5 VCs on digital health investing in a down market

While the digital health funding market has come down from its 2021 peak, investors say there are plenty of checks to be written.   

In the year’s first six months, the industry saw $6.1 billion invested in 244 digital health companies, compared with $10.3 billion in 329 deals in the same period a year ago, according to data from Rock Health, a digital health research firm. The average deal size in the year's first half was $24.8 million, a $1.7 million decrease from 2022. 

Read more: What's behind digital health’s funding freefall 

But a down market doesn’t mean investors are giving up on digital health, just choosing their bets more carefully. Five venture capital investors share what areas excite them. 

Emily Zhen, principal at Zeal Capital Partners: "The innovation will come from different specialties that still are slower on the adoption curve to value-based care. It will take time, just given the incentives and the fee-for-service system today. It's also certain subcategories that haven't been as targeted yet within Medicaid or dual eligible populations. We saw a lot of a lot of innovation in Medicare Advantage in the first wave. Medicaid is huge. It's not just one behemoth of a population. There are subpopulations within it. I still believe that there's opportunity in this segment as it shifts towards value." 

Jason Fiedler, managing partner at Left Lane Capital: "Right now, we are leaning into more higher-acuity care companies. I’m not talking necessarily about hugely intensive outpatient care but, for instance, we are investors in Talkiatry for mental health. They offer psychiatry, which is a relationship between patient and psychiatrist that can last several years. It’s not a one-off encounter. It’s the same thing with our investment in AnswersNow and applied behavioral analysis in autism care. That’s a five- to 10-year relationship. We are going after the long-term wallet spend of consumers." 

Bradley Sloan, managing partner at Questa Capital: "There have been so many companies in digital health that have gotten funded over the past several years. A lot of them are ideas or apps. They're not business models. One of the things we're very focused on is underwriting businesses that have great unit economics, gross margins and customer lists. And they need to have big moats. Two of the biggest moats are software technology companies serving the pharma and serving payer companies. We like digital health companies serving providers too, but a lot of that centers around the electronic health record and revenue cycle management. There’s a little less innovation there and sales cycles tend to be very long."
 

Scott Kolesar, managing partner at Caduceus Capital Partners: "Most of our portfolio companies in the past four or five years have had an [artificial intelligence] component. More and more [companies] are leaning on large volumes of models and that type of Chat-GPT type of stuff, but we're very cautious in that area. We think that's going to be a significant area of growth. It's going to be a game changer. But like in the 1990s, just because you have a web page on the internet doesn't mean you're going to be a viable company. So we're looking at the practical use of AI, particularly around clinical applications." 

Alyssa Jaffee, partner at 7wire Ventures: "Many digital health companies started in low acuity because it was easier, but ultimately the inflection points that you create become really great when you can tackle higher-acuity care. [Our firm] invests in more vertical players so we like to focus on companies that solve real problems, companies that can really drive value for specific populations. Then once they show the clinical outcomes and build the relationship with the health plan, they can expand more horizontally."