure out ways that we can make things better, uh, w- was a fun thing to do as well.
• 4:07
  Dan: So, uh, I think it's a great market.
• 4:09
  Dan: It's a, it's a challenging one with its own intricacies, but, um- Uh, it- it's, it's, uh, it's g- it's got, like you said, uh, innumerable opportunities because it is so big and, quite frankly, still very much broken.
• 4:23
  David: So it's hard enough to start any kind of business, but if you think about a technology business, you know, someone can start up a software business and then they can start selling.
• 4:31
  David: They've got a lot of different angles that they can take for software as a service, let's, let's say.
• 4:35
  David: And healthcare a lot of times, you know, there's just such a disconnect between what a technologist is gonna come up with and what could actually be adopted.
• 4:42
  David: And one of the ways that people deal with that from the investment side is health systems having their own investment arms.
• 4:47
  David: And so Illumia was originally part of Providence, and you were investing exclusively really on behalf of one of the, uh, the w- very largest health systems in the country.
• 4:57
  David: So I'm wondering, you know, coming from that perspective inside a health system, how did that shape how you would evaluate and work with companies?
• 5:06
  Dan: Yeah.
• 5:07
  Dan: It's, it's interesting 'cause I was, uh, prior, prior to joining Providence Ventures, which was just, you know, the in-house inside venture arm of this large, uh, integrated delivery network, Providence Health System.
• 5:17
  Dan: Uh, I joined there in 2015 when Providence Ventures was effectively created.
• 5:21
  Dan: Uh, I was at another firm, HLM Venture Partners, uh, for 14 years, and, uh, very similar profile of companies we invested in.
• 5:28
  Dan: And most of our capital actually did come from strategic sources of capital, UnitedHealthcare, Centene, uh, Walgreens, uh, some other health plans and, uh, for the most part.
• 5:39
  Dan: But I will say coming to Providence and being an employee of Providence, and part of our mission there was very much, yes, generate good financial, uh, venture capital, uh, commensurate returns, but it also was help us help our stakeholders figure out, uh, where we should be going, what kinds of partners we should be working with, help us make better solutions about the types of partners or which partners we are working with.
• 6:04
  Dan: Uh, so it really did have a dual angle and a dual bottom line.
• 6:08
  Dan: And I will say from a, from a career perspective, it's been really eye-opening.
• 6:13
  Dan: I thought I knew a lot about healthcare, you know, before, which I did.
• 6:16
  Dan: Um, but you, you know, through a decade of building really good, trusted, credible relationships with stakeholders within the system that are trying to figure out how to make things better, everybo- everywhere from the hospital side to the outpatient side to they have a health plan there, all those different components, you get a different view of the challenges, uh, and, and the nuances involved with respect to, uh, ultimately the adoption of the types of solutions of the companies we're investing in.
• 6:43
  Dan: So it's, um, I think it's been a, a, a really, really helpful, maybe too much scarf tissue gets built up sometimes because you see how challenging it is.
• 6:51
  Dan: Uh, but you got-- I think the, what we try to bring to entrepreneurs in our companies is you gotta understand it.
• 6:57
  Dan: It doesn't mean you can't change it.
• 6:58
  Dan: It doesn't mean you can't disrupt it.
• 7:01
  Dan: But if you don't understand it and understand why some of the things are broken and why they are, you really need to understand that first and foremost, uh, before you just decide to go on another path necessarily to, uh, to fix it.
• 7:13
  Dan: 'Cause a lot of things are, are broken and could be better, and they're obviously could be better.
• 7:18
  Dan: But figuring out how to implement something that, that can, can make an impact is, is, is, is more challenging than it might appear.
• 7:26
  David: So you're first investing outside a health system, then inside a health system for 10 years as Providence Ventures, but now you're, it has been, uh, spun out as of, uh, you know, last year.
• 7:38
  David: Although Providence is the anchor for the fund, I think they've made a commitment of $150 million or so.
• 7:43
  David: I wonder what, what can you do as Illumia that you couldn't do as Providence Ventures, maybe other than, uh, shedding some of the scar tissue that you had described?
• 7:51
  David: Yeah.
• 7:52
  Dan: I think the scar tissue will still be there because we still, uh, uh, is more, more borne by the companies that we're investing in trying to drive adoption and success for their companies, uh, through those, those same end customers.
• 8:03
  Dan: I think what, what, with a decade with, as Providence Ventures and then the last 18 months we've been spun out as Illumia Ventures, uh, our, the premise for the spin-out, uh, when we, we worked with the Providence executives towards where do we wanna go, uh, the conversation was very much we wanna keep doing exactly what we've been doing in terms of adding value for you, but do it even better.
• 8:23
  Dan: And one th- the way that this has kind of enabled us, I think, to take it a step further is doing some things that we did naturally and then formalizing it.
• 8:31
  Dan: So the couple Main things that are a little bit different.
• 8:34
  Dan: Under a traditional kind of venture capital fund structure, they're a limited partner.
• 8:38
  Dan: We're not employed there any, any longer, and we have a kind of a traditional fund.
• 8:42
  Dan: That traditional fund allows us to bring in a few other, uh, strategic limited partners.
