Alex Kacik: Silicon Valley Banks collapse and a ripple effect through the digital health sector. Home health provider Dispatch Health, Physician Practice Management Company, Privia Health and primary care provider Oak Street Health are among the dozens of healthcare companies that were tied to SVB. How will the bank’s failure impact digital health companies and their related investments across the industry?
Welcome to Beyond the Byline, which offers a behind-the-scenes look into our reporting. My name is Alex Kasich, senior operations reporter, and I’m joined by digital health reporter Brock Turner and Gabe perna deputy editor of digital health business and technology. Thanks for coming on.
Brock Turner: Rockin game. Thanks for having us.
Gabe Perna: Yeah, thanks for having us. Glad to be here.
AK: Right on. Brock, I’m gonna start with you. I know you both have been following this since the bank’s collapse on March 10. But Brock set the table for us a little bit. What role did Silicon Valley Bank play in the digital health investment space?
BT: Well, Alex, yeah, thanks again for having us. SVB was huge in this space. And accounting for almost $80 billion. So $78.8 billion in healthcare deposits. As of last December, it worked with around 75% of healthcare-related IPOs since 2020.
And then, you know, there’s data out there from S&P Market Intelligence that said SVB had 97.3% of deposits were uninsured. So this was the bank for digital health. And now I was talking to a couple of founders and they told me that, you know, it was really just understood that if you were a digital health or tech founder, you worked with SVB. It was just something that signaled you knew what you were doing, ironically enough.
I think a lot of founders just took that to heart. Like they kept personal accounts there. A lot of them were 100% exposed when this happened. And it really sort of sent ripple effects throughout the industry that I think we’re gonna be dealing with for a long time. Gabe, you’ve been following this as well just talk to me about how these digital health firms you know, were there other options, it doesn’t sound like they really work.
GP: Thanks, Brock. And thanks, Alex, for having us. So indeed, this was the bank for digital health in the digital health ecosystem. I think one of the talking points from VCs is that Silicon Valley Bank needs to exist in some form. Now, I’m not sure if it will be a Silicon Valley Bank or if it will be some other kind of similar bank. But it’s become a talking point of some notable VCs like Hemant Taneja of General Catalyst and Vinod Khosla, you know, they both said that they want startups to keep doing business with the new SVB, which really at this point is just a bridge bank. We’ll see what happens with the assets, they’ll get sold off. But they all want their startups to do some business.
Now, obviously, they don’t want them to do under percent business like some of them were doing, because they’re just going to be exposed again. But I think they’ve said they want startups to put in 50% in the bridge SVB.
So why did VCs want this SVB bridge bank or whatever happens to it to exist? And the reason is a bank like SVB offers a lot of opportunities to startups. Startups have a lot of financial risks, particularly when you’re talking about an emerging market like digital health, where the business proposition is still kind of being determined. So the argument is that a traditional bank like JP Morgan, or a Citibank, you know, they might not give a loan to a company that, for instance, is developing some app that addresses social determinants of health. So where’s the startup going to turn? SVB is where that startup was turning. And that’s why Hamada and a lot of these other guys, and I believe the numbers over 650 venture capital firms, have signed on to say that they support the bridge bank, and they will do business with the bridge bank once things are figured out.
I think that’s why Hamada and these others are saying we need a bank, like Silicon Valley Bank. They understand how to support these innovation-oriented companies. And essentially what he’s saying is startups need a bank that can underwrite the risk of viability, because you’re not gonna see it as much with a JP Morgan or a Citibank. You know, they will to a degree, but not to the same degree.
There was an interesting Op-Ed from Steve Case, the former founder of AOL. He also made the point that minority founders and female founders relied on SVB too, and again, those are areas broken. I’ve done this reporting. Female founders and minority founders, they don’t get the same opportunities as white male founders. So I think SVB was another area where these people could get an opportunity to get loans and kind of build up their business.
