A panel discussion moderated by Sofia Guerra of Bessemer Venture Partners aptly titled "The Great Leveling Out" provided some clear insights into how investors view the current state of play in digital health markets. Laura Veroneau, Managing Director of Optum Ventures, Andrew Adams, Managing Director of Oak HC/FT and Nick Richtt, Managing Director of JPMorgan, covered the topic from early stage to mature private equity (PE) financed to public strategic buyers.
Capital Efficiency
Not surprisingly with valuations and funding down sharply in 2023, investors are looking for companies with a speed to profitability as compared to the TAM (Total Addressable Market) driven growth models of the prior early years of 2020 and 2021. Overall tolerance for funding losses over an extended period has sharply dropped for both new investments and existing portfolio companies.
New Barriers and Valuation Drops
The panel uniformly felt that reduced valuations happen routinely in the bulge and bust environment of early-stage tech and health care investing. This time is no different. A reduced valuation is not a reflection of a poor management team or a poor platform. In fact, the presence of an experienced team that can navigate funding lulls is key, as is the judgment needed to survive another day to achieve long term goals despite reduced valuations. A team with significant experience in managing health care platforms, especially through choppy waters, was identified as a key marker by investors.
How To Escape the "Leveling" Process
Both the Optum and Oak speakers identified the Medicaid space, an area routinely associated with poor management, possible inefficiency and expanding demand with a challenging population cohort, as an area for focus given the size of the market and the challenges of population health management for low income groups. Uber's new collaboration with United Health's Medicare Advantage plans to bridge the appointment access hurdle was cited as a creative development in value-based care.1
Another area for opportunity is the expanding series of partnerships between payers and providers, such as the virtual care collaboration between Spring Health and HighMark Health.2
Niche areas (e.g. eating disorders) that are curated and focused to address the health care needs of a very specific population have received the attention of investors as well.
While artificial intelligence (AI) has captured headline valuations, most of the panel felt the investment decision for AI was still too early. Tangible success stories are needed showing cost savings, labor savings, and/or revenue to justify the persistent high valuations. Early billing and clinical documentation success stories are needed to build on larger gains and investment confidence.
Building a "multilingual" team with clinical, operational, development, legal/compliance and financial acumen was recognized by all as probably the single largest factor in investment decision making for investors.
Five Key Criteria
While not anything new, the new investment paradigm will look to the following:
- Does the service or product solve a persistent long-term issue?
- Does the company have hard predictable and scalable, clinically verified data to show a return on investment (ROI) that supports the valuation?
- Does the team have a focus on a large and growing market?
- Does the company have favorable unit economics (i.e., margins)?
- Does the company have a strong multilingual (as discussed above) team?
What does the balance of 2023 and 2024 show?
The panel felt long term a "leveling out" isn't bad as it promotes the winning survivors and allows those firms to scale and access capital.
The investor panelists focused on 1) definitive consolidation in some markets where operating model overlap amongst 3-5 competitors is clear; 2) bold initiatives such as the one by General Catalyst to buy a health system outright to serve as a product and service innovation lab for new entities born inside the health system ecosystem itself;3 and 3) new ideas/teams that have yet to surface in the rapidly changing area of value based care.
All panelists held firm that the future of digital health investing is on solid ground. The bridge period we are in is sometime slow and painful but needed. A new cycle of investing and deal making is gathering momentum...it simply takes a meeting of the minds.
Footnotes
2. https://www.springhealth.com/news/highmark-mental-well-being-powered-by-spring-health
3. https://www.generalcatalyst.com/perspectives/the-future-of-health
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