Boom to balance: An expert weighs in on digital health investment over the years

With over 30 years of experience as an entrepreneur and more than 20 years as a venture investor, Lisa Suennen has a unique ability to zoom out and see the digital health investment roller coaster in context. As we all know, the past few years have been…bumpy. But what does it mean? What’s next for the field??

Lisa Suennen shared 5 key insights with our Spring Career Accelerator cohort that you won’t want to miss:

Digital health is still in its infancy.

Until around 2004, nobody cared about the idea of tech and healthcare. In the time before broad adoption of EMRs, it simply wasn’t an investable category. In 2010, there was $300 million of venture capital in the entire field of digital health. If you look at the field now, some companies raise more than $300 million each. When you think about medical devices or pharma, these are fields that have had decades to evolve. In comparison, the digital health field is just so new and there are few examples of truly widespread adoption.

Covid shifted the field in a major way.

It really wasn't until COVID that healthtech investment exploded. It all changed on a dime because everything had to go virtual. I had one hospital client that went from having 2,500 telemedicine visits a year to 50,000 nearly overnight. It was wild. They were learning as they went.?In that time, of course, the investment also went wild. Venture capitalists invested almost $30 billion of capital in 2021 (up from the $300 million in 2010). Everything seemed possible. The IPO windows started flying open for companies, even ones that were pretty small. (Consider the fact that Teladoc acquired Livongo for $18 billion dollars…).

This wasn’t all a good thing — some bad habits developed. Both companies and investors forgot to plan for the fact that the COVID crisis might just come to an end.

Even with investments rolling in, revenue was meager.

Despite all the money flowing into digital health, you’d be hard-pressed to find too many companies with more than $20 million in revenue. And really hard-pressed to find one with more $50 million, unless they were a true back-office tech company, such as those selling EMRs.?

There’s more skepticism now.

The demand for proof and evidence of ROI, both clinical and financial, has finally started to rise to the forefront. Too many investors and entrepreneurs got enamored with tech, even when it was still in search of a problem to solve. Additionally, a bunch of inexperienced tech entrepreneurs and investors came pouring into the space with a lack of understanding around the differences between the healthcare system and general tech market dynamics. This led to too many companies that received a lot of investment capital but didn’t understand how to make money in the field. They thought, oh, software! If it makes things more efficient, people will just buy it! And software has a massive gross margin because it runs without people. Healthcare doesn’t work like that.

And now the market is starting to realize that. Health tech without services seems to be mostly undesirable, with a few exceptions. Thus, margins aren’t the same as in general tech and the operations are far more complex. So, a lot of tech people are now retreating from healthcare. Hopefully this will drive up customer empathy and reduce unrealistic expectations in that area. The best thing that could happen is that companies employ the right balance between healthcare knowledge and experience and outside knowledge and experience — new ideas from outside are great, but the realities of how healthcare operates and payments flow simply cannot be ignored.??

We’re looking at a roll-up cycle.?

The exuberance for digital health was unfettered…until it wasn’t. In 2023, investment in the space has significantly receded — we have had the lowest level investment in health tech since 2019. And out of 130 deals, 6 of them got 40% of the capital. We’re seeing a concentration of money in very big chunks to the “roll-up companies,” or, the ones that have big platforms and are well-positioned to make acquisitions. Everything in-between really struggles to raise money at a time like this. The winners are those solving big problems and proving their solution works from a workflow and ROI standpoint.

As the stock market has slowed down, no digital health companies are going public. There have been zero this year in the digital health world, and I doubt there will be any by the end of the year. Everything is pulling back. Despite all the money that's gone in, VCs are being forced to choose which companies they are going to support at this point —?not everyone is going to make it. As a result, a fair number of? digital health companies are going out of business, still trying to raise money, or are looking to be rolled up into larger organizations. Those that are lucky enough to have money in the bank are making sure they can get to profitability as fast as possible. (But they should have been doing that from the beginning...)

Even with the roller coaster of the past few years, Lisa remains optimistic:

This is a very new industry and the fact that it's having its ups and downs is not at all surprising. That is just part of any market's natural evolution. There's worse to come, but when it comes back up, it’ll be in the form of better thinking, stronger companies, tighter management, better fiscal policy, more thoughtful funding models, and more appropriate valuations.