Now, obviously, the argument against this is taking on all this risk is what led to this in the first place. This bank took on so much risk that when the market started to turn, things went south and in a hurry. And, you know, as the old saying goes: Insanity is doing the same thing over and over again and expecting different results. So we’ll have to see what happens with SVB. But I think some form of it will exist. But I’m sure it won’t be as plugged in, as Brock was saying, to the digital health ecosystem.
Alex, let’s step back for a second. Health systems really hope that digital health startups will increase their reach and provide a more seamless experience. And few areas represent that as much as mental health, which you and I have done a little bit of reporting on what’s motivating health systems investments in mental health startups.
AK: Let’s take the example of Mass General Brigham. They’re the largest provider in Massachusetts. When I spoke to them, they were considering building a neurological behavioral health incubator at its McLean Hospital in the western suburbs of Boston. So the incubator would pair growing startups with faculty at the psychiatric hospital, ideally, creating a long-term pathway to boost behavioral health, capacity and expertise.
Right now, that’s solving a problem, potentially, that virtually every health system has. Systems across the country are dealing with a surge in demand for behavioral health services, but many don’t have the staff or space to treat them all. So they’re placing long-term bets on digital health companies that can help them treat more patients with fewer clinicians. You know, they’re looking at cognitive behavioral therapy, software, and those that provide other types of services that would theoretically extend the reach of these clinicians, which are few and far between. I mean, there’s not a ton of people getting into the psychiatry or psychology field. And we could talk for another time about, you know, the pay disparities between those types of doctors and orthopedists and other specialists. All that being said, there’s a concern that the ultimate goal for these for-profit startups that are part of these, especially ones that are part of these big nonprofit systems, their aim is to grow quickly. And that may not mesh well with the safe delivery of care.
So there’s a big vetting process that goes along with the dozens of pitches that health systems get a day from different types of digital health startups.
Brock, it seems like there’s been a system has been put in place to ensure that digital health companies will be able to pay employees and vendors, at least the ones that were tied to SVB. What are some of the potential long-term impacts of the bank’s collapse related to the digital health space?
BT: Yeah, so after right after this happened, we were really trying to figure out like, okay, are companies able to even make payroll? Do you have access to any of the cash that you need just to run day-to-day vendors? The immediate answer is when the federal government came in, that sort of injected a lot of confidence into the market, like the guaranteed deposits, these companies were not having to worry about how they could make payroll. A lot of VCs, were on the phone with their portfolio companies, you know, figuring out putting contingency plans into place. At some points, companies were these VCs, were even saying, hey, we’ll, we’ll cover payroll. That didn’t end up really happening as much as a lot of people worried.
I think what it did do is inject a lot of uncertainty into a market that was already kind of reeling and trying to figure out how to navigate these economic headwinds and macroeconomic headwinds. And I think that’s going to persist. Will there be other SVBs in the future? Maybe, maybe not? We don’t know. But I think what’s left here, even though deposits have been guaranteed, is this environment where people who were already hesitant before to put money into this market are going to be even more hesitant.
A lot of people still say there’s a lot of opportunity here. I don’t think anyone believes the funding is going to be at zero or pre-pandemic levels after this. But I think the people funding these companies are going to have to think or are thinking twice about what these investments are. I don’t know, Gabe, what do you think? What’s your Outlook sort of on the sector as we come out of this?
GP: Yeah, I mean, the sector was already starting to see a downturn last year well before SVB collapsed, and I think when the numbers come in for Q1 In a few weeks, we’ll see an even more startling reality.
The truth is 2023 will be a struggle for startups to raise money. And that was true before SVB, and it’s certainly true now. Companies who are running out of runway, they’ll be acquired or those who sell for assets. We just saw this week. We’re talking about the mental health startup space SonderMind acquired Mindstrong. Mindstrong was a big company in the mental health space over the last few years, one of those unicorns that we’ve written about there are now done and they really sold for scraps. You’re gonna see a lot of that.
