By Jin Wu

2014 proved to be a stellar year for digital health. According to data from Startup Health, a New York based digital health accelerator, $6.5 billion was invested into the digital health sector in 2014, up 124 percent from 2013. The money is coming not only from venture capital, but also from the private sector as well as individual partners.

Digital health is the convergence of the digital revolution with health including digital diagnostics, electronic health records, telemedicine, digital medical devices, mobile healthcare, analytics and big data.

According to the California Healthcare Foundation, among 93 healthcare incubators and accelerators in the U.S., 72 of them started to support digital health. This trend to digitize health care has come to Chicago. AVIA, MATTER and Healthbox are three healthcare incubators to help Chicago entrepreurs develop viable digital health businesses.

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MATTER, which was opened in February, already has 69 members.

4D Healthware LLC is one of them. It provides patients with a browser-based dashboard that is compatible with more than 70 wearable sensors on the market. The dashboard aggregates and analyzes data every 10 minutes in order to inform people about preventive maintenance.

Founder Star Cunningham likes to use her car analogy to illustrate it. “You get a red light in your car to alert you about potential problems in the car, so you can get prepared before anything really happens,” she said. “Isn’t this a little insane that there is this technology for our cars, but the technology doesn’t exist for our bodies? If we get those alerts, 90 percent of strokes are preventable.”

Benecure Inc., another Chicago-based start-up, also tracks health data and creates a mobile app to help patients manage chronic conditions based on physicians’ recommendations. According to founder Muhammed Fazeel, the Benecure app is compatible with most of the current wearable trackers and also Benecure’s own medical devices.

Benecure’s app tracks four aspects of users’ health: sodium, calories, exercise and sleep. Gamification metrics are included to reward patients for participating in healthy activities. Benecure received an investment from Healthbox and a couple of small grants from other sources.

These two start-ups both target clinics and hospitals as their revenue sources by charging a monthly membership fee. Cunningham believes this B2B strategy would work because of the new Medicare Physician Fee Schedule rule, which reimburses physicians $40 per patient per month for non-face-to-face chronic care management services.

With more and more digital start-ups jumping into Chicago market, seeking funding becomes a problem for most of them.

Even companies like CareTree Inc., which has already been working with 50 providers nationwide, being funded by venture capital is still hard. Founder Carl Hirschman said among all the investment the company got, only one was from institutional investor. “Having a track record has already helped me a lot on seeking funding because I have founded two companies before,” he said. “Biggest challenge in capital seeking in the Midwest is that traditional venture capital firms are not investing in early stage companies that much. We have to go to angel investors, however, it’s hard to get access to those investors. In the Midwest, there isn’t this culture yet of people investing in start-ups. ”

Jordan Dolin, an advisor at MATTER and co-founder of Emmi Solutions LLC, a pioneer in patient engagement service, points out that entrepreneurs are marching toward the wrong direction. “A lot of those incubators focus on teaching entrepreneurs how to go out and pitch venture funds. However, venture capital firms actually only fund a very small number of early-stage companies. In Chicago last year, about 300 companies launched, and I would guess less than 10 percent of those received funding from traditional venture funds.”

Leslie Wainwright, chief strategy officer at AVIA, agrees with the diversity of funding sources. She thinks strategic partners, family funds, and high-end individual investors should also be taken into consideration when digital health entrepreneurs seek investment.

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Dolin emphasized that healthcare innovation is not well-suited for VC funds because healthcare has a much longer adoption cycle compared to other industries and VC fund investors prefer high return in as short as 3 to 5 years.

“Venture investors are looking for a revolutionary technology with high risk but also high reward,” Dolin said. “However, the healthcare industry is only used to evolution, not revolution.”

The University of Chicago’s Innovation Fund has funded university-related start-ups and projects across all industries for more than three years. According to Jason Pariso, operations director at the Innovation Fund, among all the projects funded, about 15 percent of them were in digital health and a growing trend was observed in digital health applications in the past several investment cycles.

With the robust growth in digital health in 2014, experts estimate a sustainable growth over the next three to five years.

“We are very much just at the very beginning of the cycle,” said Unity Stoakes, co-founder of Startup Health. “It reminds me of the time when Amazon just got started in the garage and Google was not even around. In U.S. alone, (health industry) is a 3-trillion market. So although 6.5 billion sounds like a big number, digital health is still at the early stage.”

More non-healthcare companies are launching health-related products. Not only Apple, but technology giants like Google, Microsoft and Qualcomm, are trying to enter the health industry.

“This is a good news to us,” said Cunningham, “These big players will accelerate the adoption of healthcare technology among users.” 

However, Wainwright still shows some concern over the existing bubbles within overvalued investments: “In the $6.5 billion investment, I believe all of the companies are focusing on the right problems, otherwise they wouldn’t be funded. However, are all of them putting out meaningful solutions to that problem? Are all of them able to survive and turn into viable companies? Absolutely not.”