CLEVELAND – Funding for health care innovation remains robust, according to a panel of venture investors at the 2016 Medical Innovation Summit sponsored by Cleveland Clinic Innovations. Although they found plenty to like across biopharma and med-tech, investors nevertheless voiced caution about excessive costs built into a system that talks value-based reimbursement but continues to deliver care on a fee-for-service basis.

No single platform will transform that dynamic, according to Leslie Bottorff, managing director of health care investments for GE Capital, who said her organization is investing in an innovation ecosystem.

"A few venture capitalists are giving entrepreneurs a mixed message," Bottorff said. On the one hand, investors are seeking a stake in "big platforms" that they can grow into billion-dollar businesses. But the demand from users such as hospitals and integrated health care systems isn't sufficient yet to support that type of infrastructure. Instead, those institutions want specific, value-added applications where they can see the results through improved care delivery and lower costs.

"That's a conundrum," Bottorff maintained. "What we're thinking about at GE is that 'It takes a village.'"

Rather than trying to identify a single technology that will develop a comprehensive system to solve the care delivery problems of hospitals and health systems, GE Healthcare is partnering and investing in a network of startups. Each strategic relationship is established based on the partner's ability to contribute a valuable insight – in a way, a single piece in an enormous health care jigsaw puzzle.

Entrepreneurs seeking to fit into that type of scheme need to know exactly which piece their therapy, device, software or other application represents – "the real value-added" or "killer app," Bottorff advised. Developers also must be prepared to prove their premise, "in economics as well as in clinical use cases," she said.

Joe Cunningham, managing director at Sante Ventures, cited the intersection of clinical and information technologies as the most interesting dimension in health care investing. He cautioned, however, that the influx of large venture funds "that have to write big checks" may actually harm early innovators long term.

Most of so-called health care information technology (HCIT) tools that Cunningham sees are merely apps that solve small problems, and those don't especially merit the high cost of venture investment, he said.

Still, Cunningham takes it as a measure of validation when Sante's life sciences and HCIT portfolio companies are approached by other funds offering $40 million or $50 million rounds, even when the startups don't need a large capital infusion.

Cunningham looks for technologies that can solve a critical need for a small number of customers, and do so profitably.

"I try to find massive pain points in big health care systems," he said. "Then I can develop those applications." Considering the rapid consolidation overtaking the health care industry, those solutions can be deployed across dozens of customers instead of hundreds, resulting in lower marketing costs and a smaller sales force at the back end.

Truly transformational tools designed to survive the current care system while building a bridge to the next generation of care are "hard to find, frankly," he said.

'The data pipes have been laid'

Michael Dixon, general partner at Sequoia Capital, said investors have opportunities now to pick and choose among technologies across vast areas of the health care space.

"There are lots of opportunities in biotech, which is an area where we've spent a lot of time," Dixon said. Citing 10-year returns in biotech – the Nasdaq Biotechnology Index more than tripled during that period – "if you think about what could happen over the next 25 years, you've got to be excited about that," he pointed out.

In terms of biotech innovation, Sequoia is looking at technologies such as virtual clinical trials, "which is a little bit more like a business we understand," Dixon said.

"I think all the data pipes have been laid," he added. "We now have data that we can use to improve how people deliver care operationally and clinically. There's still a huge opportunity, even though value is very, very slow."

For health care investors, there's no dearth of interesting opportunities, Dixon said. "It's just a matter of finding the entrepreneurs that really understand the field," he said.

But sizing up the foundational knowledge of health care entrepreneurs remains no small feat for investors, panelists agreed, citing 23andme and Theranos Inc. as cautionary tales.

"A certain amount of companies out there were founded by people who were not previously in health services," Bottorff said, citing software developers as among the largest category. "They go into areas that involve clinical knowledge, but they decide that they really don't have to go through a regulatory process."

Such entrepreneurs often are clueless about the dangers of making medical claims on their websites or trying to avoid discussions with the FDA.

"More than a few companies have really skirted that regulatory process," Bottorff said, noting that 23andme founder Anne Wojcicki resisted interaction with the FDA "until, basically, somebody finally got to her and said, 'Anne, you don't look good in orange.'"

If not for its deep pockets, 23andme might not have survived that process, she added.

Theranos founder Elizabeth Holmes – a speaker at last year's Medical Innovation Summit before the company's spectacular fall – was similarly shortsighted, panelists said, leaving in her wake a bad taste for health care startups. Earlier this year, American Medical Association CEO James Madara referred to the "explosion of direct-to-consumer digital health products" and similar applications as "the digital snake oil of the early 21st century," in what many viewed as a thinly disguised criticism of Theranos.

Nevertheless, the Theranos episode offered constructive lessons for health care investment, Bottorff said.

"It's a highly regulated industry, from the standpoint of how you get approved to treat patients all the way to how you get paid," she pointed out. "That's very different from a lot of other industries."

Even if Holmes had talent and passion, "I don't think she surrounded herself with people who had industry experience," Bottorff said. "It's an old lesson learned, over and over again. You do need great industry expertise."

It's a message for the current crop of startups, as well, Cunningham said, noting that he still sees pitches from entrepreneurs who boast that part of their strategy is to avoid FDA scrutiny, including the effort to conduct clinical trials and collect outcome measures.

"I think that's exactly the wrong direction to take," he said. Navigating the complexities of early stage development lowers a company's barriers to entry and provides crucial evidence needed to take a health care product successfully to market.

"If you haven't done anything complicated to get there, you probably haven't created a lot of value," Cunningham said.