Last year, fundraising in the digital health space took on a bit of a different shape. Startups tried out some creative ways to keep their businesses afloat — including series extension rounds, unlabeled fundraises and silent deals from existing investors.
This year, industry experts think that some digital health startups will have to confront their challenges more head-on. Some companies may need to do things like fundraise at a lower valuation, explore opportunities for an acquisition or exit or, in some cases, consider the possibility of shutting down operations.
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The many digital health startups that raised large rounds in 2021 (and the couple months both preceding and following that year) will face critical fundraising milestones this year, pointed out Cheryl Cheng. She is CEO of Vive Collective, an investment platform for digital health companies.
“[Digital health startups] will contend with valuation overhangs that have not been bridged by organic growth and a tighter macro investment environment. Reduced valuations and exits are a very real possibility,” Cheng declared.
Many providers have point-solution fatigue, and the push to move toward platforms will also force some startups to sell, she added.
Cheng also pointed out that investors are prioritizing profitability over growth this year. As such, she thinks digital health companies that are within 24 months of being EBITDA positive will have an easier time raising capital than those that aren’t. EBITDA stands for earnings before interest, taxes, depreciation and amortization and is a way to analyze a company’s financial condition. For earlier stage companies, Cheng thinks those with strong unit economics will have less difficulty fundraising than others.
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Additionally, companies that were able to demonstrate steady growth during the last two years due to an inherently strong business model or technology advantage should also have an easier time with fundraising, Cheng noted.
Ian Wijaya, managing director at investment bank Lazard, agreed that some digital health startups might need to face the music in 2024. Investors today have a “much more discerning approach” when determining which companies they should give capital to, he said.
“We are already seeing an increasing number of digital health company boards asking the question ‘We have X months of cash runway left, and it looks like both the M&A and financing markets are starting to improve, so should we explore a sale in parallel with a financing?’” Wijaya explained.
That said, he believes “the specific quality of the company and the value it can achieve across its strategic alternatives” will drive the pricing of any individual deal.
In Wijaya’s view, digital health startups must thoroughly explore their strategic alternatives. If they do this, then the board will be turning over cards with maximum insight and clarity on what is actionable versus what is fantasy, he declared.
He also noted that when it comes to M&A, the best outcomes on the sellside tend to come when companies are bought, rather than sold. In other words, companies seeking to sell or divest themselves usually achieve more favorable results when potential buyers actively express interest and initiate the acquisition process.
“That requires bespoke engagement with key decision makers at the right subset of potential buyers, identification of synergy sources, highlighting the true scarcity value of the asset, creating credible competitive tension and ensuring the company has sufficient time/runway to explore its alternatives,” Wijaya remarked.
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