Q&A: The place digital well being funding may go in 2023

After a 12 months of mega-rounds, skyrocketing valuations and a parade of rising digital well being startups, the funding panorama seemed a lot extra tepid in 2022. 

However there are nonetheless loads of alternatives for startups, particularly for firms that may show their worth amid a difficult financial surroundings, mentioned Dr. Sunny Kumar, associate at GSR Ventures. Kumar sat down with MobiHealthNews to debate digital well being funding this 12 months and his predictions for 2023. 

MobiHealthNews: What are a few of your large takeaways once you look again at digital well being in 2022?

Dr. Sunny Kumar: 2022 has been a 12 months of transition, and a 12 months of a wholesome reset, the place we noticed the exuberance of 2021 come down and, truthfully, expectations normalize as a mix of macro components — whether or not that be the rate of interest, what’s been occurring in Europe with the battle between Russia and Ukraine, what’s been taking place in Asia with “zero-COVID,” the availability chain — affecting the complete financial system, together with the healthcare ecosystem. 

Buyers, startups, massive firms have all taken a step again and reassessed the ecosystem, saying, “The place are we really creating actual worth?” And I believe that is been the query that each one of us, particularly the investor group, are asking.

Digital well being on the finish of the day can create absolute, probably even world-changing worth. However in some instances, that will have been somewhat bit overhyped previously few years, particularly through the COVID interval. To not choose on any of them, however you noticed some firms, perhaps within the tech-enabled providers, telemedicine firms like Teladoc, that went on the peak as much as 25 to 30X income multiples. And most of the people will inform you right this moment that that was in all probability too excessive. 

At this time, these firms are buying and selling at 2X, 3X income multiples within the public markets. Possibly that is too low, however that is the place we’re right this moment. I believe what we’re seeing now could be the markets resetting, realigning.

As we glance ahead, I believe the query now could be, the place are we going to create actual worth? And I believe that is what the long run goes to be about. The place’s that top ROI [return on investment]? The place do we now have the proof for scientific validation? The place are we going to have the ability to deploy know-how to create transformative outcomes?

MHN: Do you assume a few of this was predictable final 12 months?

Kumar: A few of it is all the time simpler to see in hindsight, for certain. Among the alerts have been positively there. I believe a few of the buyers in all probability acquired somewhat bit forward of themselves with how keen we have been to put money into a few of these firms. 

I will provide you with some examples of these alerts. Traditionally, we’d take our time with diligence, with ensuring that we knew the ins and outs of firms and that we understood not solely the complete ecosystem, however the specifics of firms. A few of these practices began getting curtailed. 

You began seeing firms exit to fundraise and time period sheets being issued typically inside per week or two, typically even inside days of firms going out to fundraise. So, once you begin seeing alerts like that, I believe that is once you begin seeing indications that we could also be stepping into somewhat little bit of a hype cycle. 

It does not imply that the businesses themselves have been dangerous or are doing the flawed issues. However it may need been a sign that we have been getting somewhat bit an excessive amount of on the overexcited aspect of issues. 

So, I believe you are simply now beginning to see a few of that come again. Should you look right this moment, there are nonetheless fundings taking place, nonetheless nice firms on the market. However you are beginning to see a normalization again in direction of the traditional diligence cycles, individuals doing the work. 

We’re lucky that we’re not having one other Theranos within the healthcare surroundings – not less than, we’re not seeing that at that very same scale. We’re not having one other FTX on the healthcare aspect of issues. However I believe you see extra of these sorts of issues when you do not have that full diligence course of, when you’ve of us which can be perhaps so keen to leap into firms that they are not doing the total work that they may have in any other case completed. They are not demanding the total oversight of firms that you simply would possibly in any other case have in a extra regular surroundings.

MHN: So, we all know that digital well being funding fell considerably this 12 months. How did that have an effect on your decision-making? And the way did you advise your portfolio firms, or firms you have been contemplating investing in?