• 8:47
  Dan: So we've always worked with other systems in building with-- building relationships with folks, uh, when you're doing diligence or trying to help your company drive more, uh, sales, trying to leverage those relationships for, uh, uh, in introductions to those systems.
• 9:01
  Dan: This allows us to… And we're in the process of bringing in, uh, looking just for like two or three other partners that we can do exactly what we've done with Providence over the years, which is build trusted, credible relationships with dozens of stakeholders across the, the entire organization, across clinical area function, uh, service line.
• 9:21
  Dan: Help them… Help understand what their needs, priorities are.
• 9:24
  Dan: Help them kind of hunt for solutions that can help address those.
• 9:27
  Dan: And also have our eyes, ears open for things that are working in the market that maybe they're not thinking as much about and maybe should be.
• 9:34
  Dan: So it's really trying to stimulate innovation for what you're not even, you know, things that you should be thinking about, but maybe you're not as much.
• 9:40
  Dan: What's working elsewhere?
• 9:42
  Dan: So we're looking to formalize relationships with a couple other partners, so this structure allows us to bring them in as more formal partners.
• 9:48
  Dan: The second thing it does, I think is, is, is a learning we've had, which is maybe obvious but didn't become as obvious as it is now, is the value that we, uh, we've invested as Providence Ventures, we invested in 28 companies, uh, across two allocations of capital for Providence over time.
• 10:05
  Dan: Almost every… It was never a mandate that Providence had to work with any one of those companies in order for us to make an investment.
• 10:12
  Dan: The stakeholders make those decisions.
• 10:15
  Dan: We try to h- help make the relationships, uh, he- help the communication and education, uh, but ultimately they gotta stand on their own.
• 10:23
  Dan: Uh, not surprisingly, even though it wasn't a mandate, almost every single one of those companies ended up working with Providence, and, and we really wanted that.
• 10:30
  Dan: We wanted to deliver mutual value add, and when you only had one source of capital, it was kind of hard not to, to do that if you didn't have them working with them.
• 10:38
  Dan: At the same time, um, a lot of the value we brought wasn't just the companies we're investing in.
• 10:43
  Dan: We were br- introducing 75 to 100 companies', uh, potential partner, solution partners to different people at Providence every year.
• 10:51
  Dan: Um, many more, many of those, uh- If we made 28 investments, they made-- they ended up becoming partners with a lot more companies that we didn't invest in over that time just based on those relationships and education and, and information we were giving them about some other things that are happening in the market.
• 11:07
  Dan: So, uh, going forward, you know, we still want to find companies that will work with our strategic limited partners, but it's a little-- we, we might loosen it a little bit.
• 11:16
  Dan: There were times where we didn't invest in some really interesting companies that Providence maybe later ended up working with or maybe they didn't.
• 11:23
  Dan: But in order to generate the best financial returns and still stimulate innovation, we think we can open, uh, you know, we can, we can open up our pool of candidates that we'd invest in broader than, than, uh, being a little more, more tight like we were historically really looking for that visibility from a Providence adoption.
• 11:42
  David: Let's talk about Press Ganey.
• 11:44
  David: So the last time we were, you know, working together 20 years or so ago, this whole concept of patient experience was kind of a new one.
• 11:50
  David: It was a kind of an academic kind of approach.
• 11:53
  David: We worked with a couple of nonprofits that were doing its first patient experience survey in Massachusetts.
• 11:58
  David: Press Ganey really took that and made a large business out of it to the extent that they're really essential for many of the large providers, uh, out there really around the, the country.
• 12:08
  David: And as I understand, it was an investment, uh, that you'd made, and it was, uh… company was acquired by Qualtrics, um, for almost $7 billion.
• 12:17
  David: So I'm wondering, you know, what your history is with Press Ganey and what a deal like this means for the value of healthcare experience data, especially in the AI era, because Qualtrics is not a healthcare company, or they would- they weren't, at least before, uh, this deal.
• 12:32
  Dan: Yeah.
• 12:33
  Dan: No, it's, it's, it's in- it's interesting, like, you know, as you said, Press Ganey, um, really, uh, when you think about consumer experience and, and, and also Press Ganey does things with respect to provider experience as well and, and understanding how caregiver experience is.
• 12:46
  Dan: Um, but, like, Press Ganey's probably over 40 years old.
• 12:50
  Dan: In the early days it was more of a, a general, uh, regulatory mandate.
• 12:54
  Dan: Let's make sure that, you know, and it was handwritten.
• 12:56
  Dan: These were, these were letters, right, that were sent out to people, "How was your experience?" And that's what Press Ganey did.
• 13:02
  Dan: Uh, but in that time of, of doing this for o- over a course of 40 years, I think a couple things happened.
• 13:07
  Dan: One is, uh, wow, we can use digital and digital surveying and so forth and not need to rely so much on the paper part of it.
• 13:13
  Dan: The second part is the, the, the customers themselves started thinking about customer experience differently as well, right?
• 13:19
  Dan: It wasn't just, "We need to do this for regulatory reasons." It's like, "We need to compete.
• 13:23
  Dan: We need to understand how consumers are, are seeking to, uh, experience care.
