A “Mohan Nair Interview” with Lee Shapiro, 7wireVentures

RamaOnHealthcare May 5, 2021

Mohan Nair, CEO of Emerge Inc.

Lee Shaprio, Managing Partner, 7wireVentures

Healthcare needs transformative change. We need transformative thinking turned to action. What are the elements of true transformation that our future holds and how do we find them? There are few who could respond to this question thoughtfully. Lee Shapiro, 7wireVentures, is one.

Mohan: Welcome Lee, and thank you for agreeing to be part of this series. I asked you to engage in this interview because I believe the multidimensional ways you have worked to solve healthcare crises can help others forge their future. Let me start with the future. First, what is the strongest signal in your mind that will herald a change in our healthcare system? And why?

Lee: Until the onset of the pandemic, my answer may have been quite different. There were a number of signals to choose from, including the promise of new treatments due to CRISPR; a reorientation towards value-based care from the anticipated change in leadership in Washington, D.C., and the further entry of consumer giants like Amazon, Apple, and Walmart into healthcare.

However, COVID-19 is stressing our delivery system in ways that exposes critical fissures in our healthcare foundation, and in many ways the system has begun to respond. First, the pharmaceutical industry rose to the challenge in developing and testing vaccines with technologies that had yet to produce a new drug (mRNA). Second, care delivery needed to move to a virtual care model at scale as health systems prioritized those ailing from COVID-19. The response has validated what many of us had been envisioning, which is to meet consumers where they are, especially at a time of critical need. Finally, a key priority, as we go forward, is to address health disparities as our black and brown neighbors were disproportionately impacted by this disease onslaught and faced significant gaps in access to care.

Mohan: You were instrumental in the founding of Livongo, its bellwether IPO, and through its merger with Teladoc? What do you think growth and exits like these provide for industry transformation?

Lee: Livongo had been experiencing rapid growth – and recognize that this was occurring prior to and independent of the global public health emergency. While not directly related to the pandemic, Livongo allowed its Members to stay healthy, at home, and to manage chronic conditions with 24/7 support. This became even more crucial for Members during the past 15 months.

There is certainly a high degree of validation and recognition that comes from IPOs like those since 2019 and which Livongo’s successful debut helped usher in – Health Catalyst, AmWell, Progeny, GoodRx, and Phreesia to name a few. The access to public capital provides opportunities for growth of the companies that IPO, as well as assurance to their clients of their financial foundations. It also frees up the early-stage investors who exit to redeploy capital back into new ventures that can further transform the system.

Mohan: The greed effect is all around us and is tempting. But, I know you to be very focused on changing the industry rather that the desire to make money. Don’t get me wrong, money is important, but that’s not what drives you. So what does drive you?

Lee: Our investment philosophy since my co-founder, Glen Tullman, and I started investing together over 20 years ago, has been to address the challenges we all face as healthcare consumers. Health, after all, is a fundamental right of all people. It is our hope and belief that by supporting entrepreneurs who are aligned with this viewpoint, together we can change health and care for the better. We look to tackle meaningful, large problems that can assist those who have struggled in the absence of these innovative offerings. Every day, we wake up with the urgency to accelerate the delivery of these new solutions so that more people can be helped.

This has been the case in our personal lives. I admire the work that Glen has done with the Juvenile Diabetes Foundation and now the American Diabetes Association to help find a cure, to help not only his son, Sam, but all those with Type 1 and Type 2 diabetes. In our family, we want to see a world without heart disease and stroke – and so we volunteer with the American Heart Association to support their advocacy, research, and programs to improve health equity.

Mohan: Was that always the driver? Did it evolve and why?

Lee: Initially, we approached investing with a thesis that technology can fix broken business processes. However, in ensuing years as we explored health, we realized that there was enough broken process to last us a lifetime. And we evolved from software to tech-enabled services. Tech without touch is not sufficient to build the trust necessary to build the relationships required to improve the human condition. Also, we found that we could not invest with an expectation of a “quick buck” but rather to invest with a long-term view. When you work with early-stage companies, you must find the right balance between patience and pressure. Even a successful venture like Livongo (based on growth profile and merger valuation) took seven years from the time of our first investment to exit. A good company pivots to adapt to the market, and expectations have to evolve as well. Livongo learned early on that reaching consumers through providers would be difficult – so it focused on selling to self-insured employers that felt the cost of diabetes and chronic conditions more directly.

Mohan: You’ve seen thousands of people propose solutions to you in the last 25-plus years of your career? What gets you leaning forward today?

Lee: We have been doing this for quite some time and the nature of the solutions presented to us reflect the current times. It was not long ago that AI (artificial intelligence), ML (machine learning), and population health were all the rage. Now RPM (remote patient monitoring), virtual primary care, and mental health seem to be top themes. At 7wireVentures, with our consumer orientation, we are looking at challenges we can address in aiding consumers who are navigating serious disease, understanding how to personalize their care journeys and to reduce complexities. And we are considering offerings for under-served populations, and even though there is well-grounded concern with the “digital divide”, we hope to find companies that meet people where they are to help them improve their health.

Mohan: What is your advice to investors and founders? What should they reflect upon as they forge ahead?