Consumer-focused companies in general are going to struggle. We’ve got inflation and potentially a recession. So those kinds of companies that have a consumer-focus subscription, that’s a nice-to-have, that’s not a need-to-have, when you’re trying to pay the bills, and you’re trying to put food on the table, and you got healthcare bills. You’re probably not going to be investing in some kind of wellness startup. So you’re gonna see those companies switch modes and go into survival mode.
Brock and I have seen it a little bit, a lot of these companies are focused on getting employers, getting payers, getting health systems. There are a lot of reasons for that, but the economy is kind of the chief reason. I would say the sector maybe needs this a little bit. We saw some crazy funding rounds. We saw some crazy valuations when interest rates were low. And I think it was stupid money, as someone said to me. I think we’re gonna see a little bit more sensible valuations sensible funding rounds. And I think the companies that actually are providing viable services and have a viable business model will be the ones who survive, and those are the ones that will have an impact on the industry. So I think it’s a good thing, but it could be a rough year ahead for the digital health sector. And certainly, SVB won’t help that.
I do have a quick follow-up for you, Alex, because you know, you’re covering health systems a lot, and their operating incomes are not great right now. This is an area that, as I just said, digital health companies want to get in and there are some ends. But that’s got to be a struggle right now. Health systems I can’t imagine are looking to open up their wallets too much in this environment.
AK: When days of cash on hand dropped, you see investment losses rack up through 2022 and likely continued into 2023, you got to think that their budgets for some of these investments are going to wind down as well. Some have already made huge upfront investments like if MassGeneral is to build that incubator, I mean, that’s money that they’re going to put toward a long-term investment. Maybe they don’t ramp it up as quickly as possible so it slows down some of these ventures, but you have to think with them, just trying to get staff to care for patients that some of this stuff has to be in the back backburner and then won’t be a priority for some of these investments, particularly if that there’s not a huge need for it right now.
For behavioral health. I think they’re finding other ways to try to meet this need, maybe not through digital health, whether that’s through capital expansions on the inpatient or outpatient side. I know a lot of investing in making long-term bets and like nursing schools and trying to build the pipeline of workers. You would think this potentially slows down some investment on their side. It’s something I’ll be interested in watching with you, Gabe, in how these health systems view these investment opportunities and whether they have the appetite for him. Brock, did you have anything to add there?
BT: Yeah, and I think just the one thing that I would add is for a lot of these digital health companies, they sort of see traditional providers, health systems, as being a huge asset and a way to get market share, get in front of customers. It sounds like those opportunities, at least from what I’m hearing, are starting to go to extreme lengths to find employees and clinical staff and whatever it might be just to keep the lights on as those margins shrink, I think those opportunities for partnerships are going to be fewer and farther between, which is going to make it even more difficult for these companies to sort of get off the ground.
AK: One element I did hear from these health systems is that they’re investing in these companies and hope that there’s a spin-off of some sort, and they can commercialize and go to market. So theoretically, it helps them diversify the revenue, but that’s a long-term game. So there could be some revenue that comes from this, but I don’t know how much of an effort will be placed on that going forward, we’ll see.
GP: And you have to wonder how they’re going to look at SVP and just like the market in general and think there are a lot of risks. As you know, Alex, these health systems invest in a slew of things. They have endowment funds. You have to wonder if they’re gonna look at a digital health company or whatever and say, “There’s a lot of risk here.” These companies have 100% of their funds in one bank. That’s kind of crazy on the surface. So you have to wonder if that will slow down as well.
AK: Alright guys, it’s been great. Thank you both for coming on Brock and Gabe, I appreciate it.
BT: Thanks for having us, Alex.
GP: Yeah. Thanks for having us.
AK: And thank you all for listening. You can subscribe to Beyond the Byline on Spotify, Apple podcasts or wherever you choose to listen. You can support the reporting of Brock, Gabe, myself and our team of reporters by subscribing to Modern Healthcare and giving us a follow on Twitter and LinkedIn. Thank you for your support.