Digital, Health and Care — Institute (DHC)
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Joaquim Cardoso
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December 12, 2022
Digital health VCs eye healthcare workforce, cancer care as ripe for startups in 2023
Fierce Healthcare
By Heather Landi
Dec 2, 2022
With ongoing labor shortages and clinician burnout reaching sky-high levels, startups that use technology to address workforce challenges and administrative burdens will be a hot sector next year, according to VCs.
Despite the market downturn and economic pressures, the majority of investors expect digital health dollars in 2023 to be roughly on par with 2020, bringing in an estimated $15 billion to $25 billion.
In fact, VCs plan to make roughly the same number of health tech investments this year as compared to 2021, …
… according to a new survey of 50 digital health venture capital investors conducted by GSR Ventures.
Despite the market downturn and economic pressures, the majority of investors expect digital health dollars in 2023 to be roughly on par with 2020, bringing in an estimated $15 billion to $25 billion.
For context, digital health investment in 2021 was an eye-popping $29.1 billion, according to Rock Health, and that was a huge jump from $15 billion in 2020.
Venture capital firms invested $8.3 billion in digital health startups in 2019.
Compared to a record year in 2021, digital health funding has plummeted this year.
With the third quarter included, 2022 year-to-date funding totals $12.6 billion across 458 deals, raising doubts that this year’s digital health pot will reach even half of last year’s haul, according to Rock Health, a venture fund dedicated to digital health.
Despite this, many VCs seem relatively optimistic about the sector in 2023 and see many bright spots for innovation.
While digital health investors still believe valuations will drop in 2023, most still believe the overall ecosystem is quite healthy and investment levels will be comparable to the past few years at $15 billion to $25 billion, said Justin Norden, M.D., a partner with GSR Ventures.
“People who are focused on health tech and do this for the vast majority of their deals, those investors don’t appear to be running away from the sector.
They think their investments will be kind of comparable in terms of numbers of new deals, and even dollars deployed over the next couple of years,” Norden said in an interview.
“I think there’s a lot of investors who are interested in health tech and still have an incredible excitement about where the field is going.”
“I think there’s a lot of investors who are interested in health tech and still have an incredible excitement about where the field is going.”
The largest group of investors believe valuations will be down again next year by around 20% for seed-stage investments and down by 20% to 40% for series A and series B+ investments, according to the survey.
The largest group of investors believe valuations will be down again next year by around 20% for seed-stage investments and down by 20% to 40% for series A and series B+ investments, according to the survey.
“There’s no doubt that 2021 had a lot of exuberance built into it and part of what we saw is that valuations got a little bit on the high end.
But at the end of the day, what we’re seeing is that the entire ecosystem believes that there’s tremendous potential for value creation here,” Sunny Kumar, M.D., a partner with GSR Ventures, said in an interview.
“The №1 thing that everybody’s looking at now is the potential to generate high ROI. I think that’s still cutting across most of the startups that we’re seeing. As long as that continues, I think that there’s tremendous excitement to fund companies.”
“The №1 thing that everybody’s looking at now is the potential to generate high ROI
Kumar added, “What many investors believe is a little bit more of a normalized level, from the perspective of the amount of investments and dollars, is probably going to return and reset to that healthy level of 2020.
We actually may even see a little bit of an uptick in the second half of 2023 as some of those later-stage deals that have dropped off in the current environment come back to the market.”
“What many investors believe is a little bit more of a normalized level, from the perspective of the amount of investments and dollars, is probably going to return and reset to that healthy level of 2020.
As valuations level off and funding continues to cool off, there will be more focus on digital health startups that show a measurable return on investment (ROI) and clinical validation of the technology’s platform, according to the surveyed VCs.
ROI was deemed “important” or “very important” to the success of digital health companies by more than 94% of investor respondents, and 79% for clinical evidence and trials.
As valuations level off and funding continues to cool off, there will be more focus on digital health startups that show a measurable return on investment (ROI) and clinical validation of the technology’s platform, according to the surveyed VCs.
In the current environment, purchasers prioritize their spending on solutions with the strongest value proposition, Kumar said.
Pharma companies, health systems and payers are looking to pare down some of their expenditures, …
… so digital health initiatives that don’t quite meet that high ROI or don’t have that really compelling value proposition are the ones that get cut back, he noted.
