Before the COVID-19 pandemic, few digital health tools were used in care delivery, and only about a third of consumers had ever used live video telemedicine services.[1] The pandemic poured jet fuel on the digital health market as providers and health systems turned to digital tools as the only way (in many cases) to deliver care. Demand for these tools has remained even as COVID-19 has receded from daily life. In 2022, for instance, consumer adoption of any type of telemedicine modality hit 80%, with live video visits at 52%.[2]

There is no doubt that digital health tools will be a critical element of healthcare delivery in the future. The pandemic provided the proof of concept for many, and consumers, providers and payors have accepted the idea that these tools can provide value through lower costs and improved outcomes. Even so, venture capital firms are raising the bar for digital health investments.

Constrained Capital Markets

How did we get here? The sky-high demand for digital health tools that occurred during the pandemic is cooling as providers and patients return to in-person visits. In addition, valuations have fallen or failed to meet expectations. The long sales cycle in some healthcare markets has proved slower than expected, and business models have not achieved hoped for results, causing many to rethink their assumptions about the market. We also cannot ignore the larger financial backdrop in which rising interest rates are driving up the cost of capital. At the same time, while health systems’ interest in digital solutions remains high, their financial footing in the wake of the pandemic has left them less able to invest and take risk with innovative vendors that don’t have a long track record of success.

The result: venture capital firms are investing with caution, with some shoring-up existing portfolio companies and decreasing investments in new firms. Startups that were once spending freely to fuel growth are now being forced to be more efficient and move quickly to achieve profitability because they cannot count on new capital raises.

Roadmaps for Success: Refined Thinking

Health data plays have been the driver behind many digital health investments. Companies that could show they had access to data had instant value. Today, however, there is a general recognition that data access is just one of many interconnected assets that make data plays valuable. Understanding how to unlock the power of the data through sophisticated analytic tools and skill sets, deploying those tools within a rational business model and ensuring utilization of the insights derived from the data strategy are all matters that have gained importance as data plays have been deployed in the market. Many underlying assumptions behind some of the early data strategy business models have proven inaccurate, and much more sophisticated understandings of the value of health data and its uses are informing investment decisions.

The need for holistic solutions is also driving a trend in consolidation. Point solutions, no matter how effective, can be overlooked or viewed as too burdensome to adopt. Increasingly, the market is looking for ways to bring together multiple solutions so that consumers have a single, easy-to-use tool that complements their workflow.

Investors are also placing a premium on tools that address the critical needs of the existing healthcare industry. Now that the first-generation digital health tools are on the market, investors are less interested in tools that are merely incremental improvements on existing solutions. Rather, they are focused on solutions designed to address critical needs, such as workforce burn-out and information overload, or have a ready-made market in the existing healthcare infrastructure.  Whether it is streamlining drug discovery, improving clinical workflows, improving clinical analytics within value-based care reimbursement systems or addressing hundreds of other pain points within the healthcare and life sciences sectors, solutions addressing real world problems will have an edge.

And for companies that have been funded and are scaled businesses, investors are looking closely at their renewals to make sure that they are sustainable over the long term.

Addressing Equity

Increasingly, health equity is recognized as a core part of the mission of healthcare delivery. For instance, the U.S. Centers for Medicare and Medicaid Services recently released an updated framework for advancing health equity among the 170 million individuals covered under the agency’s programs. The agency’s equity goals include expanding the collection and analysis of data on social determinants of health, closing gaps in healthcare access and improving language access and health literacy.[3] Just as digital health tools created access to care during the pandemic, innovative digital tools also have the potential to assist in achieving goals of equitable care delivery.

In some ways, digital health tools are a natural fit for addressing issues of equity. For instance, digital tools can help facilitate access to providers for underserved areas and populations. Harnessing health data can inform providers and health systems about the needs of vulnerable groups, as well as identify areas of wasteful spending that can be redirected to areas of need. Digital health can also exacerbate health inequities, and it is not always clear whether a particular tool will help or hinder these critical efforts.

While market solutions can be valuable drivers of care delivery, not all healthcare problems are best solved through venture capital investment. Some solutions are effective for individual communities but cannot be effectively scaled. In other cases, the growth needed for venture capital investment simply does not exist. In these instances, alternative sources of capital, including family offices, strategic investors and social investors, may provide critical funds without unrealistic expectations of growth and profitability.

Finding Profitable Partnerships

Building creative partnerships is one way that venture capital (VC) firms can find success with healthcare investing. Existing market participants can offer investors remarkable insight into the market their portfolio companies are looking to penetrate. They can germinate game-changing solutions and be the location of development and pilot programs. But recognition of the differences in incentives and risk tolerance between VC and health care is key to making these types of arrangements work, no matter the form. It is all too easy for the fast-paced world of venture-backed digital innovation to run head-first into the brick wall of the risk-averse, financially fragile and frighteningly complex healthcare market. Despite this, these partnerships are taking hold and delivering value.

Despite the constrained capital market, venture capital investors remain significantly engaged in the digital health market. The healthcare ecosystem has plenty of systemic problems that could benefit from creative digital tools. Entrepreneurs who offer digital health solutions that also provide a return on investment will find no shortage of partners.

References:

[1] Rock Health (2019). “Digital Health Consumer Adoption Report 2019.” https://rockhealth.com/insights/digital-health-consumer-adoption-report-2019/

[2] Rock Health (2022). “Rock Health: Consumer adoption of digital health in 2022: Moving at the speed of trust.” https://rockhealth.com/insights/consumer-adoption-of-digital-health-in-2022-moving-at-the-speed-of-trust/

[3] Centers for Medicare and Medicaid Services (2022). “CMS Framework for Health Equity 2022-2032.” https://www.cms.gov/files/document/cms-framework-health-equity-2022.pdf