• 13:27
  Dan: How are we doing, uh, on those metrics, uh, for our own purposes in trying to improve ourselves, not just, uh, for regulatory, uh, reasons to do that?" I think that, uh, and Press Ganey's, you know, had a, has done a really good job of becoming kind of the de… There are a couple companies in this space, but they are the de facto leading standard by far.
• 13:46
  Dan: Qualtrics is, is, uh, on the technology side and from a consumer experience, um, uh, and engagement and understanding perspective outside of healthcare.
• 13:56
  Dan: Um, but frankly, probably started later, had better technology and, and was even further along than Press Ganey in terms of how they would interact with consumers, that what they could deduce from, from intelligence that they would get from those interactions with consumers.
• 14:09
  Dan: Um, and they were competitive in healthcare to some degree as well, so they were, they were moving in on Press Ganey's turf a bit.
• 14:15
  Dan: I think the combination of these two in terms of what Uh, the, the breadth of what Qualtrics has done in terms of understanding consumers outside of the healthcare dynamic, combined with the longitudinal data and experience that Press Ganey's had with all these systems with years and years of data that they can build upon and continue to build upon, should position them to be, uh, to, to, to drive things even, uh, uh, uh, forward much more in terms of being predictive.
• 14:43
  Dan: So, uh, we've always been like,"How are we doing? How are we doing?" Playing catch up.
• 14:47
  Dan: This should give more of an opportunity with the technology advancements and the understandings from the Qualtrics to be more predictive and for these organizations to be able to deploy things that, um, can enable them to be in front of, uh, consumer demand, consumer experience demand, uh, in a way that Press Ganey on its own, uh, historically maybe hasn't been as, uh, able to, to move as quickly as they would've liked.
• 15:10
  David: You had an earlier portfolio company that has a pretty cool name, Binary Fountain.
• 15:14
  David: I don't know, kind of f- uh, trying to picture a binary fountain.
• 15:17
  David: In any case- Yeah … but it was acquired by Press Ganey in 2020, and I don't know if it's just there was any kind of connection between this deal and, and that deal, but, uh, it did strike me that, uh, you'd had some exposure.
• 15:31
  Dan: Yeah.
• 15:31
  Dan: It actually, it was, it, it turned out, uh, this is probably, it's the only company we have in our portfolio that, uh, ultimately got acquired by another company in our portfolio.
• 15:39
  Dan: Uh, that does, it, it does tend to happen when you end up with a, we've got 32 companies we've invested in over time, and then if you have ones that are successful and they grow and they ultimately create other products and solutions, they bump into each other.
• 15:50
  Dan: So we have situations where, you know, they ultimately become somewhat competitive.
• 15:55
  Dan: Um, and that's just a natural thing that venture capitals have to, to, to deal with over time.
• 15:59
  Dan: This was a unique one where we were actually, we were invested in Binary Fountain prior to the opportunity to invest in Press Ganey.
• 16:05
  Dan: We certainly were familiar with Press Ganey, but, um, we invested in Binary Fountain kind of on its own merits.
• 16:11
  Dan: And then, uh, over time, uh, through an introduction, you know, through Press Ganey, uh, beca- to Press Ganey that became a, a really nice channel partner for Binary Fountain in helping grow their business, and there was a lot of synergy in what they did.
• 16:24
  Dan: Um, the Pr- the Press Ganey investment ultimately was more opportunistic that arose.
• 16:29
  Dan: You know, they did a l- uh, a leverage buyout, uh, back in 2016 timeframe, and they carved out a little bit of room for a few strategic systems that they work closely with to participate.
• 16:39
  Dan: We took advantage of that 'cause we wanted to do more at Providence with them from a strategic perspective, and we, we knew Pat Ryan and the team there for a long time, so felt really good about the financial return potential.
• 16:49
  Dan: Um, I think it's, it's more of a, uh, it's more of a opportunistic, uh, coming together.
• 16:55
  Dan: Um, I think they're… We don't typically look at investments a- as it relates.
• 17:01
  Dan: We look at it with respect to a competitive dynamic.
• 17:04
  Dan: We don't wanna go into something where we think they're gonna be butting heads with another one of our companies day one.
• 17:08
  Dan: Um, the synergy part oftentimes is there, though, where, where we have some opportunities to look at, at, at learnings together, or they can, there might be some channel partner opportunities.
• 17:18
  Dan: I think there's even more of that now with, with where- Uh, AI just from an operational, operational impact perspective on product development and how, uh, operationally our companies are, are looking to advance, like any organization, how are we gonna incorporate AI into what we do?
• 17:37
  Dan: That's one area that we've been trying to leverage our, our portfolio and insights and, and practice, uh, best practices by allowing our companies to kind of share insights on those things, which are not really competitive.
• 17:48
  Dan: It's really more of a, a best practices and, um, across our portfolio.
• 17:52
  Dan: So I think, I, I imagine a lot of venture firms and private equity firms are, are focused on that because I've never seen so much change in 18 months in terms of how our companies are operating from a product development, especially on the technology side, um, in terms of what people do every day, what engineering groups do every day, um, how different it is today versus 18 months ago.
• 18:12
  Dan: So, uh, some interesting opportunities there on the synergy side, I think, going forward
• 18:17
  David: You alluded to the challenges of, uh, you know, running these companies and investing in them, and it has definitely been the case there haven't been that many great exits in general, uh, in the space that you've been operating in.
