Since the COVID-19 pandemic, more than $40 billion has been invested into venture-backed healthcare companies. This 400% increase from pre-pandemic times has generated a “gold rush” into the sector, as investors, institutions and individuals have simultaneously understood the world-changing impact of healthcare and life science innovation on a deeply personal and systemic level.
Recently, and predictably, reports signaling the “bust times” have proliferated, as evidenced by the amount of capital retreating from the sector. As we enter a period of capital markets “regime change,” how might this affect entrepreneurs, investors, innovative technologies and most importantly, patients?
The impact of venture capital
Over the past decade, a confluence of factors drove massive investment into the healthcare venture sector. A robust 10-year bull market, decade-long tech venture capital outperformance and historically low interest rates created a significant amount of capital looking for early-stage investments. Many new entrants and larger venture capital funds began dedicating themselves to healthcare. This oversupply in capital naturally decoupled market valuations from their intrinsic value.
With a turning of the market towards profitability instead of growth, companies either must survive with the cash they have or entertain a lower valuation in the future.
As capital retreats from the sector, it’s exciting to think about the potential investment opportunities. Healthcare venture capital is not for the faint of heart. Reviewing the data over the last thirty years, over half of all venture-backed companies return less than 1.0x, and 90% of the value created comes from only 31% of invested capital. And unlike tech venture capital, multibillion-dollar outcomes are few and far between. This offers opportunities, especially when supporting companies at very early stages, to create real value and catalyze a significant number of companies who are pioneering life-saving innovations for millions of patients worldwide.
Healthcare’s Role in the Economy
Currently, the United States spends nearly 20% of gross domestic product on healthcare, nearly100% more than the average of all OECD nations. Roughly 10,000 baby boomers are aging into Medicare each day through 2030. Furthermore, the U.S. is seeing an increase in chronic disease burden. According to the CDC, approximately 50% of adult Americans have at least one chronic condition. Healthcare delivery systems are increasingly unprofitable and patients are dissatisfied with current service levels. This is unsurprising given the misaligned incentives, antiquated technology, and pervasive approach of “treating the disease, not the patient.”
The need for significant investment in this sector persists. But with a fading pandemic and an emerging recession, will these acute unmet needs receive the capital they deserve?
What’s Next for Healthcare Investment
The rapid rise in healthcare investment experienced during the pandemic will not be without consequences. Like the dot-com crash of 20 years ago, many companies will be "washed out" from a regime change moving from unbridled exuberance to financial stability. As with the dot-com crash, this will cause significant pain to companies, employees, investors and limited partners alike. We hope and expect, however, that sustainable companies will similarly emerge with a trajectory to accelerate the path to better care.
While few silver linings come with an intense pandemic, one of them has been a change in mindset around care and new comfort levels with technology that can facilitate it. Capital investment into healthcare increased substantially with the onset of COVID-19, which ushered in a new era for healthcare delivery. During the early stages of the pandemic, entire populations learned how to receive virtual care and became accustomed to products and services that met their needs on demand. Additionally, a whole generation witnessed new scientific approaches like mRNA advancements, which led to real-world results in record time and were critical in taming a novel epidemic in less than two years.
Despite headlines predicting the doom of early-stage innovation, there are a few truths that should catalyze continued and accelerated innovation in healthcare and life sciences. One, there is more available capital than ever. Healthcare venture capital funds raised nearly $16 billion in the first half of 2022 alone, 50% more than the entirety of 2019. Two, the needs are greater than ever. There are dozens of multibillion-dollar markets in healthcare IT and services alone, and the “push” of solution sales is rapidly becoming a “pull” due to the perilous finances of healthcare delivery organizations. Three, new technologies are developing at an accelerating rate, which can improve lives at scale in ways unimaginable as recently as a decade ago.
Periods of economic uncertainty are often prime time for building and investing in new businesses. With steady hands and conviction around the long-term innovation trends in healthcare and life sciences, there has been no better time and place to partner with disruptive entrepreneurs and technologies that drive better care for fewer dollars spent.