Investors expect stronger startups in the sector to buy competitors this year
Venture capitalists who invest in digital health forecast growing consolidation and startup formation in 2023 as the industry rebalances following a rocky year.
Adoption of virtual care and other digital tools accelerated during the pandemic and marquee deals, such as Teladoc Health Inc.’s $18.5 billion purchase of Livongo Health Inc. in late 2020, raised the industry’s profile.
Venture investment followed. Digital-health startups globally raised $59.6 billion in 2021, nearly twice the previous year’s total, according to market tracker CB Insights.
But in 2022, initial public offerings stalled, inflation rose and investors grew more conservative. Startups that raced to high valuations during the funding boom postponed new venture rounds to prevent their valuations from falling, investors said.
In the first three quarters of last year, digital-health startups worldwide had collected $22.4 billion, according to CB Insights, which hasn’t yet released the full-year amount.
Valuations are expected to change in 2023 as funding remains tight and investors examine business models, growth potential and financial performance more closely, some venture capitalists said.
Startups these days must spend efficiently to boost revenue growth and reach profitability, said Steve Tolle, a general partner at venture firm HLM Venture Partners.
“Those companies out fundraising right now, if they are not at a point where they are break-even and they’re burning a significant amount of cash, it’s a very difficult environment," Mr. Tolle said.
This year, stronger digital-health companies will look to buy rivals and many employees of top companies will depart to start their own businesses, some investors predicted.
Company creation and seed investment will flourish over the next 12 to 24 months, said Morgan Cheatham, a vice president of venture firm Bessemer Venture Partners.
“Folks are sitting at these companies, saying, ‘Do I want to roll or be rolled—or do I now feel like I’m ready to go on my own?" Mr. Cheatham said.
Employees of large digital-health companies can hit the ground running as entrepreneurs because of their networks and experience, said Sharla Grass, a principal with venture investor Greycroft.
“Even with the general macro slowdown, we’re seeing no shortage of great entrepreneurs attracted to the sector, particularly at the early stage," she added.
Entrepreneurs willing to brave down markets often prove to be some of the best to back, said Roger Lee, a general partner at venture firm Battery Ventures.
“It takes a slightly more hardened founder in order to persevere through times like this," he added.
Arik Ben Ishay, co-founder and chief executive of Biobeat Technologies Ltd., a provider of technology for remote patient monitoring, said the Israel-based company has largely supported itself through sales since it formed in 2016, but now seeks $30 million in venture-capital financing.
He said he hopes Biobeat’s financial performance—its revenue is expected to more than double to $20 million this year, even without new venture funding—will attract investors.
“A company with revenues, a company with profits—it’s absolutely something that will be very interesting to VCs in 2023, and this is the feedback we’re getting right now," he said.
Startups that show they can make healthcare more efficient and effective despite today’s challenges can set themselves apart this year, said Shiv Rao, co-founder and CEO of Abridge AI Inc., a Pittsburgh-based startup that uses artificial intelligence to generate summaries of medical conversations from recorded audio.
“Companies who can really thrive on this pressure and be ruthlessly focused on the value proposition they’re delivering, those startups are really going to excel," Dr. Rao said.
Denver-based DispatchHealth Holdings Inc., which delivers hospital-level care in the home, in November said it had raised more than $330 million in new equity and debt. The company said it has provided care for about a million patients in the U.S. since it was founded in 2013.
Its model is especially appealing in an inflationary environment because of the drive to lower costs, said Thomas Bremner, a partner with DispatchHealth investor Adams Street Partners. It also plays into other trends such as increased focus on consumers in healthcare, he said.
Two trends that will have momentum this year are AI-enabled diagnostic tools and preventive care, especially as employers seek to lower expenses by keeping workers healthy, said Maëlle Gavet, CEO of startup accelerator Techstars Central LLC.
Lily Huang, a principal with New Enterprise Associates, said the venture firm plans to continue its steady investments in digital health.
“There’s still a lot of modernization that hasn’t happened in healthcare; there’s still a lot of these breakout companies that are waiting to be built," she said.
