Industry experts are forecasting a challenging year ahead for digital health startups. Unlike in the past, businesses in this sector are expected to confront their struggles head-on this year. Startups may need to explore different avenues of action, including fundraising at lower valuations, investigating potential acquisitions or exits, and in some instances, considering shutting down operations if necessary. Link to Image
An industry analysis indicates that digital health startups which garnered significant funding in 2021, along with those in months preceding and following that year, will face key fundraising landmarks this year. The words of Cheryl Cheng, CEO of Vive Collective, an investment platform for digital health firms, echo this sentiment.
Cheng asserts that these startups will battle with valuation overhangs that aren’t compensated by organic growth, in a tighter macro investment environment. Cheng believes the very real possibility could be reduced valuations and exits. She observes provider’s fatigue with single-solution options and predicts this discontent will push some startups towards acquisition.
The CEO further underscores that investors are prioritizing profitability over growth this year. Firms that are within 24 months of being EBITDA positive will have an easier time sourcing new investments compared to those that aren’t. Furthermore, earlier stage companies with robust unit economics are likely to encounter less difficulty during fundraising.
In addition, Cheng points out, companies that have consistently exhibited growth over the last two years due to inherent solidity in business model or technological advantage, should also experience comparative ease while fundraising. Ian Wijaya, managing director at investment bank Lazard, concurs with these sector-specific predictions and emphasizes the contemporary investor’s “more discerning approach”.
Wijaya also advises digital health startups to painstakingly examine their strategic alternatives. For companies considering M&A, the best outcomes often arise when they are bought, rather than sold. In essence, companies looking to divest themselves usually fare better when potential buyers take the initiative of expressing interest and initiating the acquisition. This calls for careful engagement with the right subset of potential buyers, and a thorough understanding of their potential synergies and unique value proposition.