Inside digital health’s reckoning, where once-hot startups are suddenly scrambling for cash
- Digital health will take a beating this year, experts say.
- Many startups are taking strict deal terms that favor investors to land necessary cash.
- Analysts and CEOs told Insider more than half of healthcare startups will shut down by 2024.
Healthcare startups looking to stay afloat have been laying off employees left and right.
When the autism-care startup Elemy laid off staff in December, its CEO Yury Yakubchyk told remaining employees that the layoffs were a good thing, according to leaked audio reviewed by Insider.
Instead of providing therapy to children, Elemy wants to make software that therapists can use on their own, which means the company will need fewer employees. If Elemy hadn’t pulled back starting in 2021, anticipating the market downturn, it would already be out of money and sold for parts, Yakubchyk said.
What’s more, Elemy’s board and investors were “150% behind us,” he said.
“Why? Because they have companies right now in their portfolios that are about to implode and run out of money,” Yakubchyk said.
In an emailed statement to Insider, Yakubchyk said that he was making a broad point about startups across sectors. He also said that Elemy is still focused on supporting families with child autism care.
Digital health founders like Yakubchyk are making sacrifices to preserve their cash as investors get picky. For many, it won’t be enough.
In 2021, digital-health startups received a record $29 billion, double 2020’s total, as patients flocked to get care over the internet during the coronavirus pandemic. Investors were falling over each other to back startups with plans to drastically change how healthcare is delivered in the US. Today, the tables have turned. With the recession looming, companies canceled their plans to go public in 2022, and funding for private companies has tumbled from 2021’s peak.
By 2024, more than half of the about 1,800 of digital-health startups will disappear, either through acquisitions or bankruptcies, several analysts and CEOs told Insider.
Founders have had it easy — raising money with less scrutiny in less time because investors didn’t want to miss out, Teresa Lee, who leads healthcare investing for OMERS Growth Equity in North America, said.
“Now I think everybody’s much more sober and thoughtful,” she said.
All told, 2023 will be a year that separates winners from losers.
Public valuations are hurting startups
Private companies are valued largely based on how their public counterparts are doing. In digital health, that’s become a painful benchmark.
Some prominent health-tech companies are trading at less than five times their revenue, a common way to measure the value of unprofitable companies, down from more than 10 times their revenue in 2020 and 2021, per Richard Close, a top healthcare analyst at Canaccord Genuity.
One reason for the slump is that public investors believe the companies might have to raise more money from investors before they’re able to start generating a profit — and raising money is getting harder, Close said.
And there’s a higher bar for going public, Daniel Grosslight, a healthcare analyst at Citi, said.
To be accepted by the market today, digital-health startups would have to be profitable, or close to it, and ideally making revenue that’s predictable, like based on a subscription model. Their public peers generally do not have these qualities, he said.
“It takes a lot more to go public than to remain public,” Grosslight said.
Komodo Health and Included Health, two large healthcare startups, scrapped their plans to go public in 2022, Insider reported.
In the absence of IPO funds, and burning through cash fast, Komodo raised an additional $200 million from investors in November. Web Sun, one of the cofounders, told Fierce Healthcare it was also restructuring the business and laid off 9% of its workforce.
The “structured equity” deal didn’t affect Komodo’s valuation, a spokesperson for the company said. But structured equity comes with terms that favor the investor, aimed at protecting their cash when companies are vulnerable.
Deals with more structure will become the norm in 2023, multiple industry observers told Insider. Besides equity deals, companies can raise venture debt, which won’t affect their valuation. But venture debt has to be paid back with interest.
One healthcare banker, speaking on the condition of anonymity to discuss deal dynamics more frankly, cautioned that debt investors structure their deals to ensure a minimum return.
“They may rip your face off, so be sure to read the fine print,” he said.
Investors are setting stricter terms
Many startups are making sacrifices to appease new and old investors, such as slashing how much money they’re spending.
The online pharmacy Truepill burned through its cash as it struggled to fill prescriptions efficiently, two former employees told Insider.
When the startup raised new funds in November, an investor backed Truepill on the condition that it reduce its expenses, the two former employees and a current employee said.
