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HARD TIMES IN THE DIGITAL HEALTH FUNDING MARKET

Halloween may be over – but frightening developments can still abound.

The availability of funds for digital healthcare companies has contracted significantly since the halcyon days of 2020 and 2021.  The market has seen

  • Bankruptcies and shutdowns of once promising companies
  • Significant pullback in investor interest in the sector
  • Creation of a new reality for market participants

All of these developments have heightened the realization among executives in the sector that building flexibility into their contracts with vendors, partners and others can be a key factor in promoting survival.  That flexibility can help companies pivot as the needs of the market whipsaw less nimble competitors.  Unfortunately, companies that don’t figure that out up front in their contracting practices may be the victims.

My firm has a great deal of experience in helping business leaders plan strategically for their contracts and execute strategies to maximize flexibility.  If you are an executive  working in this area, call us at (908) 540-6901 to arrange a discussion of your challenges and opportunities.

Bankruptcies and Shutdowns

The bankruptcy of Olive AI has been a significant event in the digital health sector for 2023. Olive, a healthcare AI startup that was once valued at $4 billion and sought to revolutionize healthcare with its revenue cycle automation tools, faced a series of challenges that led to its shutdown. These included a rapid and perhaps unsustainable growth pace, economic downturns and strategic missteps​.

In a stark turn of events, Olive AI wound down its operations and sold itself in pieces to companies like Waystar and Humata Health, despite having raised nearly $900 million from investors​. This dissolution is symptomatic of a broader trend within the digital health sector, which has seen a substantial contraction in investment and activity compared to previous years.

Lower Investor Interest

In the first half of 2023, U.S. digital health startups raised $6.1 billion across 244 deals, a stark decrease from previous quarters. If this trend continues, 2023 could record the lowest funding year since 2019​. The reduction in funding is accompanied by a decrease in the number of investors, with only 555 participating in digital health fundraises in the first half of 2023, compared to 775 in the first half of 2022​.

To mitigate the impact of lower valuations, many digital health companies have opted for “unlabeled raises,” which allow them to raise capital without publicly attaching labels to weaker funding rounds. This strategy was employed in an unprecedented 41% of H1 2023’s digital health funding deals​.

The New Reality

Despite these challenges, there is still some confidence in the sector, with a smaller group of active investors focusing on mega deals for companies they believe have high potential. The first half of 2023 saw 12 mega deals which comprised 37% of the total funding dollars. These deals were concentrated in areas like value-based care enablement, non-clinical workflow and practice management and at-home care, reflecting an ongoing interest in transformative digital health innovations​.

The digital health market has thus entered a new era characterized by fewer deals, lower check sizes and a more selective cohort of sector investors. Some companies are sunsetting their operations, while others are adjusting to the new status quo with different strategies, from unlabeled raises to focusing on mega deals with the potential for high returns​.

Key Takeaways

In summary, the landscape of digital health in 2023 has been shaped by significant contractions in investment and a wave of restructurings and shutdowns. Companies like Olive AI have faced the brunt of these changes, leading to their dissolution, while the remaining players are navigating the new terrain with cautious optimism and strategic shifts.

Of course, the time to create flexibility is when entering into contractual relationships – not when the “stuff” hits the fan!  If you’re contemplating significant collaborations with outside parties, call us to discuss how we can help.  You can reach us at (908) 540-6901 or [email protected]

We’re here to help.

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