The news cycle took a bit of a breather ahead of the upcoming wave of HIMSS announcements, giving us a chance to highlight an excellent thinkpiece from the healthtech team at a16z.
After charting up a beautiful comparison of publicly traded healthcare companies versus other growth companies, a16z found that the healthcare outperformers leverage the same three types of “business model magic” as the world’s largest tech companies:
- Increasing customer lifetime value (LTV Magic)
- Expanding operating leverage (Operating Leverage Magic)
- Declining customer acquisition costs (CAC Magic)
LTV Magic can be boiled down to creating “sticky” products with high retention. Healthtech companies that embed their platform into their customers’ core workflows can then build pricing power and widening revenue streams.
- Outperformers can add new components to their platforms that increase LTV without a proportionate increase in costs. Ex. Flatiron Health’s provider network enabled it to efficiently build a pharma-facing, real-world evidence generation business on top.
Operating Leverage Magic revolves around reducing the marginal costs to serve customers as the business expands – mainly by leveraging software’s near-zero marginal cost dynamics.
- Outperformers in a16z’s analysis also maintain modest operating expenditure growth at the central business level as they scale. Ex. Agilon and Oak Street command a valuation premium for impacting the cost of care without having to hire many central clinical staff.
CAC Magic involves finding ways to have declining marginal costs of customer acquisition. One of the most efficient ways to acquire new customers is by accessing groups of patients through partnerships with entities that already maintain those relationships, like MA plans.
- Outperformers also have network effects that make their service more valuable as more people use it. Ex. Doximity gave more value to its 10,000th user than its 1,000th user, making it easier to acquire new users over time.
The Takeaway
a16z makes one thing very clear with its analysis: investors are ultimately underwriting a business’s ability to generate a lot of revenue over the long term. Every healthcare startup has to find its own way to reach that goal, but the three types of magic highlighted by a16z give a good sense of the ways that current outperformers are earning their premium valuations.
