Q&A: How cooling digital health funding changed the market in 2022

After digital health startups scooped up 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 prove their ability to improve care, says John Beadle, managing partner at Aegis Ventures.

He sat down with MobiHealthNews to discuss the growth in partnerships with health systems and venture capital firms, the changing funding environment, and what digital health investment in 2023 could look like.

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

John Beadle: Despite the macro environment obviously turning down, the transformation and care delivery and innovation that was spurred by COVID is definitely continuing to accelerate in a lot of different areas. I think the industry has really hit a tipping point, and we should continue to see innovation advancing at a rapid pace. 

With that said, I think the market has definitely cooled after a red hot 2021. We saw lower deal volume, smaller check sizes becoming the new normal. Terms have also changed a fair bit, liquidity preferences have gone up. 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 it’s evident that the days of selling quarters and collecting dimes are somewhat past us, particularly for companies in growth stages. And so, to maintain those 2021 valuations I think it’s become imperative not only to be generating clear value to customers and compelling ROI metrics, but also demonstrating a path to profitability and scalable unit economics. 

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

You’ve also seen VCs and venture studios shift to partnership models. Redesign announced a partnership with CVS and another partnership with UPMC. General Catalyst has pulled together their Health Assurance network to try to offer better distribution for their companies. a16z announced a partnership with Bassett Healthcare. We’re obviously pursuing a lot of different initiatives with Northwell. I think that’s going to continue in the upcoming period.

The last one I might mention is just the increased focus on healthcare from a lot of the incumbent tech players. Google Cloud has announced a number of partnerships with health systems. You’re seeing Amazon look at M&A opportunities much more actively. Entities like Morgan Health are really trying to continue to play a big role in accelerating the transitions to more value-based models for employers, where there’s very significant pressure to lower healthcare costs and try to deliver benefits that encourage retention and reduce burnout.

Providers are under really substantial financial pressure. They’ve started to look at more innovative models to try to increase the value that they’re able to capture through the care they’re providing. We still largely live in a fee-for-service world, but I do think there’s been an increased focus on risk-based models as a way to try to recapture margin. I think we’ll continue to see that in 2023 as well.

More year in review stories:

How retail healthcare, telehealth trends could evolve in 2023

Where digital health funding could go in 2023

Digital health leaders discuss their key takeaways from 2022

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

Beadle: Digital health is still quite a nascent market overall. It’s much easier in a lot of ways to build things direct-to-consumer. You can launch them a lot more quickly. You only need to convince yourself. You can onboard customers really quickly and gain a lot of market traction. 

A lot of companies have tried to transition to B2B models, and a great way to do that is the partnerships. I think that one element of it is trying to secure more scalable, predictable distribution for your portfolio companies. I think that was a big driver behind what General Catalyst has been doing with Health Assurance, which is quite impressive.

With Redesign, I think it’s much more on the side of 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 truly 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 you’ve seen for quite a long time is that health systems, in particular, play a huge role in determining the overall value proposition for companies and increasing their valuations. But they haven’t really been able to achieve a model that enables them to capture any of the upside relative to the amount of value they’re delivering. And so I think health systems, as they’ve been under increased margin pressure, have been trying to find ways to produce diversified revenue streams. 

MHN: So you noted that funding has definitely declined compared with 2021, which was just a real boom year. Why do you think that happened? And how did it affect investors as well as startups?

Beadle: From a macro standpoint, I do think the growth in funding is largely justified, given the complete reordering of healthcare that’s been underway. But I think going to a more micro level. There’s certainly been a lot of companies funded over the last two years that likely shouldn’t have been.

But I do think the increased focus on health tech among the VC community is a good thing for the industry and the world. But it’s certainly cooled down. Check sizes have cooled down, it’s become a lot more challenging to get funded relative to where things were in the last two years in particular, just given that the cost of capital has gone up so much.

At the same time, I think the best companies are still all getting funded. But you do need to be serving not only important needs and playing 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 bit surreal to see over the last two years is companies going from raising $10 million to taking $100 million from players like Tiger and Coatue, which is a really difficult transition to make as it relates to management structures and systems. There’s certainly been a lot of growing pains and layoffs for the companies that did that. 

In the same vein, going from running a company with 25 people to one with 200 people is very challenging, particularly when your pre-product market fit. So I think it’s largely a good thing that we’ve seen this slowdown, given that I think companies are going to need to build with a lot more discipline going forward.

MHN: What do you think the funding environment will look like in 2023?

Beadle: Given the macro backdrop, I think the slowdown in funding we saw in 2022 is likely to continue through most of 2023. I don’t see us going back to ’21 levels of investment in the near term. But I do think we’ll settle above 2020 numbers with continued year-on-year growth, probably minor growth against that 2020 benchmark, on a go-forward basis. 

To raise money in this environment, you definitely need more proof points now than you’ve seen over the last few years, which is driven both by the macro slowdown and the fact that we’ve seen a lot of vaporware in this space during a time of very easy money. I also think the reset and valuations we’ve seen should enable a lot more robust M&A activity as we head into 2023. 

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

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