4 Things Digital Health Investors Need To Get Off Their Chest

During a panel at MedCity News’ INVEST conference, venture capitalists shared some of their takes on today’s healthcare funding landscape — including their thoughts on AI and the industry’s slower investment pace.

From left to right: Jack Stockert, managing director at Health2047; Fatima Husain, managing partner at Mosaic General Partnership; George Khalife, vice president of Midwest U.S. at Toronto Stock Exchange; Nancy Sullivan, CEO of Illinois Ventures; and Shawn Ellis, managing partner at Distributed Ventures

Healthcare startups’ funding environment this year may be characterized by a slower investment pace and more deal scrutiny, but that doesn’t mean that the healthcare innovation market is in a grim place, according to a panel of venture capitalists at MedCity NewsINVEST conference in Chicago.

During a Tuesday session, the panelists shared some of their takes on today’s healthcare funding landscape.

It’s not a bad thing that the digital health investment market has cooled off.

It’s no secret that the digital health funding market looks quite different than it did two or three years ago. 

U.S.-based digital health startups ended last year with a fundraising total of $10.7 billion, marking the lowest annual fundraising amount the sector has seen since 2019. The sector’s fundraising total for the first quarter of this year was $2.7 billion, showing that digital health startups are now pretty far removed from the type of frenzied investing that took place in 2021 and 2022.

In 2023, it became apparent that digital health founders were having a bit of a “burn runway issue” — meaning that their startups were facing challenges related to how quickly they were spending their capital and how long they could sustain operations before running out of money — pointed out Shawn Ellis, managing partner at Distributed Ventures

“Founders were willing to come to the market and take a reset in terms. I think where we are now, the market is sort of digesting,” he said. “I think people are still pouring capital — there’s money to be had. But I will say, I’m seeing founders who are more disciplined with what they’re building — paying more attention to unit economics, contribution margin, thinking critically about the milestones in their business and the KPIs they need to show all the way.”

This doesn’t mean that the digital health funding market is doomed — it means that the market now has a discipline that “probably was lacking” in previous years, Ellis noted. In his view, some much-needed practicality has been injected into the funding environment.

Fatima Husain, managing partner at Mosaic General Partnership, agreed with Ellis. 

“I think what’s really valuable in today’s environment is that everything has gotten recentered a little bit. The focus is not looking at incremental shifts in what’s already existing, but rather at truly radical movements,” she declared.

To Husain, this kind of course correction was necessary. Capital deployment has certainly gone down in comparison to what it looked like a couple of years ago, but this by no means signals that digital health founders are working with an impossible market, she said. It just means that investors are giving their money only to companies that deserve it. 

Investors are much more than money machines — they help startups create the network they need for commercialization.

As an investor, Husain wants to help her portfolio companies sustainably accelerate their profits to the best of her ability. So once she decides that she would like to invest in a startup, she quickly starts to help the company build the network it will need for eventual commercialization, she remarked.

This means bringing in her connections from the healthcare operator and health system worlds, Husain explained.

For instance, she and her team helped introduce their portfolio company Better Health — a durable medical equipment supplier — to health systems that could help the startup build a better patient experience, she said.

“It was a vote of confidence from a whole bunch of our health systems — two of which came into the round in conjunction with us as strategic investors who were working alongside the company to create the exemplary patient experience it needed,” Husain noted.

She and her team were also able to connect Better Health to Healthworx, the investment arm of CareFirst BlueCross BlueShield, early on in the startup’s journey, she added. Introducing these types of partners is something that investors should do sooner rather than later, Husain pointed out.

A lot of AI startups seem like they’re products rather than companies.

When she comes across a healthcare AI startup, Nancy Sullivan, who serves as CEO and managing partner at Illinois Ventures, said she asks herself one question: Is this a product or a company?

“I’ll give an example — the drug discovery process. We’ve seen a lot of AI-enabled drug discovery, and I think that helps, but I don’t know if that’s a standalone,” Sullivan said.

Another panelist — George Khalife, vice president of the Midwest at the Toronto Stock Exchange — gave a piece of advice to young AI startups. He said they need to make sure that AI is an integral part of their core business rather than just a trendy add-on.

“If [AI] is your central story and it’s really impactful to your theme, stick with it and be consistent — because just like money comes in quick, money also washes out,” Khalife declared.

Diversity really does matter — and there are ways to take actionable steps toward a more inclusive industry.

There is a persistent diversity problem in the allocation of venture capital funding — and this goes for most industries, not just healthcare. For instance, Black-founded startups received just 0.5% of the $140.4 billion raised by all U.S.-based startups last year, and research shows that female founders raise only 2% of venture capital dollars annually.

Husain noted that this is the result of systemic issues rooted in historical injustices. So in order to effectively address this diversity problem, investors must take it seriously, she said.

In all of the term sheets that her firm signs, there is a clause that stipulates diversity requirements for its portfolio companies, Husain explained.

“The clause says that as you’re building your companies, they need to reflect the population that you’re headquartered in,” she said. “Even if it’s an entry-level engineering team.”

Picture: Gabriela Golumbovici, Breaking Media