Teymour Boutros-Ghali
It is quite common for private foundations to play a significant role in life science research, whether it is through funding support (often through flexible, non-dilutive, funding), a higher risk-tolerance for innovation, a desire to make a positive impact on society and sometimes a unique patient-centric approach if the foundations were established by individuals or groups directly affected by specific diseases.
While foundations play a crucial role in advancing life science research, they often become less involved in the “D” or development and commercialization of the research they fund. Or to be more precise once research moves into the commercialization phase “efficient markets” tend to take over. Those same foundations may continue to support the initiatives or invest via “for profit” entities (theirs or managed) but success metrics tend to gravitate towards profit.
The shift to “market driven” metrics, notwithstanding ESG and “social impact” efforts, often means that in success some of the neediest are the last to benefit from such success. Here I argue that continued participation in the commercialization side, with clear impact metrics, may serve the “free market” profit and the “social market” impact goals far more effectively.
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Inequity has plagued the U.S. healthcare system for decades, but the Covid-19 pandemic illuminated it as never before. Underprivileged communities suffered higher rates of infection, hospitalization, and death. And while knowledge workers could be economically productive at home, low-skilled workers were either shut out of their jobs by industry slowdowns or had to risk working at jobs deemed ‘essential’, often in unsafe environments.
But the need for health equity goes far beyond the pandemic. Its complex effects encompass nearly all aspects of healthcare, from differences in insurance coverage, access to and use of care, health literacy, and of course health outcomes.
As a longtime venture investor, I have watched the healthcare divide grow over the past 10 to 15 years. The difference between well-insured patients and those with no coverage has become more pronounced, and as the gap widens, overall health outcomes are falling dramatically. The opportunity to improve those outcomes (as well as financial returns) should now be at the forefront of any venture investor.
In the past five years, for example, the Kaiser Family Foundation reports that more than half of U.S. adults have gone into debt because of medical or dental bills. One in four people with cancer have declared bankruptcy or lost their homes. Black women are three times more likely than white women to die from a pregnancy-related cause. LGBTQ+ youth are twice as likely than other students to use illegal drugs (and suffer the effects). Poorer older adults experience more dental disease and disability than their higher-income counterparts. Treatment for any of these triggers a virtue-less cycle that drives up costs for everyone and further exacerbates inequalities.
In fact, according to Deloitte, health inequities currently cost the U.S. $320 billion a year in unnecessary medical spending. Health disparities also account for $200 to $300 billion in premature deaths—a $335-$435 billion annual loss to the U.S. economy. According to the CDC, chronic diseases that are avoidable through preventative care services account for 75% of the nation’s healthcare spending. This is exacerbated when the burden of these chronic diseases is unfairly placed on vulnerable populations.
One result of the for-profit healthcare system in the U.S. is that innovators will follow the money. That’s why the venture community can and should instigate positive change for health equity through our investments. Startups are better positioned to pioneer, and scale, real solutions. Disruption is often the wellspring of their market potential. They can also pave the way for broader changes to ripple through an industry. Netflix proved the economic viability of content streaming long before Disney got there; Warby Parker and Casper pioneered D2C sales before established brands adopted their strategies.
In short, health equity is not just a moral obligation; it can become an economic imperative. Over the last ten years, the venture community has invested more than $300 billion in health and life science startups. And many have advanced health equity, whether by lowering costs or by democratizing access to products and services. For example, the digitization of clinical trials allows pharmaceutical companies to recruit participants of all socio-economic backgrounds, leading to more effective targeted drug development. And the miniaturization of medical devices is lowering the cost and access to diagnostic and testing.
All of this is promising, but it’s not enough. Nearly one in four American households without an internet connection can’t take advantage of expanded telehealth options, while the tens of millions of uninsured and underinsured may not benefit from lowered drug prices. Indeed, the U.S. healthcare system’s economic incentives are often misaligned or in outright conflict, making it difficult to build the business case for change.
The moral case for investing in health equity is clear. What about the business case? Research in adjacent domains has shown the direct value to companies of investing in diversity and CSR (corporate social responsibility) initiatives. Companies with above-average diversity have higher revenues, more productive employees, and are more likely to outperform competitors. Those with meaningful ESG (environmental, social, and corporate governance) initiatives enjoy greater operating efficiency, employee productivity, and financial performance. CSR initiatives have also been shown to raise acquisition premiums during M&A transactions — something the venture community also cares about.
A focus on health equity may also be a key weapon in the war for talent. The Millennials who will soon make up 75% of the workforce are overwhelmingly interested in pursuing more purposeful work; the same is true of Gen Z. Health equity enables companies to provide a unified vision for positive impact and build an engaged culture that attracts and retains high performers.
Increasingly, consumers are just as interested in supporting companies that are committed to making an impact. Decades of research, not to mention the pandemic, have demonstrated that social responsibility and sustainable profit are more tightly linked than ever.
For startups that must worry about cash flow, and established companies that have products years in the making, how can we ensure that health equity remains central to strategic planning and not simply a noble notion on the “nice to have” list?
In our view, advancing health equity is a perfect opportunity to think creatively about funding. This is where non-traditional funding sources such as research sponsorships and foundations need to be marshalled to tackle equity initiatives. Government funding, now in its infancy, may also grow, especially if federal and state agencies understand what success can look like on the venture side.
We have been lucky that several of our portfolio companies have benefited from such funding strategies. After providing significant grants to support ground-breaking research at leading institutions of learning, the same foundations continued to fund with non-dilutive capital the commercialization phase of the resulting companies.
Issues of why other investors should benefit from this “free capital” can, we believe, be addressed through win-win requirements. For example, a break-through low-cost medical diagnostic device requires ongoing customer feedback. Non-dilutive grant funding can ensure devices are distributed to undeserved communities: they get the benefit of the devices the company gets valuable market research. Similarly, a high-cost therapeutic may be subsidized to a target demographic accelerating sales and company value.
There is a myriad of such win-win scenarios and it’s time for conversations around health equity to move from “nice to have” to “must have” — and come directly into the boardroom. Companies must be encouraged to identify how underserved communities can be beneficial to them and proactively reach to non-traditional funding sources. Foundations should allocate a portion of their funds beyond research and into commercialization.
Investing in any aspect of healthcare should include a strategy for healthcare equity. The system is too dysfunctional, and the opportunity cost is too great, to ignore such a large percentage of the population. We now have the optimal opportunity for foundations, investors, startups, and underserved populations to come together: not-for-profits need to see the full cycle of company creation as an opportunity to continue their grant cycle. The returns will be even more dramatic.
© 2023 Teymour Boutros-Ghali
