Digital Health Startups Facing Bankruptcy or Shutdown: Analysis of Lessons from High-Profile Failures

The digital health sector has witnessed significant growth fueled by advancements in AI and billions in venture capital. Despite the promise of transformative innovations, not all startups succeed in sustaining their operations. High-profile failures, including those of Babylon Health, Pear Therapeutics, Better Therapeutics, Forward, Olive AI, and Ruth Health, offer valuable lessons about the challenges of scaling, market fit, and financial sustainability.

I. Post-IPO Bankruptcies

1. Babylon Health

Babylon Health set out to democratize access to healthcare through an AI-powered app that combined virtual consultations, symptom checkers, and health monitoring. At its peak, Babylon raised $550 million in 2019 and went public in 2021 with a valuation exceeding $4 billion. However, by 2023, the company declared bankruptcy. Key factors contributing to its failure included the unsustainable cost structure of its global expansion and overestimation of the revenue-generating potential of its AI tools. Babylon’s bankruptcy serves as a cautionary tale about the risks of aggressive growth without a proven, scalable business model.

2. Pear Therapeutics

As a pioneer in prescription digital therapeutics (PDTs), Pear Therapeutics developed software-based treatments for conditions like substance use disorder (SUD) and insomnia. Despite regulatory approvals and partnerships with healthcare providers, Pear struggled to achieve commercial success. After raising $80 million in 2020, Pear filed for bankruptcy in 2023, citing challenges in reimbursement pathways and market adoption. This highlights the difficulty of monetizing digital health innovations in highly regulated industries with entrenched traditional practices.

3. Better Therapeutics

Better Therapeutics aimed to combat cardiometabolic diseases with its FDA-authorized software, AspyreRx?, which delivered cognitive behavioral therapy (CBT). Despite raising $6.7 million in 2023 and securing regulatory approvals, the company failed to generate sufficient revenue and announced plans to cease operations in May 2023 after IPO. The lack of widespread adoption among healthcare providers and insurers underlined the challenges of integrating digital therapeutics into conventional care models.

II. Shutdowns

1. Forward

Forward, an ambitious startup combining AI-powered health assessments with high-tech clinics, aimed to revolutionize primary care. The company raised over $500 million and introduced AI-driven CarePods to bring automated primary care services to malls and gyms. However, technical issues with the CarePods, logistical hurdles, and slow patient adoption derailed its plans. Forward ceased operations in 2024, emphasizing the importance of addressing both technological feasibility and patient acceptance when implementing innovative healthcare models.

2. Olive AI

Olive AI developed AI solutions to automate healthcare administrative tasks such as billing and prior authorization. Backed by over $800 million in funding and valued at $4 billion, Olive’s growth trajectory appeared promising. However, strategic missteps, lack of focus, and overextension led to multiple rounds of layoffs and the eventual sale of key business units in 2023. Olive's shutdown highlights the risks of pursuing aggressive growth without aligning product offerings with market demands.

3. Ruth Health

Ruth Health, a telehealth startup founded in 2020, focused on providing virtual maternal healthcare services, including pelvic floor training, lactation counseling, and C-section recovery support, through 30-minute sessions and unlimited text access. Despite raising $3.1 million in funding, including a $2.4 million seed round in 2022 led by Giant Ventures, the company struggled to achieve sustainable growth and scale its operations. In November 2023, Ruth Health announced its closure, with co-founder Alison Greenberg reflecting on challenges such as delayed investor commitments, difficulties in maintaining sales momentum, and the complexities of aligning a niche service with market needs. The company’s experience underscores the critical importance of product-market fit, operational scalability, and timely financial backing in the competitive digital health sector.

III. Key Lessons Learned

Sustainable Growth and Scalability

Digital health startups like Babylon Health, Olive AI, and Ruth Health illustrate the perils of unsustainable growth. Rapid expansion often places undue strain on operational infrastructure, leading to inefficiencies and substandard quality. Ruth Health's struggles in scaling its maternal telehealth services highlight the necessity of robust planning and infrastructure development to support growth without compromising care quality. Startups must focus on demonstrating profitability and operational stability in controlled, smaller markets before attempting broader-scale expansion. Healthcare scaling requires meticulous navigation of regulatory hurdles, logistical challenges, and market dynamics. A phased growth strategy, centered on sustainable and measurable outcomes, is often more successful than aggressive expansion driven by external pressures.

