Venture capitalists are investing in digital health startups. How will it impact Healthcare?
There appears to be a significant gap between expectations and digital health startup success today. Customers’ rationalization of their application portfolios and venture capitalists’ tightening of funding terms, revisions to valuation thresholds, and search for a path to profitability are putting digital health startups in a difficult position. The funding for digital health startups, which reached a record high of nearly $30 billion in 2021, is expected to significantly decrease this year to approximately $21 billion. Digital health startups that have raised hundreds of millions of dollars are facing slow growth and must lay off employees to save money and stay afloat as the VC funding market slows down.
VENTURE CAPITAL – VC
A lot of startups want to get money from venture capital (VC), which is a type of investment for new businesses with a lot of potential for growth and is usually for the technology industry.
The issue is that venture capitalists (VCs) have a very fast funding cycle, which compresses time and puts a lot of pressure on entrepreneurs to build a sustainable business quickly. This does not always take into account the fact that the majority of healthcare startup businesses will not make a profit at the beginning of their existence.
This is made worse by venture capitalists that don’t have experience in healthcare. More and more, venture capitalists with experience in real estate or construction are funding in digital health startups.
What caused this to occur?
Inflationary pressures, shrinking profit margins, and a slowdown in the economy as a whole could be to blame for the increased scrutiny of healthcare businesses’ technology investments.
Venture capitalists typically place their bets on entrepreneurs rather than on solutions. Venture capitalists frequently assume that the product strategy will undergo multiple pivots before coming to a successful conclusion. They focus on the credentials and track record of the founding team and anticipate that the team will figure it out over time.
As they iterate over their product strategy, founders, on the other hand, assume that they will continue to receive regular rounds of funding from VCs.
On the other hand, leaders in the healthcare industry frequently place their bets on solutions rather than on entrepreneurs. They cannot afford multiple failed pilots in a low-margin industry like healthcare services, so they cannot afford it.
The majority of large health systems appear to be shifting from innovation and risk to safety and stability. They now prefer the volatile finances of startups to the deep pockets of large enterprise technology companies. They frequently work with startups to acquire particular features that are otherwise unavailable from conventional platform providers.
Healthcare companies are still using digital health, despite the difficulties startups face. Health systems are actually expanding their digital health programs. They are consolidating their technology platforms to facilitate a more seamless data flow and integration, unifying patient and consumer data to better understand their audience, enhancing analytics capabilities for improved patient targeting and engagement, and building foundational capabilities to comprehend and map patient journeys. Leaders in digital health continue to make selective investments in innovative businesses’ brand-new solutions. However, they are paying closer attention to the impact on patient satisfaction and financial returns.
Patients, practitioners, and regulators all flocked to remote healthcare solutions as a result of digital adoption driven by the pandemic. Digital health startups received $6 billion from investors in 2020 and 2021, more than in the previous ten years taken together.
And despite the downturn, many founders and venture capitalists believe that digital health startup is more resilient to adverse market conditions due to the fact that health services are typically the last to be cut from personal and government budgets when money is tight.
However, increased exit activity suggests that some startup leaders are losing faith in their ability to raise funds.
Conclusion: In today’s market, digital health solution providers that established a foundation of customer success early on will likely continue to prosper. Those on the margins, on the other hand, might have trouble balancing the need to keep current customers, invest in growth, and save money for the inevitable downturn that lies ahead. A Darwinian slaughter of the herd may occur as the VC money spigot dries up.