In order to secure capital in the current digital health fundraising environment, startups must adopt a greater focus on profitability and the sustainability of their unit economics, according to Ian Wijaya, managing director at investment bank Lazard.
The digital health sector ended last year with a fundraising total of $10.7 billion — the lowest amount of capital invested in U.S.-based digital health startups since 2019. In an interview this week, Wijaya pointed out that there were several reasons for this — including uncertainties around the Federal Reserve’s interest rate cuts, inflation, two wars, lengthened sales cycles in the health IT space, and investors returning to a more conservative, ROI-focused mindset. Gone is the Gilded Age of 2021 — when digital health startups raised $29.1 billion across 729 deals.
This year will likely be a transitional year from a deal dollar-volume standpoint — and potentially more active than 2023 — Wijaya predicted.
“More specifically, the 2024 recipe is this: greater clarity on interest rates — and thus, more normalized post-2021 valuation multiples — plus a renaissance in technological innovation, plus an improved business quality seeking investment, plus pent-up demand for capital to be deployed, albeit with discipline,” he explained.
In this new environment, investors are looking beneath the surface to understand more about company-specific dynamics and the nuanced crosscurrents of the market, Wijaya declared.
For instance, investors are monitoring the extent to which a disproportionate amount of capital will compete for the highest quality startups. They are working to determine what a best-in-class multiple could look like in the new fundraising landscape versus what an “average company” can command, Wijaya remarked.
Additionally, venture capitalists are paying close attention to what the mix of early, middle and late-stage investments looks like, as this could signal a potential reopening of the IPO market window this year, Wijaya pointed out. He also said that investors are tracking “the degree to which strategic players en masse get deals done,” as this lets them know how to keep pace with a long-term vision that “requires inorganic growth in a quickly-evolving chessboard.”
Overall, Wijaya thinks this year will require startups to focus more on their unit economics and pathway to profitability. He’s not saying that every single early-stage digital health company needs to have a concrete plan to reach profitability, but the ability to achieve profitability will be more important in 2024 than it has been in the past four years or so, he noted.
It’s also important to remember that digital health investors assess startups by looking forward and backward, Wijaya pointed out. When making investments, they consider the growth trajectory, as well as look backward from a potential exit valuation pathway, he explained.
“The base case market expectation for 2024 is for there to be somewhat greater quality and clarity across both of these dimensions over the course of the year, though the quality of the specific asset — and thus its alternatives to doing a financing round or being acquired — will drive specific pricing and deal dynamics,” Wijaya stated.
