With rising interest rates since 2022 making a significant impact on the venture capital market, digital health companies have faced a challenging environment. Consequently, funding for these organizations saw a dramatic decrease in 2023; from a high of $29.1 billion in 2021, the funding fell to only $10.7 billion, according to data from Rock Health.
Yet, even amidst the seemingly pessimistic landscape, digital health companies continue to attract venture capitalists. For instance, some businesses successfully managed to close ample funding, as high as $31 million Series B, in this tight market.
Such fundraising success largely hinges on four critical factors that entrepreneurs must skillfully demonstrate: a sizable total addressable market, sturdy unit economics and product-market fit, a world-class team, and an enticing plan for the future.
Digital health companies that seek to grab investors’ attention need to illustrate that they are trying to solve significant issues that profoundly affect people. For example, companies that focus on gut health education have successfully impress potential investors with their large addressable market, as supported by data from reputable entities like the CDC and NIH. By comparing these figures to familiar markets, such as those of diabetes, mental health, and musculoskeletal care, entrepreneurs can underline the immense promise of digital health solutions.
From a business standpoint, demonstrating strong unit economics and product-market fit are just as fundamental. Investors look for proof that companies can create their products profitably and maintain their unit economics as they grow. Additionally, they want assurance that the market requires the product that companies are offering profitably. Industry benchmarking resources, like those provided by Rock Health, can help provide these demonstrations. These resources outline venture capitalist-specific profitability expectations, enabling businesses to illustrate their gross margin profiles, customer acquisition cost, average LTV of customers, and monthly burn rates with clearer, investor-pleasing precision.
Transparency about the company’s vision and feasibility of that vision is integral to fundraising success. Investors are not just looking for striking plans for the future; they seek plans that entrepreneurs are capable of executing. Roundabout forecasts and dreamy outcome possibilities can make these pitches more concrete and compelling.
Lastly, the team behind the product and business plan plays a pivotal role. Building a team with top-tier talent, characterized by domain expertise and a successful growth track record, gives investors the confidence they need in the business’s potential.
It’s also worth noting that relationships with investors, besides funding, could be of great value for entrepreneurs. These connections not only facilitate understanding of what investors look for but also allows for valuable feedback. They can also ease the pitching process, making it less about familiarizing potential investors with the business and more about the business values and potentials.
In this challenging market, it’s important for entrepreneurs to remain dedicated to their mission. Fundraising efforts should not just be about financial gain; it should also be seen as a path to create a greater impact, particularly on the lives of the patients they service, which might often be the core mandate of digital health businesses.
For a more comprehensive understanding of these strategies and tactics, interested readers can refer to the reflections of multiple industry insiders here.