• 18:30
  David: But if I look at what you were doing, at least kind of counting up the number of exits, a lot of success- a lot of exits, um, last year, whereas the overall market maybe hasn't been that, that good.
• 18:40
  David: Have you, have you actually stood out in terms of performance?
• 18:43
  David: And if so, what, what explains that?
• 18:45
  Dan: Yeah, I think so.
• 18:46
  Dan: It, it is-- it's interesting.
• 18:47
  Dan: Uh, oftentimes you, you know, liquidity will come in clumps based on market dynamics, oftentimes public market dynamics, I think, over time.
• 18:55
  Dan: If you look back at, um, you know, COVID, it was probably the only time in my career for a brief one, maybe 12-month period where digital health was cool, like, uh, non, non, non-healthcare tech, where you had, uh, you know, my old firm, we were investors in Teladoc, and they, they came together in the mega merger with Livongo and were worth, I don't know, $70, $80 billion on paper one day, and, and now Teladoc's worth, worth a couple billion again.
• 19:21
  Dan: Um, so there was a time where… And, and we got-- we had a couple liquidity events in that timeframe.
• 19:26
  Dan: So One Medical, uh, we had invested in.
• 19:29
  Dan: We got liquid within 15 months after a, a strategic investment in, uh, a s- an investment that came along in One Medical and went public.
• 19:36
  Dan: Weren't really expecting that to happen, and it traded up really, uh, aggressively, and we were able to get a, a really great financial return on that in 15 months.
• 19:44
  Dan: We sold a company called Collective Medical, which is a great company that sold to PointClickCare for several, several hundred million dollars in that timeframe.
• 19:50
  Dan: So there were some-- they're both good companies, but also got very-- the, the, the markets were trading very, very nicely, so you were able to take advantage of that.
• 19:58
  Dan: I think the, the last year, uh, s-since, since we spun out in 18 months from Providence and became Illumia Ventures and continued to manage out the Providence portfolio, we had seven, seven companies that have, have sold or, and/or go public.
• 20:10
  Dan: Omada is the one that went public.
• 20:12
  Dan: And, um, and that is a lot.
• 20:14
  Dan: We had about, I think we had 19 portfolio companies active, and seven of them exited effectively within, uh, an 18-month timeframe, which is, uh, a big number in that timeframe.
• 20:23
  Dan: I think the, the-- i-in a time where there hasn't been great liquidity, especially I think in healthcare venture, um, the-- what I would point to is I think our, our, our approach to investing is very much focused.
• 20:37
  Dan: It's really not shoot the moon, trying to build billion-dollar companies and build them really fast and pour a ton of money into them.
• 20:43
  Dan: There are times where tho- that is a part of the strategy, where it's a really big opportunity.
• 20:48
  Dan: Omada ended up raising a lot of money and getting public.
• 20:50
  Dan: We have another company, Lyra, in the behavioral health, uh, area that's, uh, you know, grown ex-extraordinarily fast and is a, a large company, leading company in its segment for online behavioral healthcare.
• 21:02
  Dan: But most of them, when we're targeting are, are trying to be capital efficient, build a company that gets to be EBITDA positive, and puts it in a different position to exit at a couple hundred, 400, up 200 to maybe$400 million type of exits, and we can get strong venture returns with that.
• 21:20
  Dan: And most of the d- most of those exits that we had are, are kind of in that, in that kind of framework, which allows us to, um, not have, you know, valuation expectations that are disheartening when you're looking at trying to exit otherwise.
• 21:36
  Dan: Or, uh, once you get to that cash flow breakeven, EBITDA breakeven part, it opens up the growth equity, private equity angles a lot better, and the strategics certainly have been liking that more as well.
• 21:47
  Dan: So I think it's, it's good, I mean, there's some good fortune, but also part of our strategy in terms of how we're looking to build companies.
• 21:54
  Dan: What exits and what drives our, our fund returns are a lot more doubles, triples and, you know, hopefully the occasional home run versus trying to have fund makers, um, by, by creating billion-dollar companies every time we're, we're making an investment.
• 22:10
  David: So for the next, uh, section of this discussion, I wanna turn to maybe some advice for the companies themselves, and let's focus on what you call the pilot graveyard, which I can, uh, easily envision.
• 22:23
  David: It may even be, like, a real thing.
• 22:24
  David: There may be a little place on the grounds of the hospital for this.
• 22:27
  David: So I'm wondering, you know, why are there so many health tech solutions that fail, you know, even once they get inside these large healthcare organizations, and frankly, even when the product works?
• 22:38
  Dan: Right.
• 22:39
  Dan: Yeah, I think the… I think it… Take a step back for a second.
• 22:44
  Dan: Again, healthcare, healthcare I would, I always say healthcare is different, especially when selling to health systems or health plans.
• 22:50
  Dan: I would put pharma maybe in a different bucket.
• 22:53
  Dan: They're… It's a different profile from a margin perspective that pharma has in terms of their willingness to try their new products and their ability to consume new products.
• 23:02
  Dan: But health systems, health plans, um, low margins, um, not necessarily, uh, as tech forward as some other industries.
