There was a huge influx of capital into digital health companies in 2021, but since then there has been the reduction of the public market, along with the reduction of funding for digital health.
However, with increased investments in the past year, company values have also increased many have achieved unicorn status, a term given to privately held companies valued at $1 billion or more.
But are companies being prematurely valued at these high prices, allowing for unrealistic growth expectations?
“We’re not looking for operators that are focused on that price at all. It’s about how much capital do I need to get to the next turnaround stage? When do I need to raise more capital and how can I do that by minimizing dilution so that the team is motivated, but I also position myself that way that in the next round I can still get an equal or better round?” Emily Melton, managing partner at Threshold Ventures, said during a discussion at HLTH 2022 conference last week.
Companies now have to learn to manage the crisis in a market where there was once practically free money, said Andrew Adams, co-founder and managing partner of Oak HC/FT. This led to high 409A estimates 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 is really refocusing those efforts and re-prioritizing,” Adams said. “It’s kind of a more logical process as opposed to trying to turn the ship right away.”
Overall, the panel agreed that the decline in investment will continue, with some saying the funding shortfall may even worsen as time goes on.
“There are a number of things that would change what the macro picture looks like, but I look at it and expect the rest of this year, whatever is left of that, and maybe going into ’23 to look worse and then really kind of a challenging situation in ’24. So basically what I would like companies to have a perspective on is how they can make their money last until ’25, if possible,” said Krishna Yeshwant, general partner at Google Ventures.
Melton agreed with that sentiment. However, each investor emphasized the importance of focusing on a unique offering and using technology in a way that no one else has done to ensure the sustainability of the investment.
“I think the message should be how do you build a great company and how do you do it in a way that makes everyone say, ‘Wow, I want to invest in that company because I see a path,'” said Glen Tullman, CEO of Transcarent and managing partner at 7wireVentures. .
Tullman said it’s critical to understand a clear path to profitability, ensure the company has adequate capital and that its board of directors and investors support the company’s mission.
“I’ve seen a lot of companies say, ‘We just want to last. We want to cut whatever we need to cut so we can last three years.’ “The venture is not about how long you can last because you can scale back and make it last five or six years. It’s about how quickly you can get to something that’s differentiated,” he said.
Yeshwant adds that it is crucial to have a plan for how the company will achieve profitability.
“We’ve all seen in the environment 25%, 50% of companies out there, certainly in digital health and digital beyond, don’t really have a plan for how they’re going to get to profitability. They have a plan for growth, but they don’t have a clear plan for profitability or positive unit results,” he said. Yeshwant. “I think the low-interest environment has supported that for a while. I think we’re at a point where that environment just won’t tolerate it anymore.”
Investors highlighted specific motivations they’d like to see the next unicorn companies focus on in 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 Medicaid space.
Melton emphasized the need for women’s health care to become health care.
“We let politicians make decisions about our bodies, and mostly it’s because we don’t have the education or the clinical context to make those decisions. And it’s not just a health care thing. It’s an economic imperative. Women drive the workforce. We’re growing GDP and we actually have to get access to the right kind of health care if we are to continue to be productive members of our society.”