Many digital health initiatives are raising the bar for silence and closing shop. Here is the reason.

• Hundreds of health startups have not raised new funding since 2021.
• Now, VCs say many digital health startups are reducing their values ​​to live another day.
• Many startups are quietly folding, investors said, while others are hoping to be bought out.

For a brief moment at the beginning of 2024, as healthcare investors open their books after two years in the financial wilderness and breathe new life into a struggling group of startups, it seemed that hungry health technology founders would be fed again.

This year’s new financial reality hasn’t given all the past darlings of health care a seat at the table.

Healthcare startup Forward made headlines this month when the operation abruptly shut down after raising $100 million Series E in November 2023 for its AI doctor-in-a-box, a bed marked with problems of Many of the management and finance, Business Insider found.

Many startups are quietly struggling — cutting their valuations, selling assets, or closing their doors without announcement, investors told Business Insider.

While 2021 saw 729 health startup deals, a total raised of $29.1 billion, the first three quarters of 2024 brought in nearly half of those deals with much smaller check sizes, of the $8.2 billion raised through September. 379 deals, according to Rock Health.

The drop suggests hundreds of startups that received funding during the VC ZIRP have now been left out to dry. As of mid-November, PitchBook data shows 327 digital health startups that received funding in 2021 but have not raised since then. Even the AI ​​boom, which has brought recent funding for hot health systems like Abridge, can make up the difference.

Investors told Business Insider that many startups are now raising funds at a lower price than their last round, also known as a “down round”, or are hoping to meet someone who compete with them to prolong their life. Some could close completely.

“There are a lot of digital health companies that sell goods, sell people, or whatever they can,” said Greg Yap, a partner at Menlo Ventures. “This is a tough market. We’re certainly not done with companies going out of business.”

Same companies, different words

After health services raised large shares in 2021 at high prices – and the floor fell – many investors threw their health systems with a bridge, which was intended to give the founders more money to take them to their next funding round.

Related stories

But those firms have stopped backing portfolio companies that aren’t performing as well as expected, several healthcare VCs told BI.

As AI startups proliferate, Doba Parushev, vice president of CareFirst BlueCross BlueShield’s Healthworx Ventures, said some limited partners simply want the money they’re backing to focus on new and existing deals. fun and reduce their losses.

“At least for some firms, the perception of LP is that it was a bad past. It’s over, move on. That’s liberating,” Parushev said. “I think that maybe it keeps the person from doing some of the internal defenses.”

Therefore, some startups will need to adjust their pricing to get the chance to raise more capital from new or existing backers. Alyssa Jaffee, a partner at 7wireVentures, says she’s still being bought deals that are too expensive, with data on the remaining revenue expectations through 2021. But she sees more health care companies embracing the demand. of taking quality action to achieve their milestones.

“In fact, I hope that many companies say, it is good to go down. We realize that we were expected badly in the market, and we need to be right,” he said. “There are prospects from earlier investors who don’t want to take the brand but they may need to take it because it’s the best fit for the business.”

While downside is happening at every stage, investors have said that Series B and C launches may be a great opportunity to reduce their value now that they have access to a large amount of cash. suggesting that they should continue betting.

On the other hand, Seed and Series A companies are likely to close without that process. Antenatal and postnatal care startup Ruth Health announced it was closing in November after failing to find the product it needed to market. The company last raised $2.4 million in seed funding in 2022.

“Losing a job is terrifying. Looking to find it is humbling. Selling your baby for parts to find despair. The list of downsizing is long,” Ruth Health CEO and co-founder Alison Greenberg said. wrote in a LinkedIn post about closing.

Tie-ups and closures

Not all health care disruptions this year have happened quietly. Health clinic startup Forward made headlines in November by announcing it was closing up shop, a year after raising $100 million to scale up its AI-powered kiosks called CarePods. A Business Insider investigation revealed technical and logistical pitfalls in the Forward-over-substance strategy — such as automated blood draws not working as expected, and patients clinging to CarePods.

But investors have said that many other health care businesses have closed their doors under the radar this year, especially seed and Series A companies, which have little eye on them. This event is not focused on healthcare yet – 254 startups are supported by businesses everywhere. sectors collapsed in the first quarter of 2024 alone, according to Carta. And Healthworx’s Parushev said he expects more health issues to come.

To avoid closure, some startups want to merge with a competitor to extend the lifespan of both companies. VC firms may be moving to renew two of their portfolios at once, such as LetsGetChecked’s $525 million purchase of Truepill. Both startups are backed by Optum Ventures.

Axios reported in August that LetsGetChecked was seeking $150 million in a convertible note to help finance the sale. Galym Imanbayev, a partner at Lightspeed Ventures Partners, says he sees a fair number of similar investments as “merging rounds” rather than downwards — startups raising more capital to help consolidate or to get. He said that’s a more attractive option for investors than the straight line approach.

Some startups prefer to establish themselves as competitors without fanfare, said Menlo Ventures’ Yap.

“Nobody wants to make a lot of money from a company that didn’t do well. A lot of it happens, but if you don’t have to publicize it, why publicize it?” he said. “The surviving company, which is the acquisition company, can grow a little bit and go public whenever it makes sense, or not go public at all.”

The next chapter

Health care still has plenty of room for winners. Startups like Hinge Health and Omada Health are expected to test the IPO waters next year, and private equity firms are looking for health technology companies to acquire.

Some areas of health care will have to work harder than others in the opposite direction.

While healthcare AI interventions have taken center stage this year, actual care has slowed; Telehealth applications won $1.4 billion in VC capital in the first three quarters of this year, compared to $2.8 billion in total last year (and $10.2 billion in 2021), according to PitchBook data. In general, health services are out of favor, with clinic startups struggling to offer reimbursements against more powerful brands and retailers like Walgreens and Walmart downgrading their health offerings or they completely abandon them.

VCs told BI that they are pursuing the next generation of health services for a better discipline to balance growth and profitability.

“Hopefully, now people have a clearer view of what it takes to be sustainable, and there will be a group of companies that will choose to grow slowly, but with good unit economics and EBITDA, with profit,” said Yap. “That would give them an advantage not to be subject to negative business conditions, private equity and crowdfunding. “