In 2021, there was a huge influx of capital into digital health companies, but since then there has been shrinking the public market as digital healthcare funding declines.
However, with increased investment last year, company valuations have risen and many have achieved unicorn status, a term given to private companies valued at a billion dollars or more.
But were the companies valued at these high prices too early, allowing for unrealistic growth expectations?
“We are not looking for operators that are focused on this price at all. The question is, how much capital do I need to get to the next inflection phase? When do I need to raise more capital, and how can I do that while minimizing dilution so that the team is motivated, but also setting myself up so that in the next round I can still get a tie or high round?” Emily Melton , managing partner at Threshold Ventures, said during a discussion at HLTH 2022 conference last week.
Companies now have to learn to deal with the downturn in a market where there was once essentially free money, said Andrew Adams, co-founder and managing partner of Oak HC/FT. This led to high 409A ratings that may have pushed teams into areas that did not make sense for the core ethos of the business.
“I think what you’re doing with your precious monetary resources and time in the day is really refocusing those efforts and changing your priorities,” Adams said. “It’s more of a logical process than trying to turn the ship around right away.”
Overall, the panel agreed that the decline in investment will continue, with some saying the lack of funding may even worsen over time.
“There’s a lot of things that would change how the macro picture looks, but I’m looking at it and looking forward to the rest of this year, whatever’s left of it, and maybe going into the 23rd looking worse and then really challenging situation in 24. So, to a large extent, what I would like is for companies to have a perspective on how they can make their money last through 25, if possible,” said Krishna Yeshwant, general partner at Google Ventures.
Melton agreed with this sentiment. Still, each investor noted the importance of focusing on having a unique proposition and using technology in a way that no one else has done to ensure investment sustainability.
“I think the message should be how do we build a great company and how do we do it in a way where everyone says, ‘Wow, I want to invest in this company because I can see the path,'” said Glenn Tullman, CEO of Transcarent and Managing Partner at 7wireVentures.
Understanding a clear path to profitability, ensuring the company has an adequate capital pipeline and that its board and investors support the company’s mission is critical, Tullman said.
“I’ve seen a lot of companies say, ‘We just want to last. We want to cut whatever we have to so we can last three years.”The enterprise is not about how long you can last because you can cut and make it last five or six years. It’s about getting to something that’s differentiated quickly,” he said.
Yeshwant adds that it is vital to have a plan for how the company will reach profitability.
“We’ve all seen in the environment 25%, 50% of the companies out there, certainly in digital health and digital more broadly, don’t really have that plan for how they’re going to get to profit. They have a plan for growth, but they don’t have a clear plan for profitability or positive results per unit,” said Yeshwant. “I think the low interest rate environment has sustained that for a while. I think we’re at a point where this environment just won’t tolerate that anymore.”
Investors noted specific reasons they’d like to see the next unicorn companies focus on healthcare, with Yeshwant saying mental health, senior care and primary care are important to him, and Adams noting he’d like to see future unicorns in the Medicaid space.
Melton emphasized the need for women’s health to become health care.
“We let politicians drive the decisions around our bodies, and a lot of that is because we don’t have the education or the clinical context to make those decisions. And it’s not just a matter of healthcare. It is an economic imperative. Women are the engine of the workforce. We are expanding GDP and we really need to get access to the right kind of healthcare if we are to continue to be productive members of our society.”