Health Care Startups: Dancing With Elephants

At 15%+ of U.S. GDP, it’s impossible to ignore health care as a vector for investment. By all accounts the system is badly broken, which should create myriad opportunities for nimble startups to find and exploit inefficiencies. But the sheer size and complexity of the system, not to mention the thicket of state and federal regulations woven through it, calls to mind the folk expression: “when elephants dance, the chickens must be careful”.

Since Founders Co-op invests in companies at the earliest stages of development, we’re particularly sensitive to the kinds of “non-market” risks present in health care. We’ve cheered from the sidelines as friends like Henry Albrecht at Limeade, Christopher Parks at change:healthcare and Tom Lee at 1Life Healthcare have waded into the battle, but – until recently – haven’t seen a bet that fit our model of investing.

Late last fall we got wind of a Seattle-area startup aiming at well-documented pain point in the current system: the rapidly-escalating cost of group health insurance for small business owners. The company, Array Health Solutions, had come up with a unique application of the IRS-sanctioned Health Reimbursement Account and created a Software as a Service (SaaS) offering enabling employers to shift from a “defined benefit” to a “defined contribution” model for their employee health benefit spending (analogous to the shift from employer-sponsored pensions to 401(k) accounts in the 1980’s).

We weren’t the first to hear of the deal and, by the time we got there, the terms had pretty well taken shape in a way that prevented us making a big bet, but we liked the team and the opportunity well enough to participate as a minority investor. We made the investment just before the global economy really drove off a cliff and have been watching carefully to see how the opportunity is changing as a result. Unsurprisingly, more companies than ever are looking for ways to control costs, and health care benefits are a major line item for most small to medium-sized businesses. We liked their chances before the downturn, but it’s now clear that Array is a great counter-cyclical bet, ideally positioned to create value for both customers and investors through the down cycle and beyond.

Now that we’ve taken the leap we’re digging deeper into the health care market, looking for holes that small, scrappy teams can run through to create value, generate early cashflows and chip away at the mountain of inefficiency out there. Seen anything like that out there? Let me know.