As economic headwinds intensify, digital health investors are telling companies to close funding rounds before the market gets worse.
“Anyone who is thinking about raising in 2023, we’re advising them to try and raise even sooner,” said Dr. Krishna Yeshwant, general partner at Google Ventures. “Things are going to be worse in 2023 than they are now.”
Yeshwant spoke on investing in a down-market economy while presenting at the HLTH conference in Las Vegas. He was joined on a panel by Andrew Adams, co-founder and managing partner of the venture capital firm Oak HC/FT; Emily Melton, managing partner of the early-stage VC firm Threshold; and Glen Tullman, CEO of the digital health company Transcarent. It was hosted by Megan Zweig, chief operating officer of the consulting firm Rock Health.
In 2021, investors poured a record $30.2 billion into digital health. While 2022 is on pace to be the second biggest year in digital health investment, according to Digital Health Business & Technology’s database, it will fall far short of last year’s record.
The challenges coming into this market should be a lesson for investors and founders alike, panelists said.
“When you come out of a market where there was essentially free money, it created a lot of bad behaviors,” Adams said. “A lot of that behavior was from investors coming in with high prices that weren’t correlated to any sort of evaluation metric. That lead to investors pushing and [companies] pushing themselves into areas where it didn’t make sense for them to go.”
Melton said so much cash was coming into the early-stage markets because of low interest rates. As a result, investors were willing to pay high prices to get into the business. This led to high valuations that created undue expectations on founders. She said the industry needs to get back to a more rational way of financing companies.
For digital health companies, panelists say they should take a disciplined approach toward operations as the economy tightens. Adams said founders should focus on core capabilities and be willing to push out the broader product roadmap.
While some advisers may push a company towards profitability, this approach won’t be applicable for everyone, Tullman said.
“It’s a mistake for companies in Series A, B and maybe even C to focus on getting to profitability quickly,” Tullman said. “The message should be on building a great company to make people want to invest in that company. We wouldn’t have the Amazon we have today if they focused on profitability and they had just stopped at books.”
Yeshwant said that companies in digital health often don’t have a plan or even a clear path for profitability. These companies are facing a hard shift in a market with higher interest rates. Companies should either plan to de-risk their growth or focus on unit economics from an early stage, he said.
Partnering is an important strategic maneuver that early-stage companies should take, Melton said. It’s important, she added, for companies to find the right investors who are in total alignment with founders on companies taking a slow path to profitability.
Companies should also look to partner with existing digital health firms. “Where do you have leverage with existing players? It’s really hard for any startup to go at it alone,” Melton said. “It’s such a complex health system.”