• 23:13
  Dan: Um, and there aren't any new ones either, right?
• 23:16
  Dan: Like this, there's no new hospitals, right?
• 23:18
  Dan: There's no new health… There are very few new health plans.
• 23:21
  Dan: So you, you don't have, like, new entrants that are willing to try a new something new that's come.
• 23:25
  Dan: So you're always trying to displace something, or you're largely trying to displace something that's already, they're already doing.
• 23:32
  Dan: So this, the sales cycles, uh, and, and adoption cycles are more challenging, I think, in those end markets.
• 23:38
  Dan: I think the self-insured employer space is a, is one where if you go look at where some of the biggest growth companies have been, you take Hinge Health, which is public now, Amada's in this category, uh, Teladoc Livongo in the days.
• 23:50
  Dan: Lot more, lot of more enterprises.
• 23:52
  Dan: It's the, the world is your oyster in terms of enter- every enterprise can be a c- a customer, so you have a different kind of growth trajectory you could get there.
• 23:58
  Dan: So the adoption, you just need to, it-- even if you're growing fast, fast is still relative because you're, it's, it's long sales cycles and you gotta get in there.
• 24:06
  Dan: The pilot graveyard is kind of a even a, a, a d- even deeper on that is you're trying to get in there, so you're trying to get in as quick as you can.
• 24:15
  Dan: You might discount your price to a point or make it, you know, a six-month type contract.
• 24:20
  Dan: The ch- the biggest challenge is, um, one, a, you need to know what success is.
• 24:26
  Dan: The, the, the company that's selling it and the customer needs to be able to define at the end of it, this was successful and it supports budget.
• 24:33
  Dan: And oftentimes you'll just get it in there, try to, try to prove that it's good and works.
• 24:38
  Dan: Works doesn't mean that the technol- doesn't-- work should not mean that just the technology is working.
• 24:43
  Dan: There's change management associated with it, and there has to be value.
• 24:47
  Dan: What's the value that we're deriving here, and can we calculate that value?
• 24:50
  Dan: Because the next step after that pilot is, if it's not, hasn't already been, uh, a- articulated well upfront, is, okay, now what?
• 24:59
  Dan: Do we have budget for this?
• 25:00
  Dan: Did we, did we, can we prove to finance that we should get budget for it?
• 25:04
  Dan: Um, that's kind of the pilot graveyard is there's oftentimes not enough thought put in upfront or, and even visibility.
• 25:12
  Dan: I th- I think health systems don't, I don't think it's true health systems are looking to adopt with no intention to ever, uh, adopt more broadly, uh, or long term or stretch it out to their, uh, across the system.
• 25:24
  Dan: They'll oftentimes smart- start small, see if it works, and then wanna go bigger.
• 25:29
  Dan: But if they're, if, if the company itself can't define what success is and the customer agrees and is nodding and is very clear, you're kind of setting yourself up for a, "That's great," uh, that great kind of moment where at the end of the six months there's no money there, there's no budget, and, and it's hard to go back and, uh, for your stakeholders there to be able to be in position to, uh, to go find budget, uh, without the demonstrable ROI or the demonstrable valuable value proposition.
• 25:58
  David: You mentioned that it could be different in pharma.
• 26:00
  David: Maybe I'll just share a slightly contrasting impression of what happens there.
• 26:04
  David: So you've had th- this is maybe a few years ago, it's less so now, I think they've learned their lessons.
• 26:09
  David: You know, pharma would have these innovation groups, and you could go and you could get a contract for $150,000 or $200,000 and do something, and it went great.
• 26:17
  David: And then it'll… And the company's like,"Okay, now what?" But the innovation group, you know, they had their conference presentation, it was really cool, they impressed their friends, and now they're onto the next one.
• 26:26
  David: There was never really any connection with the business, and I, I think some of the pharma companies- Yeah have done that.
• 26:30
  David: But this is just sort of general principle that, you know, you're so hungry for revenue and demonstrating something, but you've gotta look ahead to see what is this gonna… what does success look like, and where does the path take me from there?
• 26:43
  Dan: I, I would, I would agree with you.
• 26:44
  Dan: And, and, and health systems and health plans have not been devoid of their own innovation groups over time, which I think have good, uh, uh, have good value proposition in terms of what they do.
• 26:54
  Dan: I think there's a lot of different ways you can do it.
• 26:56
  Dan: But I've always been concerned, and every time any of my, any of my companies that's, uh, selling into any health system, oftentimes the, the innovation folks are great stakeholders to help lead the way.
• 27:07
  Dan: But when it gets down to contracting time, if I start hearing something like that where it's like, "Well, we're gonna do the first year for them and then, and then we'll figure it out," you… It doesn't mean you don't do it, 'cause sometimes you might not, there might not be an opportunity, but you kinda know what the answer's gonna be if you have a, if your pipeline's full of those types of things, you're gonna end up with a, a lot of churn on them.
• 27:27
  Dan: So, um-
• 27:29
  David: So there's these places, m- maybe we'll come back to the scar tissue from a different direction, which is to say, yeah, it's really hard working in these health systems.
• 27:37
  David: If you're a clinician on the front line, an operational team trying to get stuff done, these are really big entities, and they're dealing with just mission critical stuff every moment.
