- In the first half of 2023, healthcare investors have written big checks for their top startup picks.
- A handful of startups are landing megadeals — while others have been scrambling for extra cash.
- 2023 is on track to be the lowest year of healthcare funding since 2019, Rock Health says.
It’s been a rough year so far for digital-health funding. But some startups are getting big checks again — and a smaller group of investors is calling the shots.
Digital-health startups in the US raised $6.1 billion in the first half of 2023, Rock Health’s H1 2023 funding report published on Monday found.
It’s a significant difference compared to the $10.3 billion raised over the same period in 2022. And fundraising activity so far this year has been dominated by mega-rounds of $100 million or more, with 37% of all funding invested through megadeals.
Fewer investors are making healthcare bets than in 2022, too. Many of the tech-focused funds that dug into healthcare investing in 2021 have steered clear of the industry in the downturn, and some of the remaining healthcare funds haven’t made any investments this year, said Rock Health.
Healthcare’s late-stage startups have limited options to keep building their businesses, and their fates could be in the hands of a smaller group of venture firms that are narrowing their bets to only their top picks and doling out fewer big checks.
Right now, 2023 is on track to be the lowest healthcare funding year since 2019, according to Rock Health. The startups that aren’t picked for healthcare’s next “varsity class,” as the firm put it, may be forced to search for a buyer or to shut down altogether.
VCs are picking their MVPs
Some healthcare investors still in the game appear to have changed their strategies this year to protect themselves against startup risk, Rock Health’s head of research, Adriana Krasniansky, told Insider.
Instead of spreading their cash among a large group of startups to diversify their portfolios and attempt to decrease risk, many investors are making bigger investments in the few companies that they have the most confidence in, Krasniansky said.
Those investors are picking startups in areas where they see the potential for big wins in the next few years, like AI, value-based care, and at-home healthcare, she said.
Some investors have taken that hands-on strategy a step further by incubating startups, allowing them to pool money into a company they have closely overseen from its creation rather than a company they’re banking on later in the game, Krasniansky said. Monogram Health, for example, which was incubated by Frist Cressey Ventures, pulled in a whopping $375 million in January.
Krasniansky said Rock Health expects more firms to incubate or codesign healthtech startups moving forward as investors attempt to minimize their risk.
“VCs aren’t waiting for the market to tell them who will be the next generation of players,” said Krasniansky. “They’re cocreating or giving a leg up to some of the bets they’re putting on the table now instead.”
Startups are coming out of hiding
Summer has historically been a quieter time for fundraising, but several VCs told Insider that they’ve seen a number of startups kick off the fundraising process after Memorial Day.
Healthcare startups looking for cash right now seem to be doing so for one of two reasons, those investors said: either they want to test the waters and see what kind of deals they could land as the public markets improve — or their money is running out and they’re becoming desperate.
Ian Chiang, a partner at Flare Capital Partners, told Insider he’s seen many companies that attempted and failed to raise money in the last quarter of 2022 or in the first months of this year now coming back to market with better terms for investors.
Startups that haven’t been able to raise yet could luck out in the second half of 2023, as some investors that have stayed on the sidelines since the start of the downturn are being forced to jump back into the game, said Lynne Chou O’Keefe, the founder and managing partner at Define Ventures.
“Some investors have been kind of off bet, and you can only be that way for so long,” she said. “For some people, it’s been multiple quarters. You’re seeing that dynamic thaw as well.”
Sellouts and shutdowns on the horizon
Companies that aren’t able to raise extra cash may be scrambling to get acquired or sell off some of their assets before shutting down.
This year, some startups have sought out other digital-health companies to buy their assets. Thirty Madison bought the birth-control startup The Pill Club’s patient files after the startup declared bankruptcy in June, and the digital-therapeutics player Pear Therapeutics sold its assets in May to four healthtech companies after its shutdown.
Krasniansky said Rock Health expects many of the impending shutdowns to impact healthcare startups that sell products and services to patients online and on-demand, especially direct-to-consumer companies like telemedicine or mail-order-pharmacy startups.
Direct-to-consumer healthcare startups do have a place in the future of healthcare, Chou O’Keefe said — but those companies need to plan to eventually sell their services to employers and health plans in order to get her firm’s backing.
Read the full article here