“Looking at it from our perspective, which are the companies that are going to be most likely to succeed, it’s going to be those ones that have that stellar ROI, those ones that are not 30% 40%, but those that are 2x, 3x and 5x,” Kumar said.
“ In some cases, you have companies that can deliver 10x ROI on every dollar spent, and those are the ones that are going to completely outperform this type of market.”
“Looking at it from our perspective, which are the companies that are going to be most likely to succeed, it’s going to be those ones that have that stellar ROI, those ones that are not 30% 40%, but those that are 2x, 3x and 5x,” Kumar said.
The need for clinical validation and evidence that tech solutions improve clinical care is not new in the digital health sector but is now taking a priority as the sector matures, Norden said.
“This is something that’s going to be really important to investors and customers in the years to come. Having that evidence in hand and being able to demonstrate that and take that to your customers, that’s where the emphasis is, especially now,” he noted.
“Looking at it from our perspective, which are the companies that are going to be most likely to succeed, it’s going to be those ones that have that stellar ROI, those ones that are not 30% 40%, but those that are 2x, 3x and 5x,” Kumar said.
Going into 2023, VCs have their eye on areas they see as ripe for opportunity for further investment.
With ongoing labor shortages and clinician burnout reaching sky-high levels, startups that use technology to address workforce challenges and administrative burdens will be a hot sector next year, according to nearly half of investors surveyed.
With ongoing labor shortages and clinician burnout reaching sky-high levels, startups that use technology to address workforce challenges and administrative burdens will be a hot sector next year, according to nearly half of investors surveyed.
“We’re starting to see solutions where people are using computer vision and people are using AI to correctly triage people and using AI to finish clinicians’ notes, which allow visits to happen faster,” Norden said.
These solutions can boost efficiency for doctors and enable clinicians to focus more on providing care.
Investors identified changing reimbursement models and interoperability as challenges that provide the most opportunities for startups.
VCs also see cancer care, mental health, neurology and primary care as the some of the most promising clinical startup sectors in 2023.
VCs also see cancer care, mental health, neurology and primary care as the some of the most promising clinical startup sectors in 2023.
Oncology and neurology have the greatest unmet need, Kumar said.
“The interesting thing is both of those sectors are now seeing the potential for more specialist tech-enabled care, and I think that’s where we’re starting.
These companies seem to be very early on, we’re starting to see innovation happening and can we make services available to those patients in a way that we haven’t done so in the past,” he said.
“We can bring, for example, oncology care into the home and make that experience better, more seamless, more convenient and make the experience of managing some of the symptoms that those patients may be experiencing while they’re on chemo more manageable.”
“We can bring, for example, oncology care into the home and make that experience better, more seamless, more convenient and make the experience of managing some of the symptoms that those patients may be experiencing while they’re on chemo more manageable.”
In neurology, there are opportunities to use remote patient monitoring to be able to understand what’s happening with these patients and provide them with access to tools, solutions and medications, he noted.
He added, “These companies are still relatively early but one where the investor community is looking at this space and eager that these technologies could have a truly disruptive impact.”
It’s interesting to note that mental health was identified by VCs as both the most promising clinical startup sector and the least promising.
“This is a space where there’s still an incredible need.
But I think it’s also a space where mental health has showcased some of maybe that excessive investment and dollars kind of being thrown at the problem, not always in the most efficient or effective way,” Norden said.
“Especially for new startups coming into this space, there’s just a lot more competition and barriers.”
Investors also seem to losing interest in telehealth (24% identified the sector as the least exciting) along with blockchain.
Mental health has attracted major investment from a dollars perspective sector in the past four to five years.
“It’s great to see investors place increasing importance on clinical validation which is going to be essential as startups go after these areas of huge opportunity such as oncology and provider burnout,” Norden said.
“It’s great to see investors place increasing importance on clinical validation which is going to be essential as startups go after these areas of huge opportunity such as oncology and provider burnout,” Norden said.
Originally published at https://www.fiercehealthcare.com
NAMES MENTIONED
GSR Ventures.
Rock Health,
Justin Norden, M.D., a partner with GSR Ventures.
Sunny Kumar, M.D., a partner with GSR Ventures
