Health: A Hot Topic for Y Combinator

Doctorpreneurs was lucky enough to attend the much fabled Y Combinator Demo Day this August. For those too consumed by twilight ED shifts and all day ward rounds to have noticed, Y Combinator (YC) is the Rolls Royce of growth vehicles for early stage companies. To get technical, it is an accelerator providing seed funding, the circa $50k-$1m funding round that typically follows angel investment, and precedes Series A, B, C etc. funding.

Y Combinator is famous for flipping the founder-investor relationship on its head, making founders the ‘hunted’ and investors the ‘hunters’, and also for seeding game-changing companies like Airbnb and Dropbox. In a nutshell, it is a 3-month programme based in Silicon Valley that takes 7% equity and gives you $150k capital, plus a goldmine of a high quality investor; customer introductions; and advice. You should definitely consider applying- especially if you are a healthcare company.

My rather naive assumption going in to the Demo Day was that Y Combinator was full of software-based, Silicon Valley-focused companies projecting hockey stick growth in the next 1-2 years. Rest assured, I did see this, but I also saw a lot more that I was not expecting, including the health focus that emerged from the Demo Day.

Let’s start with the evidence – 27 healthcare companies participated in this latest batch, comprising 14% of all companies. In fact, this is not even a new trend. On average 10-15% of YC companies have been focused on healthcare every year since 2015. Indeed, as of the last couple of years, healthcare has actually been the 2nd largest sector represented at YC, after B2B services. There is a roughly even split between digital health, therapeutics, diagnostics and medical devices. Contrast this with the zero healthcare companies present in YC’s inaugural 2005 batches. Healthcare is becoming a hot topic.

Indeed, as of the last couple of years healthcare has actually been the 2nd largest sector represented at YC

This preponderance of healthcare companies is somewhat unexpected as it does not fit the typical Silicon Valley founding/investing story – growth is relatively slow as preclinical tests must be passed, regulatory approval secured, and traditionally skeptical doctors convinced. However, it is also easy to see why healthcare aligns so well with the YC approach. The YC investor community is laser-focused on a large total addressable market (healthcare is a trillion dollar industry in the US alone), disrupting traditional industries (healthcare is about the most ‘old-school’ industry around), and identifying defensible technologies with expert founders (such as PhDs and medical doctors). To further elaborate on this third point, for software companies there has been a shift in recent years towards founders with a technical background that intimately understand and would use the product they are developing and selling. In the same way, healthcare professionals should become the de rigueur founders of healthcare companies, where deep industry and product expertise are critical. In the most recent batch 3-4 healthcare companies were founded by doctor-come-entrepreneurs, and this is only likely to increase. Incidentally, this mirrors the findings at another high caliber investor in the Valley, StartUp Health, where 100 of their current 300 portfolio companies are led by doctorpreneurs. A revolution is coming.

Healthcare professionals should become the de rigueur founders of healthcare companies, where deep industry and product expertise are critical

One important aspect of healthcare companies that really enhances the YC brand is the societal impact that these companies can have. This societal impact story was surprisingly lacking from many of the companies on show at the Demo Day, and clearly helped set the healthcare companies apart. In one stark example is that we went from discussing a groundbreaking technology to reduce mortality rates from stroke, to a (albeit potentially very successful) company helping people jump the queue at nightclubs. The latter may just come in handy on my next night out without the baby (one can dream…), but the former could well save my life at some point. That is the value healthcare companies bring to the YC portfolio (and society as a whole for that matter).

We have established that YC is very interested in healthcare companies. However, should they be interested in YC? After all, what can a relatively hands-off, short, generalist programme offer healthcare companies, which are often esoteric, complex and slow-growing. James Li, of Mighty Health, which is providing personalised digital health coaching for cardiac patients, commented that the multidisciplinary nature of YC’s mentors offers healthcare companies, “orthogonal ways to think about problems”. According to Grace Wei and Crystal Nyitray of Encellin:“YC excels in helping you create a brand new category of product that fundamentally changes how things are done.” Encellin is developing the world’s first pouch to protect cell transplants from rejection. The founders of Voyage Biomedical, who have a cooling device to help stop brain death, agreed that visionary thinking was one of the strengths of YC: “It makes you dream big”. The companies I spoke with did also acknowledge an occasional culture clash between healthcare companies and YC’s non-healthcare partners/mentors. However, this was perceived as healthy, because it pushed the healthcare founders to think more laterally about their execution, and helped to prepare them to speak with a broader range of investors.

“YC excels in helping you create a brand new category of product that fundamentally changes how things are done.”

Pertinently, all three companies I spoke with coalesced around the fact that YC appreciates healthcare companies will have a different (read slower) growth trajectory and a need to test their product more cautiously. The best of the healthcare companies that pitched at the Demo Day were not trying to fit the mould of some of their fellow cohort members by talking about hockey stick revenue growth and getting thousands of early customers on board. Instead they resolutely focused on what we all know it takes to succeed in healthcare – including a few key research partnerships, clinician input and regulatory approval. In fact, this necessarily slow growth is viewed as a major strength of healthcare companies by YC. As Dr. Robert Schultz from Voyage Biomedical pointed out: “There is more and more interest in regulated industries [amongst investors], as we move beyond the low-hanging fruit of B2B and B2C software companies…plus healthcare demand will always be there.” Healthcare is not seasonal or cyclical, unlike so many other industries.

Healthcare is not seasonal or cyclical, unlike so many other industries.

There you have it. Much to my surprise, YC should be a strong consideration for any ambitious, innovative healthcare company out there, especially those founded by doctorpreneurs. However, if you do not need investment and/or you do not want to up sticks to Silicon Valley (it is not all glamorous), then you could consider the YC Startup School, launched last year and delivered remotely. It must be good, it was modelled on the Doctorpreneurs Startup School. Or was it the other way around?