Strong Health Tech Ecosystem, but lacking a strong capital market
Investors in the survey believe that the Nordic Health Tech Ecosystem possesses many of the ingredients to become a leading ecosystem in the global health tech landscape. Most investors agree that this ecosystem benefits from high-quality education and research institutions, high levels of IP produced, high levels of innovation, a strong healthcare system, and strong governmental support. In other words, investors believe the Nordics have the right infrastructure in place to support the development of the Health Tech ecosystem. However, for an innovation ecosystem to truly thrive, it needs to have three things in place: talent, infrastructure, and capital markets. When it comes to talent, Investors believe that the Nordic Health Tech ecosystem benefits from highly specialized talent, however they do not rank the levels of entrepreneurship to be very high, suggesting that probably more efforts can be made in the region to support more scientific products to become commercial products and to encourage the creation of new health tech companies. When it comes to capital markets, there seems to be a consensus among investors that one of the main risks to investing in Nordic Health tech is the lack of capital for the companies, especially at the growth stages. Many investors believe there is not enough follow-on capital for these companies, therefore investing in the early stages can have the risk that companies are not able to secure further capital to grow, to reach the market, and to start generating revenue. Some investors also indicated that another important risk is that exit strategies for Nordic health tech investments still look very unclear, and they would need to see a better exit landscape for Nordic Health Tech companies before they would consider investing in the space.
Main barriers preventing more investments in Nordic Health Tech
In essence, the Nordic Health Tech ecosystem has the infrastructure in place, the necessary talent, and even the right national strategic policies, however, what is really missing is strong and well-functioning capital markets. Nordic Venture has experienced a significant inflow of capital in the last few years, registering an increase of 250% in venture investments in the period of 2019 to 2022. However, investments in Nordic Health Tech only grew at a 92% rate for the same period, highlighting some subjacent barriers that are preventing capital from flowing into Nordic Health Tech. To understand how to improve capital markets Nordic Health Tech it is important to understand what are the main barriers preventing more investments into the space. Below we state the main barriers to investing in Nordic Health Tech and what investors believe can be done to overcome them.
Health Tech companies, compared to other industries, have longer sales cycles and take longer to market. Most investors indicate that the main risk to investing in Health Tech is how long these companies take to market, how long it takes them to start generating revenue, and how long it takes them to sell to the end customers. Health Tech companies, unlike other companies, address one of the most important human needs, which is health, and because of that, they need to show that their products and services are safe, that they are effective, and that they make a difference in people’s lives. Health tech companies, in essence, need to provide robust clinical evidence for their products and services to be able to get to market and for both public and private health providers to be able to trust and purchase their solutions. Furthermore, Health Tech companies, especially in Europe, rely on B2B and B2G2C business models, which by nature involve long and bureaucratic procurement processes that significantly reduce their growth prospects and make them less attractive or suitable for growth capital. A lot can be done to reduce Nordic Health tech companies' time to market and sales cycles and therefore reduce their perceived investment risks. Some investor suggestions include:
More local testbeds for Nordic health tech companies to gain the necessary clinical evidence early on to start selling. Meru Health in Finland is a success story.
Meru Health was able to test its solution with the
Finnish Student Health Service, which was its first pilot customer, and now it offers its services to the main insurance companies in the US. “We need to offer more test beds for clinical testing at home, and these Nordic test beds should allow for larger tests and pilots. Clinical evidence is the market proof in this industry” says one investor.
Better public procurement processes with local and national health providers to improve public sector engagement in the Nordic Health Tech ecosystem, to allow more health organizations to purchase from smaller health suppliers, such as health tech startups, and to speed up the public purchasing process.
DFØ in Norway is an example on how Nordic countries could ensure that the public procurement process has more startup-friendly criteria and that more startups enter into a pilot agreement with the main healthcare providers.