• 27:47
  David: And even though there's a ton of spending, there's never seems to be enough money to do everything.
• 27:51
  David: And a lot of times they are actually looking to see something, gee, I have a lot of problems that I'd like to see solved.
• 27:56
  David: So what do some of these frontline players, clinicians, operational teams, what do they wish the founders of these companies would understand before coming up with something and, and, and bringing it to them?
• 28:09
  Dan: Yeah.
• 28:10
  Dan: I think the, I, I think there's a couple angles to it.
• 28:13
  Dan: There's the, the, here's the, there's the frontline folks that are actually the ones that need to be engaged with the workflows and actually are the, call it the users, uh, of the technology and are gonna be most impacted by the actual deployment itself in terms of how does this impact my life?
• 28:29
  Dan: Is it, is it making things better or, or harder for me?
• 28:33
  Dan: I think a lot of times the workflows, um, aren't-- The, the worst is when the workflows aren't, aren't understood well enough by a company that's coming to demo and, uh, the folks that will be utilizing it on the front lines are going to-- It, it doesn't fit their workflows right, or it's not integrated into, uh, another system that they're needing to use, so you're kind of thinking about it on a standalone basis.
• 28:55
  Dan: I think there's a, an element of that in terms of not understanding the workflows that is kind of… You're, you're, you're not gonna get anywhere.
• 29:01
  Dan: That's gonna be a quick meeting.
• 29:03
  Dan: The second part of it, which I think happens even more often though, is, um, you got, you almost need to help those, those stakeholders that are gonna be your biggest champions that really are gonna want this to get done or have the, uh, the ones who are really gonna be working with the technology.
• 29:20
  Dan: You need to help them understand again that value proposition and how to define it and who get in, get the key stakeholders involved that they're gonna need to prove.
• 29:28
  Dan: 'Cause oftentimes we'll go right to, say it's something for nurses or someone, or it's for, um, some other caregiver.
• 29:35
  Dan: It's obvious to them why it works, but either the financial equation doesn't hold or the IS integration that's gonna be required is gonna be too big of a lift.
• 29:44
  Dan: Um, there, there's a number of different things that you're gonna run into which is part of the challenge in terms of selling into healthcare.
• 29:50
  Dan: It's never just one person who's gonna make a decision and go.
• 29:53
  Dan: Um, it's, it's, it's understanding who those other folks are and helping them with respect to… You're, you're helping them help themselves, right, and help you to get adopted by understanding the path within their own system that they're gonna have to navigate, uh, to, to prove that value pro- value point to, uh, uh, to the folks that they're gonna ultimately need to get budget allocated from.
• 30:18
  David: Let me ask you about a couple of recent Series B investments that you've made.
• 30:22
  David: I think one is in the substance abuse disorder space and another one value-based primary care.
• 30:28
  David: What are the sort of things you're looking at today?
• 30:30
  David: What led you to tho- to, you know, to invest in those couple of opportunities?
• 30:35
  Dan: Yeah.
• 30:35
  Dan: Um, you know, we now we've actually made four n- four investments now.
• 30:39
  Dan: Those were the first two we've made, was Affect, Affect, which is the virtual substance use disorder, uh, provider, and then Greater Good Health, which is lever- leveraging nurse practitioners primarily, uh, nurse practitioner first, uh, primary care models, uh, that both augment, uh, uh, uh, primary care services for primarily Medicare Advantage patients through kind of, uh, providing longitudinal virtual care to patients with chronic conditions and trying to help them navigate the system better.
• 31:09
  Dan: They also are going to rural market… This Greater Good Health, they're also going to rural markets and ba- basically becoming the de facto primary care clinic with, through a, through a, uh, a combination clinic and strong virtual, uh, in-person kind of network that's required in the rural markets.
• 31:25
  Dan: What we, what we, I think we really like about both of those business, and the other two we have also are very much telehealth-enabled businesses, is, um, one, they are targeting markets that have unmet demand, that today, uh, there are problems, there are people that need care and, and aren't able to get it.
• 31:45
  Dan: Um, Affect with the virtual substance use disorder reminds me a lot of what happened in, uh, more generalized behavioral health.
• 31:52
  Dan: You know, we were investors in Lyra, which was one of the first, uh, companies to come to market offering enterprise employers a, a solution to get your patients quick access to care, both in person, but also did it on a virtual basis and digital programs.
• 32:06
  Dan: I think virtual substance use disorder, similarly, you've got a big buildup of people who need care and when they need it quickly, and it's not easy to get, uh, with the old brick and mortar.
• 32:15
  Dan: So it, it provides you easy access with respect to onboarding and being able to triage.
• 32:21
  Dan: Uh, the other part that, uh, we like, uh, in, in Greater Good Health on the rural market initiative in particular, uh, we've got, uh, primary care deserts in rural markets where it's really hard to reach it, and they're leveraging telehealth and people's understanding of telehealth and comfort with it to be able to better reach patients and provide access.
• 32:41
  Dan: The other part that is, was critical, at least in our diligence part of it, was these are… They've also got economic models, financial models that work.
• 32:48
  Dan: And, and Affect, most of its patients are Medicaid, so it's getting a lot of Medicaid rates and so forth.