Without that new funding, Truepill was set to run out of money before the end of 2023, one of them said.
A spokesperson for Truepill told Insider in an email that the company’s burn rate was in line with its projections.
November’s raise is being used to fuel the company’s continued growth, she added.
Carbon Health’s January funding round, a $100 million raise from CVS Health Ventures, involved “significantly more diligence” than previous fundraises, as investors grew more cautious of the startup’s spend on primary- and urgent-care clinics, CEO Eren Bali said.
Along with the raise, Carbon announced a shift away from its plan to open 1,000 clinics across the US.
Bali said Carbon also took a lower valuation to avoid stricter deal terms.
For many companies, no amount of cuts will be enough to win over investors.
OMERS’ Lee said that businesses that require a lot of up-front investment — to build clinics or advertise heavily online, for example — are especially vulnerable.
Julie Yoo, a general partner at Andreessen Horowitz, said certain companies that don’t sufficiently transform their sector, particularly in areas that many investors now consider overfunded, like digital pharmacy, will be weeded out this year.
Medly, a pharmacy startup that raised $100 million in July 2020, laid off more than half of its staff and closed stores as it burned through cash, Insider reported in November. It filed for bankruptcy in December.
The sudden store closures left many of Medly’s patients without medication. Similarly, when Elemy pulled out of several states starting early last year, patients were left without care.
Elemy’s Yakubchyk said that the startup offered families transition services across several months.
Digital health’s bright spots
Even though digital-health valuations are down in the public markets, nothing much has changed about those businesses’ underlying financials. In fact, many of them are still growing, indicating demand for virtual care isn’t going away.
“Ultimately at the end of the day, the pendulum probably swung too far in terms of the euphoria,” Canaccord’s Close said, adding: “And the pendulum has definitely swung probably too far in terms of the valuation contraction.”
Companies with solid business fundamentals, like low costs to operate compared to high earnings, and a plan to become profitable will be successful even in a downturn because they have options, Andreessen Horowitz’s Yoo said.
Some startups that boast those qualities are still getting the funding they need at the terms they want.
The women’s-health startup Maven landed $90 million before it needed more cash, according to CEO Kate Ryder. The November fundraise boosted Maven’s valuation from $1 billion to $1.35 billion, and Ryder hinted that the deal included clean terms, meaning it didn’t include a long list of protections for the investor.
NOCD, an app that provides therapy to people with obsessive-compulsive disorder, raised $34 million in January at a higher valuation, without restrictive terms, NOCD’s CEO Stephen Smith told Insider.
Both Maven and NOCD are planning for growth in 2023. Maven wants to hire 200 more employees this year, and NOCD plans to double its provider network by the end of 2024.
While the broader economic pressures will hurt many startups that can’t raise, it may help others, experts told Insider. Hospitals’ financial pressures are already boosting startups that help cut administrative waste, per Rock Health.
Many startups are in a comfortable enough position to avoid raising entirely. The startups Virta Health, Cedar, and Medable all told Insider they plan to reach profitability without raising additional money from investors. Quantum Health, a company that helps patients navigate their healthcare benefits, is already earning enough to fund itself, CEO Zane Burke said.
A wave of M&A
For some startups, getting acquired will be inevitable.
Giants like the retailer CVS Health and Amazon, looking to defend themselves against a potential recession, could invest further in healthcare, an industry that continues to grow each year.
Digital-health companies are also set to further consolidate, aiming to cut costs.
Included Health — the combined entity of Grand Rounds, a navigator that helped connect patients with care, and Doctor On Demand, the primary-care company — has a head start there.
Before the two companies merged in 2021, they each raised enough cash to last the combined company until around 2025, Owen Tripp, the CEO of Included, told Insider.
While Included wants to be in a position to be profitable, Tripp is still hoping to grow. In 2023, the startup will look to either acquire clinics or partner with in-person care providers to complement the care it already delivers through screens, he said.
“Now is not a time for daydreaming,” Tripp said. “It’s a time for knowing what the most important thing is and then executing on it.”
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