Q&A: How the Digital Health Financing Cooldown Changed the Market in 2022

After digital health startups raked in huge amounts of investor dollars last year, the market slowed down significantly in 2022.

But it’s still a relatively new field and there’s plenty of room for startups that can demonstrate their ability to improve care, said John Beadle, managing partner at Aegis Ventures.

sat down with MobiHealthNews to discuss the growth of partnerships between venture capital firms and healthcare systems, the changing funding environment, and what digital healthcare investing might look like in 2023.

MobiHealthNews: What are some of your big takeaways as you look back at digital health in 2022?

John Beadle: Even though the macro environment is obviously worsening, COVID-driven transformation, care delivery, and innovation are definitely continuing to accelerate in many different areas. I think the industry has really reached an inflection point, and we should continue to see innovation move at a rapid pace.

With that being said, I think the market has definitely cooled off after a red hot 2021. We saw lower transaction volume, smaller check sizes become the new normal. The terms have also changed a bit, liquidity preferences have increased. So the cost of capital has clearly increased.

I joke a lot that digital health companies are great at raising money, but not at making money. But clearly the days of selling quarters and collecting dimes are long gone, particularly for growth-stage businesses. So to sustain those 2021 valuations, I think it’s become imperative to not only drive clear customer value and compelling ROI metrics, but also demonstrate a path to profitability and scalable unit economics.

A couple of other big takeaways that I think will continue into 2023: You’ve seen a big increase in the focus on partnerships and companies have switched from DTC [direct-to-consumer] to B2B [business-to-business] , which I think is emblematic of the broader macro environment. Consumers have less disposable income, medical bills are rising, so you’re seeing a lot of companies move away from selling to individual consumers and trying to sell to companies, both employers and payers.

It has also seen venture capitalists and venture studios switch to partnership models. Redesign announced a partnership with cvs and another association with UPMC. General Catalyst has assembled its Health Insurance network to try to offer a better distribution for their companies. a16z announced a partnership with Bassett Healthcare. Obviously we are pursuing many different initiatives with north well. I think it will continue in the next term.

The last one I could mention is just the increased focus on healthcare by many of the incumbent tech players. google cloud has announced a number of partnerships with healthcare systems, you’re seeing Amazon look at Mergers and acquisitions opportunities much more actively, entities such as cheers morgan they are really trying to continue to play a significant role in accelerating transitions to more value-based models for employers, where there is very significant pressure to reduce health care costs and try to provide benefits that encourage retention and reduce burnout.

The providers are really under substantial financial pressure. They have started looking at more innovative models to try to increase the value that they can capture through the care they provide. We still largely live in a fee-for-service world, but I think there has been more of a focus on risk-based models as a way of trying to recoup margin. I think we will continue to see that in 2023 as well.

More years in review stories:

How Telehealth and Retail Healthcare Trends Might Evolve in 2023

Where digital health financing could go in 2023

Digital health leaders discuss their key takeaways for 2022

NMH: Why do you think partnerships were a big focus this year?

Sheriff: Digital health is still a fairly nascent market overall. It’s much easier in many ways to build things directly to the consumer. You can launch them much faster, you just need to convince yourself, you can onboard customers really fast and gain a lot of traction in the market.

Many companies have tried to transition to B2B models, and a great way to do that is through partnerships. I think one element of this is trying to ensure a more scalable and predictable distribution for your portfolio companies. I think he was a big driver of what General Catalyst has been doing with Health Assurance, which is pretty impressive. With Redesign, I think it’s much more about trying to find a partner for co-creation and innovation, which is very similar to our partnership with Northwell. When we work with them, it’s really us sitting in the trenches with clinical leaders and administrative leaders, trying to better understand how we can deliver models that bring innovation and existing healthcare incumbents closer together.

I think something that you’ve seen for quite some time is that healthcare systems, in particular, play a huge role in determining the overall value proposition for companies and driving their valuations up. But they haven’t really been able to come up with a model that allows them to capture any of the benefit relative to the amount of value that they’re delivering. So I think healthcare systems, as they’ve been under increased margin pressure, have been trying to find ways to produce diversified revenue streams.

NMH: So you noticed that funding is definitely down compared to 2021, which was just a real boom year. Why do you think it happened? And how did it affect investors and startups?

Sheriff: From a macro standpoint, I think the growth in funding is largely justified given the complete reordering of healthcare that has occurred. But I think going to a more micro level, there certainly have been a lot of companies funded in the last two years that probably shouldn’t have been.

But I do believe that the increased focus on healthcare technology among the VC community is a good thing for the industry and the world. But it certainly cools. Check sizes have cooled, it’s become much more difficult to raise funds relative to the state things have been in the last two years in particular, as the cost of capital has increased so much. At the same time, I think the best companies are still getting funding. But it needs to not only serve important needs and play in big markets, but also demonstrate a much clearer path to profitability and more scalable unit economics.

One of the other things that I think has been a little surreal to see in the last couple of years is companies go from raising $10 million to taking $100 million from players like Tiger and Coatue, which is a really difficult transition to make. do in terms of structures and management systems. There certainly have been a lot of growing pains and layoffs for companies that did that.

Likewise, going from running a company with 25 people to one with 200 people is a huge challenge, especially when your pre-product market fits. So I think it’s largely a good thing that we’ve seen this slowdown, as I think companies will need to build with a lot more discipline going forward.

NMH: What do you think the financing environment will be like in 2023?

Sheriff: Given the macro context, I think the slowdown in funding that we saw in 2022 is likely to continue through most of 2023. I don’t see us going back to 2021 investment levels any time soon. But I do think we will settle above the 2020 numbers with continued year-over-year growth, probably less growth compared to the 2020 baseline, going forward.

To raise money in this environment you definitely need more test points now than you’ve seen in recent years, which is due to both the macro slowdown and the fact that we’ve seen a lot of vaporware in this space during a time of money. very easy. I also think the reset and valuations we’ve seen should allow for much stronger M&A activity as we head into 2023.

There is a lot of fragmentation and point solutions that need to be consolidated, and employers and commercial payers are increasingly looking for solutions that can solve multiple problems. But I think, all things considered, the best companies, the ones that can generate high engagement, demonstrate measurable improvements in health outcomes, and generate clear ROI while reducing costs, should continue to see strong funding.

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