• 32:53
  Dan: But they've designed a, a care model that, uh, can still cost effectively generate, you know, strong margins, uh, for what they're doing, uh, that with AI as well should continue to get better over time.
• 33:06
  Dan: And they're doing the right thing.
• 33:07
  Dan: They're actually, actually enhancing the kind of care that they're able to give with respect to substance use disorder by, uh, elongating the care model.
• 33:15
  Dan: By being able to reach them virtually, they can stay with patients longer.
• 33:18
  Dan: They can do it more longitudinally.
• 33:19
  Dan: It's not just a transactional You're here for a certain period of time, then you move on.
• 33:24
  Dan: Uh, it actually is enhancing a care model while doing it more cost effectively.
• 33:28
  Dan: Similar to Greater Good Health leveraging virtual, um, and, and I think AI will continue to get incorporated into it to allow for patients to get seen more often, uh, you know, in smaller touch point ways but at critical junctures to be able to manage patients that have needs in a more regular basis versus wait for the visit and, and hope nothing happens between those.
• 33:50
  Dan: So we really like what-- I, I think, you know, our, uh, probably two of our biggest themes are what can AI do and, and the, the virtual, which has been, you know, introduced really, it's been 15 years with Teladoc starting it, but really the la- co- since COVID, a l- a lot more of a comfort there and understanding, uh, that we can reach people more regularly, either in an automated way with AI or through virtual to reach people when they need it, uh, more frequently and, and make more impact.
• 34:19
  Dan: So we like both of those models from that perspective.
• 34:24
  David: You anticipated my next question, which was about how AI fits into your investment philosophy.
• 34:28
  David: And if I, if I understand what you said, it's both kind of a, a theme and then ties into, you know, the virtual, uh, care as an opportunity.
• 34:37
  David: And as you say, there's been more change in the last 18 months than you or anybody could remember, and presumably it's not just that it's been reset, but there's also gonna continue to be change.
• 34:47
  David: So as I assume as you look ahead and say,"Okay, here's where we are today," and let's say as Medicaid rates get squeezed or whatever may happen with the big, big beautiful Bill Act- Yeah … there's still a path because of things that we may not have exactly in hand just yet.
• 35:01
  Dan: Yeah.
• 35:02
  Dan: I think AI, it's interesting.
• 35:04
  Dan: We, we don't think of it as a… It, it's, it's pervasive.
• 35:06
  Dan: We don't think of it as a, a category.
• 35:09
  Dan: It's not a category we're investing in.
• 35:10
  Dan: I mean, the reality is the, the first dynamics that we're noticing of it is, uh, it's kind of a wake-up call for any company like that over the last 18 months of, "Well, what are you doing in AI?" Like, you know, you are software.
• 35:22
  Dan: Most of them are software today.
• 35:24
  Dan: No one will say they're software now.
• 35:25
  Dan: They're all AI.
• 35:26
  Dan: Um, it's w-what do you do?
• 35:27
  Dan: But it's, it is not just on the product end, the, the, the user end, whether you're, you're touching, uh, patients or if you're facilitating clinicians.
• 35:36
  Dan: It's not necessarily as need to be as revealing just on the, the product touch side for the, the users.
• 35:44
  Dan: It's how are you… It's more operational.
• 35:46
  Dan: It's, it's, you know, how do we, how do we do things faster?
• 35:49
  Dan: How do we develop product faster?
• 35:51
  Dan: How do we, how should we be developing product?
• 35:53
  Dan: What is our, what is our development strategy?
• 35:55
  Dan: Uh, all, and, and it's been really interesting to watch in terms of, you know, companies where 18 months ago coders coded are most of our companies, they don't code anymore.
• 36:05
  Dan: They're, they're… It's all, it's all, you know, it's all, uh, AI first, it's cloud code or, uh, uh, it's, it… Develop the code and then, you know, uh, code after, you know, code after that.
• 36:17
  Dan: So the whole dynamic on what you're doing and the people that you need to hire and how you do it, um, most of the cost efficiency's really been in the operationalization of it.
• 36:26
  Dan: I think the on the come part of it is, is the product.
• 36:29
  Dan: What is, what is happening at the product level in terms of the touch, and that's where I see the biggest opportunity, uh, most exciting opportunity going forward is, um, the Four models that we've invested in kind of in the clinical care side.
• 36:42
  Dan: I think there's the operational efficiencies that come ASAP in terms of how do we do that, how do we incorporate that.
• 36:47
  Dan: And then there's how do we, how do we do it better?
• 36:49
  Dan: And that's kind of some of the allow for the doc to only need to intervene when they, when it's necessary, allow for people to do better self-care because you're able to educate them and, and understand what's going on with them.
• 37:01
  Dan: Um, and, you know, allow a more automated, uh, uh, a process with respect to whatever the, the care pathways are for patients to, to build in AI to optimize that and allow for, uh, the utilization of the actual human clinicians, which is still critical and key to be at the highest level of the license.
• 37:25
  David: So I wanna ask you a little bit as a last question about your outlook for healthcare venture.
• 37:30
  David: You know, who knows, it's cyclical, things happen.