Kumar: It is positively come down. I believe it is come right down to a comparatively regular degree, so it hasn’t completely cratered. Should you evaluate it to 2021, it is completely down – there is not any doubt. However for those who evaluate it to 2020 or 2019, it is similar to these ranges.

However on the finish of the day, it hasn’t been an enormous, huge change to the purpose the place there’s panic within the markets. That mentioned, it has modified conduct. Even previous to 2021, there was a mindset that firms ought to develop, and to some extent, “develop in any respect prices.” Progress was the primary factor that was valued. 

From a startup perspective, what’s modified right this moment — and that is particularly seen within the public markets, and this carries upwards into the non-public markets — is to develop, however develop in an optimum method. That signifies that whereas development is valued, you should not be prioritizing development over every thing else. You need to ensure that your development is going on at a tempo that’s accountable relative to your different prices. 

Do you’ve a plan to get to profitability, or not less than money movement breakeven? And the fascinating factor is, you are seeing that [question] at earlier and earlier levels. It was frequent that the majority firms could be going public nicely earlier than profitability. And you wouldn’t even hear the phrases “give a path to profitability” at a Sequence C or Sequence D stage. These days, it isn’t unusual to listen to buyers ask a Sequence A or Sequence B firm going out to fundraise, “Do you’ve a plan to profitability?” And I believe some would possibly say that is somewhat little bit of an overcorrection. However I believe, total, that is wholesome for the surroundings.

MHN: What do you assume the funding panorama will seem like in 2023? Do you assume it can enhance in contrast with 2022? And what do you assume are going to be a few of the engaging therapeutic areas and worth propositions subsequent 12 months?

Kumar: I believe for those who have a look at it on a run fee foundation, the full quantity of {dollars} will in all probability look just like 2022. From a run fee foundation from the place we ended up in Q3, This autumn, I really anticipate us to bounce again somewhat bit above the place we find yourself on the backside of Q3, This autumn. So, I really assume this can in all probability be the general lull available in the market. 

Should you have a look at who’s on the market within the ecosystem right this moment, the valuations are nonetheless correcting. Some of us on the market are nonetheless normalizing, with the correction within the public markets to the non-public markets. And I believe that is very regular. Valuations acquired very, very excessive, multiples acquired very, very excessive in 2021. Many firms went out to fundraise, and I believe a few of that’s nonetheless percolating all through the non-public markets. 

Many firms who raised in 2021 have not felt a robust must exit to the non-public markets to fundraise once more. We’ll begin to see a lot of these firms come again to market in 2023. And I believe that can kick off one other spherical of fundraises. Should you have a look at the information, there are nonetheless really fairly just a few firms fundraising within the seed and Sequence A and, to some extent, the Sequence B. However you have not seen as a lot within the Sequence C and collection D levels. I believe that these firms will begin coming again to market in 2023, particularly in mid-2023 and later. So, total, I anticipate issues to normalize after which begin to come again, particularly within the latter half of 2023. 

Should you have a look at particular sectors, I believe that there is going to be plenty of areas which can be going to be fascinating. However I believe an important drivers of areas of curiosity are going to be the place there’s going to be a excessive ROI and worth proposition. It is very, very possible that the U.S. and the world goes to enter a extra contractionary interval. It is possible we will have a recession, and it’s in all probability going to have an effect on healthcare. 

So, for those who have a look at the entire consumers — whether or not that be well being techniques, payers, pharma, even customers themselves — all of them are going to be somewhat bit extra conscientious with their spending. So, what we have seen already is that anyone promoting to these clients has to ensure that their answer is both mission important or producing an especially excessive worth proposition. So, for those who’re producing $5, $10 again for each greenback spent, that is one thing that is going to have the ability to justify that spending even in that contractionary surroundings. If it is nice-to-have, if it generates 10% to twenty% ROI or has a extremely lengthy payback interval, these are options that I believe are going to be somewhat bit more difficult within the close to time period.