Nordic Health Tech founders, compared to other countries, are not perceived as ambitious enough by investors. Investors, particularly Venture Capital investors, seek certain return targets on their investments, and for that, they need to invest in companies with high growth and high market potential. In that sense, Nordic Health Tech companies that are targeting one or a few Nordic markets for their solutions are not perceived as attractive enough, as these markets, even if addressed together, are still very small to provide outlier returns and they are very fragmented to efficiently enter and grow in each of them. Most investors interviewed for this report indicated that the Nordic countries could work together to support more Nordic health tech companies to establish themselves in the US and get funding from US investors, as the US health market is considered to be “the single biggest market for health tech companies by far”, pointed out a Finnish investor. One of the investors interviewed used the example of
Oura Ring, a Finnish company now valued at 2.5 billion USD, and how pivotal it was for them to successfully establish in the US market, something that also allowed them to attract a lot of funding from US investors. “It is not necessarily easy to successfully establish your company in the US or other highly competitive markets”, explained. That is why investors believe that more can be done on a Nordic level to support Nordic health tech companies in developing sound go-to-market strategies targeting markets with high growth potential and in helping them to successfully establish their companies in new markets and attract capital from investors in those markets.
Health Tech deals require a certain level of knowledge or expertise to invest in and many investors would prefer to invest with health specialist investors. Most investors, and especially health tech investors, believe it is somewhat important to have previous knowledge or experience in health in order to invest in Health Tech. Most investors currently investing in Nordic Health Tech indicated to have some sort of background in health, mostly from previous work experience. And investors not yet invested in the space indicated that they would start investing in the field if they could gain some knowledge or experience. Furthermore, both generalist and specialist investors prefer to co-invest with investors with certain knowledge or expertise in health, and most investors indicated the lack of specialized co-investors in health to be one of the main risks associated with investing in Nordic Health Tech. In this sense, it is clear that more efforts could be made in the Nordic Health Tech investor ecosystem to increase the number of health-specialized investors. Some of the investor’s suggestions include:
Supporting more health professionals to become angel investors. 70% of the investors currently investing in Nordic Health Tech gained their expertise from previous work in health corporations, startups and as health investors. More initiatives that attracted and trained health corporate managers, startup founders and employees, researchers, and clinical experts into startup investing would increase overtime capital and health expertise in the Nordic Health Tech ecosystem.
Attracting more STEM graduates and PhDs into the venture industry. Particularly with medicine, biology, or chemistry backgrounds. As the Nordic Venture industry becomes more specialized and as scientific research and innovation improves in the Nordic Health Tech ecosystem, there will be an increased need for more STEM PhDs working in the Nordic venture as industry experts, advisors, angels, or venture partners, among many roles. This could be achieved by providing more venture training and education to STEM professionals and by engaging further universities and academia in the Nordic Health Tech ecosystem.
Supporting more generalist investors to learn to invest in health tech and co-invest with health specialists. Last but not least, it is also possible to educate and train more generalist investors in health tech investing and to facilitate more co-investments between new investors and experienced health tech investors. A third of investors who are not currently investing in Nordic Health Tech indicated they would start investing if they could increase their knowledge and expertise in the field, and over half indicated they would start investing if they could co-invest with experts in the field. Learning by doing startup investing programs or co-investor networks focused on health tech are some of the initiatives that could support more generalist investors to start investing in health tech.
Support more active investors in Nordic Health Tech become thematic investors. Health focused investors invest more often compared to generalist investors. And most active investors in Nordic Health Tech have gained their Health experience by investing in the space. As indicated above, as the Nordic Venture ecosystem evolves and new players come in, investors would be pressured to narrow their focus and limit the number of sectors they want to be active in. More thematic investors in health tech would mean more investments in Nordic Health Tech and more specialised health investors in the Nordics. This could be achieved by working closely with active LPs investing in Nordic funds and by supporting emerging managers in the Nordics develop more focused thesis and investment strategies.
The best Nordic health tech investment opportunities are hard to access. Most investors that have not yet made an investment in Nordic Health Tech indicate the lack of access to good companies in the space as the main barrier. Most of the investments into Nordic health tech are done at a local level, attracting mostly local investors into the deal. Most active investors in the field are mainly sourcing health tech opportunities from proprietary entrepreneurs and investor networks, which are not always visible or easy to access if you are an outsider in Nordic Health Tech. Furthermore, health tech specialists tend to co-invest with other health tech specialists and other professional investors, making these circles even more exclusive and inaccessible for outsiders in the space. In that sense, many generalist investors, angels, or non-Nordic investors find it difficult to access good health tech companies to invest in and are missing out on the best Nordic Health Tech opportunities. The Nordic Health Tech ecosystem could attract more investors in the field by facilitating more co-investment opportunities between different investors and by creating more health tech arenas for outsiders to enter the Nordic Health Tech ecosystem. Some ideas include: