The New Dawn for Digital Health
Although 2023 was a dark time for digital health, all signs point towards a bright future as valuations reset and founders look towards strategic partners to sustainably scale in the current market.
In recent years, digital health funding has skyrocketed, driven by increasing healthcare costs, aging populations, demand for remote healthcare solutions, and advancements in technology. The venture capital ecosystem invested more than $50B in 2021 in digital health in the wake of the pandemic, but funding has slowed significantly, decreasing more than 48% in the past 12 months due to broader macroeconomic events.
As the funding landscape has shifted, exit expectations have also shifted. The heyday of multi-billion dollar exits in the industry is over, outcomes such as Livongo’s $18.5B deal with Teladoc, CVS’s $10.6B purchase of Oak Street Health, and One Medical’s $3.9B acquisition by Amazon are few and far between. With more than 170 M&As in health tech, 2021 was a pivotal year for venture capital investors targeting this market, but over the past two years investor sentiment around the industry has soured given a broader shuttering of the IPO window and few successful M&A closings.
Publicly traded health tech companies have underperformed the past 5 years which has contributed to the narrative shift around the industry. Bessemer described this period as a natural part of the hype cycle for industries, with health tech experiencing a boom triggered by COVID-19 followed by a peak of inflated expectations down to a trough of disillusionment, and finally stabilizing in the current environment at reasonable valuations. Many businesses did not survive the cycle, take the healthcare automation company, Olive AI, for example. Once valued at $4B, they announced they were shutting down last fall after raising hundreds of millions, including a $400M round, in venture funding. Those who did make it out of the wreckage are now more focused than ever on pushing towards profitability and growing at a stable rate into their previously overinflated valuations received in 2020 and 2021.
Despite the decrease in funding and uncertain outcomes for many of these businesses, consumer desire for digitization within healthcare and more consumer centric models continues to hold strong. The wave of “click-and-mortar” has opened up unique opportunities for patients to be more active in their health journey and has increasingly improved accessibility to products and services in the space. What’s even more encouraging is that active players in healthcare are no longer categorized into just payers, providers, and pharma, but have expanded to include companies in the retail, technology, and fitness spaces.
As Apple’s Tim Cook mentioned in 2019, “if you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind?’ it will be about health”. Some of the world’s largest companies are eyeing health as the next great frontier for innovation and value creation and are continually putting more resources towards their healthcare platforms.
All this points towards a very optimistic future for digital health, but let me level set with you. 1) healthcare is still a very complicated and antiquated industry, making change takes time and a lot of money making it vastly different than tradition software markets 2) it is still unclear what exits look like for many of the health tech darlings of the past few years 3) investing in the industry takes expertise and patience (not for the faint of heart, or average VC for that matter). We are finally seeing investors, founders, and other stakeholders come to these realizations and although it may paint a bleaker future for the industry, there are many positive changes that will come from this.
Specialized investors have the most to gain from this resetting. Generalist funds are pulling back given multi-billion dollar outcomes are needed to return their enormous fund sizes. Sector focused firms can be very successful with smaller multi-million dollar outcomes and are primed to take advantage of decreasing valuations. Sector specialists have the ability to add tangible value to these businesses and provide founding teams with the necessary networks and guidance needed to grow in a historically antiquated industry.
What’s next for the digital health market? Many predicted the exit windows to open in 2022, but ultimately, interest rates were still high, more geopolitical tensions arose, and investors were still quite wary. While it’s impossible to predict the future, I believe in 2024 we will continue to see a ramp of the consolidation of point solution companies through attractive M&A opportunities that can help companies achieve economies of scale, increase efficiency, lower costs and drive innovation. Outcomes in the space will not be as grandiose as those across other sectors, but will still drive positive returns for investors. What’s worth mentioning is that despite the downturn in the market, health tech has created over $90B of market cap in the past five years and will continue to expand as technology advances and consumers look to take more ownership over their health.
My top sectors to watch in the coming months are:
Value-based care (VBC)
Women’s health
Medicaid
Food as medicine
Comprehensive gut health
While most of this is not news to investors in the space, it’s worth iterating given the bad rap the industry has been getting from the broader venture capital world. Despite the serious hesitations in the industry, healthcare is still lightyears behind other industries from an innovation and digitization standpoint which presents a huge opportunity for those willing to bet on the space. Let me know your thoughts in the comments!