Market Fit and Adoption

Achieving product-market fit is a fundamental requirement for any startup, especially in healthcare. Ruth Health targeted a critical niche in maternal telehealth but failed to align its services with the needs of a sufficiently large market. Similarly, companies like Pear Therapeutics and Better Therapeutics faced challenges integrating their solutions into established healthcare systems. Successful adoption requires not only innovative solutions but also clear demonstration of value to providers, payers, and patients. This involves addressing practical concerns such as cost, accessibility, and integration into existing workflows. Thorough market research and continuous refinement of offerings based on feedback are essential to align innovations with market demand and secure consistent revenue streams.

Regulatory and Reimbursement Hurdles

Healthcare is a highly regulated sector, and navigating its complex landscape is a significant challenge for startups. Pear Therapeutics’ difficulties with reimbursement pathways serve as a cautionary tale of how payer systems can hinder innovation. Ruth Health may have encountered similar obstacles in establishing consistent reimbursement models for its telehealth services. Early engagement with insurers, regulators, and healthcare providers is crucial to ensure that services align with reimbursement frameworks and meet regulatory requirements. Failure to address these challenges early can erode momentum and trust, ultimately impacting a startup’s ability to thrive.

Technical Feasibility and Patient Acceptance

Successful digital health solutions must be both technically robust and user-friendly. Forward’s failure due to technical issues with its AI-driven CarePods and Ruth Health’s limited patient adoption underscore the importance of designing reliable platforms that address real patient needs. Telehealth startups, in particular, must prioritize building infrastructure capable of delivering consistent, high-quality care. Understanding patient behavior and preferences is equally critical. Startups should invest in tools and channels that foster patient engagement, build trust, and ensure seamless integration of their offerings into patients’ lives.

Strategic Focus

A clear and targeted strategy is critical for long-term success. The downfall of Olive AI, which attempted to address too many problems simultaneously, underscores the risks of a diffuse approach. Ruth Health’s efforts to tackle multiple aspects of maternal care were innovative but may have diluted its focus. A concentrated strategy that prioritizes solving specific, high-impact problems enables startups to refine their offerings, optimize resources, and establish a strong value proposition. By narrowing their focus, startups can achieve greater operational efficiency and build stronger connections with their target audience.

Investor Expectations and Financial Management

The pressure to meet high investor expectations often drives startups to prioritize rapid growth over financial sustainability. Ruth Health’s experience highlights how delayed or insufficient funding can hinder a company’s ability to adapt to market demands and capitalize on growth opportunities. Effective financial management, including monitoring burn rates and clearly demonstrating returns on investment, is critical to maintaining investor confidence. Startups must balance short-term goals with building a solid foundation for long-term success, even if it requires slowing growth temporarily to stabilize operations and validate their business model.

Achieving Product-Market Fit in Specialized Sectors

Specialized sectors like maternal telehealth require a deep understanding of target demographics and market demand. Ruth Health’s niche focus addressed a vital healthcare need but struggled to create a sustainable business model. Startups operating in specialized markets must validate their assumptions about market size, willingness to pay, and scalability. The lack of consistent sales momentum, as noted by Ruth Health’s leadership, further underscores the importance of a robust sales strategy focused on customer acquisition and retention. Early-stage startups must prioritize building a loyal customer base while fine-tuning their offerings to ensure alignment with market needs.

Leveraging Peer Insights and Industry Knowledge

Ruth Health’s leadership emphasized the value of learning from peers in the startup ecosystem. Sharing knowledge and leveraging industry networks can provide actionable insights and help startups navigate common challenges. Collaborative efforts can foster innovation, identify potential pitfalls, and support the development of practical, industry-specific solutions. By engaging with the broader ecosystem, startups can learn from others’ successes and failures, improving their chances of long-term viability.

Balancing Innovation with Operational Feasibility

Ruth Health’s innovative approach to maternal care was commendable, but its operational execution fell short. Startups must balance ambitious innovation with practical strategies for implementation and scaling. This includes investing in operational infrastructure capable of supporting both current offerings and future growth. Iterative development, which involves refining products and services based on real-world feedback, is crucial for ensuring that innovations are aligned with market demands and operationally feasible. Success in digital health requires harmonizing visionary aspirations with the practical realities of healthcare delivery.