Three years after digital health companies received a record $29.1 billion from venture capital funds, they face a far different reality in 2024: trying to raise enough capital in a tight market to stay solvent.
Venture capital investors say many founders are taking bridge rounds, interim funding meant to help startups stay afloat between larger funding rounds. Companies are keeping funding rounds open longer or resorting to convertible notes, a type of debt financing that could convert into equity for investors. The moves underscore how difficult the environment is, and how the high stakes are.
Read more: What’s behind digital health’s funding freefall
“I think there's this wave of reckoning that we're going to see in 2024 into 2025,” said Bill Geary, co-founder and general partner at venture capital firm Flare Capital Partners. "Investors are being more cautious. They're doing more due diligence than they ever have. No matter how high their bar was [beforehand], the bar is even higher [right now]."
Rock Health data found that 44% of last year’s funding deals were unlabeled, meaning they were not designated by a letter or series. That compared with just 22% of deals in 2022. Investors say companies have been unable to meet growth expectations, which means executives have had few choices other than to either accept less money in a funding round or arrange bridge financing.
Alice Zheng, a principal at venture capital firm RH Capital, also forecasts a reckoning. Zheng said investors are focused on supplying capital to a small, exclusive group of digital health companies with proven results. Beyond that group, the vast majority of startups are experiencing a much tougher environment, she said.
“There are lots of good companies that got funded in 2021 that are going to have a harder time because there’s way less capital and the bar is really high,” Zheng said. “So whether your business model is through employers, or through consumers themselves, everybody’s feeling a pinch somewhere.”
The outlook, with many funders sitting on the sidelines, would exacerbate a difficult past year for entrepreneurs in the space. Total venture capital funding for U.S.-based digital health companies was $10.7 billion in 2023, the worst year since 2019, according to Rock Health.
"A lot of people haven't [completed] a deal in a while," said Christina Farr, an investor at venture capital firm OMERS Ventures. "There are partners at funds that have not done a deal in two years, or have not done more than one deal in two years because of the way the market has been."
While unlabeled rounds might buy some companies enough time to hit financial and performance-based benchmarks set by investors, others are likely to struggle and a bridge round may just delay the inevitable.
“[In 2024], I think it's going to look like a year of increased company failures. It's going to look like a year of increased down rounds,” Geary said. “The reality is, some of that should have been spread out over 2022 and 2023, but it just got delayed."
In a potential sign of things to come, several digital health companies have undergone layoffs since January. Redesign Health, which helps create and invests in healthcare startups, laid off 77 employees last week.
In an email to employees, Redesign Health CEO Brett Shaheen said the job cuts were due to slower-than-expected recovery in the U.S. venture capital market that has affected the pace of new company creation. Amwell, Found and Nomad Health also have cut jobs since the start of the year.
