Which Digital Well being Startups Are Most & Least Suited to Elevate Capital in 2023?

Final yr’s digital well being funding traits have left some startups feeling uneasy about their capacity to boost capital within the new funding atmosphere. Healthcare startups raised $3.4 billion within the fourth quarter of 2022, marking the sector’s lowest quarterly funding whole up to now 5 years. This autumn was additionally the primary quarter with no new unicorn births since 2018. 

These low funding totals and altering macroeconomic forces beg the query: which startups will prevail of their fundraising efforts, and which is able to fall by the wayside? Enterprise capitalists suppose corporations which have a demonstrable return on funding and serve a number of stakeholders will most likely have the best time securing capital. Not surprisingly, level options and startups in crowded markets will face a harder atmosphere.

Although digital well being startups are raking in much less capital than they had been in 2020 and 2021, contemplating healthcare funding traits on a yearly foundation is a shortsighted method, Morgan Cheatham, vp of Bessemer Enterprise Companions, identified. As an alternative, we should take a look at the general development.

Simply 10 years in the past, solely $1.6 billion of whole enterprise capital was invested into digital well being corporations, Cheatham stated. In 2022, the sector raised $15.3 billion. Whereas it is a far cry from the $29 billion raised in 2021, final yr’s funding was nonetheless 10 occasions larger than it was a decade in the past.

Ambar Bhattacharyya, managing director at Maverick Ventures, agreed that final yr’s dip in digital well being funding isn’t as foreboding as some might imagine. 

“Maybe counterintuitively, I count on macroeconomic forces will find yourself being a optimistic tailwind for healthcare this yr,” he stated. “Healthcare has traditionally been a recession-resilient sector, as a lot of the demand for healthcare tends to be inelastic. When coupled with the decade-long shift in the direction of a value-based care mannequin, the macro atmosphere shall be much less of a consider healthcare than different rate of interest or inflation-sensitive elements of the economic system.”

On this market, capital effectivity is king. It’s apparent that buyers will before everything flock towards corporations with robust unit economics and ROI, Bhattacharyya stated. He additionally predicted that digital well being buyers will preserve their curiosity within the generative AI area, as this business is within the midst of a technological revolution.

One other enterprise capitalist — Lu Zhang,  founder and managing associate at Fusion Fund — stated that her time earlier this month on the JP Morgan Healthcare Convention reminded her that there’s nonetheless loads of capital able to be deployed into digital well being.

“These investing in healthcare are targeted on effectivity enhancements and wish to have the instruments to assist healthcare clear up its ‘triple A’ drawback, as I prefer to name it: addressing points with affordability, accessibility and accuracy,” she stated. “On this present second, healthcare’s largest difficulty is lack of expert labor, one thing that could possibly be solved with built-in digital options.”

In Zhang’s view, one of many largest methods the digital well being fundraising atmosphere is altering amid financial headwinds is that buyers are paying nearer consideration to the founders with whom they select to align themselves. Buyers wish to know the way adaptive the founder is and whether or not they’re skilled in dealing with downturn and figuring out alternatives when in disaster mode.

Individually, founders shouldn’t be too depending on personal capital, but additionally search for investments from different sources like the federal government for non-dilutive funding.

“I prefer to see that founders aren’t planning to solely depend on VC funding to outlive as a enterprise. Is the VC capital a catalyst to assist them develop or is VC funding their solely technique?” Zhang stated.

Zhang and others’ recommendation not withstanding, many digital well being startups are more likely to falter given how the bottom has shifted. As we speak, the corporations with the strongest capacity to boost capital shall be those who serve a number of stakeholders, Cheatham declared. Buyers discover corporations extra enticing if they’ll create worth for suppliers, pharma, payers, employers, and shoppers, he stated.

And serving a number of stakeholders seemingly implies that corporations constructing level options could have essentially the most arduous, uphill fundraising climb.

“Executives throughout the hospital, payer, employer and pharma panorama are reevaluating tech spend throughout the board and taking a tough take a look at the lengthy tail of distributors that they signed up for over the previous few years,” Bhattacharyya declared, including that healthcare suppliers need to consolidate distributors.

Cheatham argued that companies that serve suppliers should show monetary ROI for his or her purchasers not solely by saving them cash, however by truly making them cash inside a yr post-deployment. This nuance would be the distinction between corporations which might be capable of scale quickly and people which might be flat or rising slowly, he stated.

On the employer facet of issues, it’s turning into tough for care navigation corporations to show their value as buyers train extra scrutiny over demonstrable ROI, stated Drew Hodgson, nationwide observe chief for well being care supply at Willis Towers Watson.

“I personally don’t suppose there’s essentially an ROI with a navigation vendor,” he stated. “They’re a type of sorts of distributors which have worth with staff — staff actually like them. However it’s difficult for them to have the ability to show direct ROI underneath their explicit mannequin.”

Hodgson described care navigation corporations’ ROI as “oblique.” Corporations like Livongo or Carrum Well being can find yourself driving care utilization, nevertheless it’s tough for them to show that they’re the explanation a specific individual ended up searching for care, he stated.

As enterprise capitalists proceed to invest about which corporations will prevail amid the brand new fundraising atmosphere, it’s additionally vital to recollect that there’s some removing to do. The affected person engagement and medical documentation areas are each a bit too crowded, Rebecca Springer, PitchBook’s lead healthcare analyst, identified. 

Merely put, there’s a whole lot of startups on the market that carry out the identical process, so those that may do it cheaply and effectively will win out over those that don’t. Within the affected person engagement area, some huge gamers embrace Weave and Arterathey may eclipse startups which might be much less established, Springer stated. The identical goes for key gamers within the medical documentation area, like Iodine and Nuance

So, count on some failures and consolidation in these markets.

There was one closing piece of recommendation from enterprise capitalists on tips on how to go about fundraising on this financial atmosphere: be adaptive.

As an alternative of setting sights on a significant spherical, founders ought to rigorously think about how a lot capital they really want at any cut-off date and be versatile relating to the funding quantity, velocity of finishing the spherical and valuation. Funding quantities and valuations will change because the market does, nevertheless it doesn’t imply your online business is doomed.

Pearl Well being CEO Michael Kopko shared related recommendation. His firm, which helps unbiased doctor practices take part in value-based care fashions, not too long ago accomplished a $75 million Collection B financing spherical. Although Pearl’s fundraising efforts had been profitable, he admitted that this spherical took longer than the startup’s Collection A.

“You are able to do rather a lot with just a little and that’s sort of all the time been the promise of startups,” he stated. “On the finish of the day, you’ll be examined by your mettle and your capabilities and the outcomes you ship — the {dollars} don’t actually try this. It’s the staff and the flexibility to execute. So I feel individuals get just a little bit obsessive about {dollars} and numbers. And I don’t know if that’s the healthiest factor for the ecosystem.”

Picture: Khosrork, Gatty Photos