Lee: We advise founders regularly, and we believe that there are many promising offerings in the market. It is a heady time with more capital chasing later stage deals but less availability where we engage – in the Seed/Series A cycle of funding. We also interact with many investor colleagues from growth capital, private equity, and corporate funds, and because of our focus is at an early stage, a number of them want to be positioned to work with us in later rounds of investment.

My advice to both founders and investors is that we should be conscious of the times we live in, as stewards of our investors’ money as well as our own. We have a responsibility to serve shareholders but also have obligations to the employees of the companies we invest in, the customers they serve, and the communities that they operate.

Let’s take the example of a start-up in the behavioral health space. As investors, we have learned that there can be a double bottom line. First, serve those who suffer mental health challenges, which is so important, especially during the pandemic. However, in doing that, you also serve the family and friends of those who are using the solution, as well as the sponsor of that offering (be they a health plan or self-insured employer). More important, you help facilitate the transition of someone from (let’s say) anxiety disorder to returning as a productive member of society.

Mohan: If you missed one and wished you had a second go at that company, which one would it be?

Lee: As I have noted in my remarks, our investment approach is to look to solve the hassles we all face as consumers of health. Here is one example. We were introduced to Pillpack many years ago. We were very impressed with the founders, their energy and commitment to making it easier to manage medications for those of us who need to take multiple pills. They approached this need from a small family pharmacy, that they acquired, which packed and shipped pills to those who transferred their prescriptions to them.

While I was impressed with their “chutzpah”, I thought they would be crushed by the PBMs, or bought by one and put on mothballs. I assumed that the PBMs, who manage hundreds of millions of prescriptions and ship them overnight to their tens of millions of members, had technology and volume-based pricing on their side. Yet, Pillpack grew and was acquired by Amazon, and some of their clones have grown as well.

I missed the opportunity because of the “curse of knowledge”. I was blinded by my own knowledge of the current system and couldn’t envision the prospects of Pillpack that appealed to significant parts of the market. Further, I underestimated the embedded resistance to change at the incumbents, which leave them open to the type of disruption that the late Clay Christensen expressed. I suspect we have missed a few others as well 😊.

Mohan: What are the areas in healthcare that you see are the transformational opportunities where we make a difference and create wealth at the same time?

Lee: Healthcare is a massive multi-trillion dollar market in the US. First, there is a massive amount of waste and inefficiency in the system. However, what I call inefficiency is someone else’s profit margin. For example, administrative expenses, which are largely billing-related, account for 20 percent to 25 percent of U.S. healthcare expenditures, according to David Cutler, a Harvard economics professor and healthcare policy expert. Incumbents have little interest in fashioning a simpler process for consumers and providers. Successful alternatives can shift wealth to a newco vs. the incumbent or even dramatically reduce these excess costs.

Second, I see a shift to health-at-home, particularly for our seniors. In my informal surveys, there are few seniors, and their families, who wish to move into congregate care facilities. They like living at home and having their needs addressed in the novel ways that technology enabled services can facilitate.

Finally, the expanding accessibility of diagnostics will help us understand what is causing the symptoms that we may be experiencing, and moving beyond treatment to cure. Add to this the availability of home testing, and there is an opportunity to intercept disease progression.

Mohan: If there is one thing that you feel needs to be said but is yet said about this industry, what would it be?

Lee: This industry, for all of its advances in medications and devices, is resistant to change. Providers want to know how they are compensated for using a new offering. Plans want to know that there are not only outcomes data to support the new solution, but that someone is willing to pay for it as part of a premium. Consumers don’t want to do more or pay more. This tension makes it challenging for innovative companies to introduce compelling solutions. We see many promising companies fail because they run out of runway in attempting to contend with this tension. It is time to realign these interests.

Mohan: Why does it take so long to change an industry and what more can we do to change it?

Lee: I think this is tied to my prior observation. It takes new medical knowledge up to 17 years to make its way to practice. What the pandemic taught us is that “necessity is the mother of invention” and that we can find new, better, and less expensive ways to operate when forced by an external compelling event to act. My hope is that the same approaches that allowed us to bring vaccines to market quickly can also be used to address pressing challenges like food insecurity and mental health.

Mohan: I asked you for this interview because I admire you and the intentionality of your work. Thank you for bringing applied curiosity and real outcomes to the healthcare industry. Even more, thank you for your direct response in service of an industry in transformation.

Lee Shapiro is managing partner at 7wireVentures, a Chicago-based investment firm he co-founded over a decade ago. He also served as Chief Financial Officer of Livongo Health [NASDAQ:LVGO] until November 2020. He is a member of the National Board of Directors of The American Heart Association, serves on the boards of Senior Connect [NASDAQ:SNRH}, a special purpose acquisition company focused on the aging space, Clover Health [NASDAQ:CLOV], and Click Therapeutics. He is also active with and serves on the board of many of the 7wire portfolio companies.

Mohan Nair is the CEO of Emerge Inc., a business transformation advisory based in Oregon. He is a holder of the prestigious Edmund Hillary Fellowship from New Zealand and sought-after keynote speaker and moderator. He has 3 startups with exits, 3 executive roles in larger enterprises, 5 startups incubated, built and launched, and 3 books to his name. Mohan holds the most read commentary in the history of RamaOnHealthcare. @mohanemerge, linkedin.com/in/mohanemerge.