Digital health startups in the U.S. raised nearly $11 billion last year, a steep decline from the funding poured into the sector just a few years ago, according to digital health advisory firm and venture capital fund Rock Health’s latest report.
But the pandemic spike now looks like an outlier as the industry adjusts back to a more normal funding cycle, according to Andrew Hedin, partner at Bessemer Venture Partners. And there are still opportunities for startups to thrive — particularly for high quality startups that can prove their worth.
Hedin sat down with Healthcare Dive to discuss what digital health investment could look like this year, whether the sector will see an uptick in mergers and acquisition, and whether more companies will go public in 2024.
Editor’s note: This interview has been edited for clarity and length.
HEALTHCARE DIVE: We’re seen digital health funding decline over the past year. How do you characterize the funding environment in 2023, and how do you think it will evolve next year?
ANDREW HEDIN: It's interesting to hear about the downturn in investment, because on an absolute basis, we are still way far ahead of where we were even six, seven years ago.
And so as I think about the recent couple of quarters, and even the last 12 months, it's been a bit of a return to normalcy in terms of activity and pacing. I think there's been a good amount of activity, but it is not the same level as early 2022 or especially 2021. I'd say those years were certainly the anomaly, not the more normal times that we're in today.
I think we're going to see more of the same going into 2024. I expect that we're still going to have a lot of focus on really high quality teams, really high quality opportunities that are delivering hard clinical ROI where that's relevant, hard, financial ROI, where that’s relevant with high quality products. And those companies are still getting funded in this environment and will continue to get funded into 2024 as well.
With less funding available, M&A is likely to rise. Do you see that happening now? What sectors do you think are ripe for consolidation?
We're starting to see a little bit of that emerging. But I think it's still pretty light. If you look at the numbers, the M&A activity has actually been relatively low compared to maybe where expectations would have been. You see this with Signify Health, Oak Street and a couple of other larger acquisitions by incumbents like CVS. But the number of acquisitions has been modest in nature so far.
Candidly, there's going to be a lot of forced consolidation in the coming years as some of the less successful opportunities need to find a home for themselves. In a scenario where it's more difficult to finance through traditional venture capital, there's going to be a need to find a home for those companies, and I suspect that's going to happen across sectors. That's going to be most apparent in areas where there's less of an independent opportunity for that specific company. If they don't have that same level of conviction around the opportunity ahead for the product that they're building, the ROI and clinical ROI that they're delivering against, I think there's going to be some opportunity to find homes for those types of businesses.
IPOs are also at a standstill. Do you think that will change soon? What could push more established digital health companies to go public?
I think you honestly have to wait for the market. So across every single sector right now, we're in a relatively risk-off environment with the high interest rates that we're seeing more broadly.
And so we've seen a couple of IPOs happen this year across the broader tech ecosystem. I think those are early bellwethers for what we hope will come in the future, but it's been few and far between. So I think it's going to be really reserved for the highest quality companies that have a level of growth that's interesting, and a level of efficiency that is palatable to the current public market, given their increased focus on efficiency on a go-forward basis.
We’ve also seen some digital health companies shut down this year, like Pear Therapeutics, Olive and Babylon. Do you think that’s a trend that will continue?
I think it's going to be a flight to quality on a go-forward basis. And so all of those companies were unique cases, idiosyncratic in what specifically happened.
But I think on a go-forward basis, investors are really attracted to companies that have a really clear product value proposition, are delivering on that product value proposition, have the ROI that's delivering value back to the customer, and are sustainable in terms of their growth on a go-forward basis in terms of an efficient growth model.
Those are the companies that are going to be most sustainable on an ongoing basis, regardless of the external financing environment.