• 37:32
  David: You've got your own, uh, way that Illumia is, is positioned compared to Providence Ventures.
• 37:38
  David: But in particular, I'm interested in kind of the source of, of new companies.
• 37:42
  David: Where is the kind of the next generation of great companies gonna come from, do you think?
• 37:47
  Dan: Yeah.
• 37:48
  Dan: I-- my view is, um, I think, I think it's, it's, it's… I think it's a, it's a, a awesome, awesome time to be investing.
• 37:56
  Dan: G- and it's driven by, uh, it's driven by what has happened in technology, uh, AI more recently, but even the virtual and the comfort with, with respect to how virtual can play a role so that we can touch patients in a more cost-effective, frequent way.
• 38:14
  Dan: Uh, and AI's only gonna enable that, uh, so much more because it's not even gonna require a human on the virtual end.
• 38:19
  Dan: Look at, look at Hinge Health.
• 38:20
  Dan: They do, they… I think I saw their last… They have about 85% gross margin.
• 38:24
  Dan: They're basically doing physical therapy without physical therapists.
• 38:26
  Dan: They're b- they're allowing for so much, um, they're able to do so much in terms of self-support, uh, people doing their physical therapy routines that they, the clinician is, can manage so many, so many patients.
• 38:38
  Dan: Not everything is as, as easy, uh, you know, as suited for that.
• 38:42
  Dan: Um, but I think AI's gonna allow for, uh, continued leveraging of clinicians and more cost-effective care models.
• 38:49
  Dan: So my view is, I think, uh, the biggest opportunities are, one, health systems, health plans in particular, they need to be more cost effective and on a, on the administrative side.
• 39:00
  Dan: And I think that's what you're seeing most of the, the, the s- the technologies that are getting adoption are really more around that, trying to help with, uh, call it administrative waste and automating, automation of more administrative tasks.
• 39:13
  Dan: Um, which should be very helpful, but it's, it's still, it's still challenging in early days, I think, with respect to that.
• 39:20
  Dan: Uh, I think the, the, the part that I'm excited about is the care model change.
• 39:24
  Dan: We need to do… We need better ways for caring for patients that we're only… Everybody's gonna keep getting older.
• 39:29
  Dan: We're living a long time, and the reality is we're all still… We might prevent getting sick, but ultimately those sicknesses happen, and there's still gonna be people that need to be cared for with chronic conditions.
• 39:38
  Dan: Uh, even if we're pushing them out, uh, and staying healthy longer, that happens.
• 39:42
  Dan: So we're gonna need to have, uh, leverage AI and different ways for reaching people more frequently to do a better job just to, to manage the patient loads.
• 39:51
  Dan: So I think the care model change, um, that the, that the technology is gonna facilitate is gonna be very exciting.
• 39:57
  Dan: So new companies coming out with saying,"We're gonna manage these populations different." The whole, the old model of everybody coming, you know, the old model of everybody coming in and you get visits when you need them, that's already changed to some degree.
• 40:08
  Dan: I think that's gonna advance considerably.
• 40:10
  Dan: Um, and then I think the, uh, the, uh, the other big part is, uh, I think the AI, the technology itself.
• 40:18
  Dan: So I like the care mod- We're, we're more interested probably in the care model.
• 40:20
  Dan: That's what we understand better.
• 40:22
  Dan: The technology itself- So I think it's harder actually.
• 40:25
  Dan: I think it's-- I've never, I've never found it more hard to figure out, um, a… You, you know it's compelling, but it's hard to pick the winners right now.
• 40:34
  Dan: Because of the, because of the strength of the LLM providers and the commonality of it, everybody can move fast, very fast.
• 40:41
  Dan: Um, so you're, you're, you can be a competitor, but you're a threat, uh, all at the same time.
• 40:46
  Dan: Your ability to create a moat is shorter and is a- as deep as it was.
• 40:51
  Dan: There's big questions around that.
• 40:52
  Dan: And, and to some degree, uh, the incumbents maybe are stronger than they were before, if I think of like an Epic.
• 41:01
  Dan: I've never found it more hard to think about investing in something to sell to a health system that's in the crosshairs of Epic than there is right now, because they, they used to be they might not be the best, fastest in terms of new technology development.
• 41:14
  Dan: Uh, AI and the LLM providers have made that a lot easier and faster for them.
• 41:17
  Dan: I think it's, they're, they're enabled in a different way, so they, they can kind of play their game in terms of blocking and, and saying it's on the come even better than they've done in the past.
• 41:25
  Dan: So it's, it's, uh… I think it's exciting, but it is, it's, it's challenging at the same time with respect to how AI is gonna, uh, play a role in terms of how to play it.
• 41:38
  David: Well, that's it for the latest episode of the Health Biz podcast on the Care Talk channel.
• 41:42
  David: I'm David Williams, president of Health Business Group.
• 41:45
  David: My guest today has been Dan Gallus.
• 41:47
  David: He's a partner at Illumia Ventures.
• 41:50
  David: I hope you like this podcast.
• 41:51
  David: If so, please subscribe and leave a review wherever you get your podcasts.
• 41:55
  David: And Dan, thank you so much for joining me today.
• 41:58
  Dan: I appreciate it.
• 41:59
  Dan: Thanks, David.