April 20, 2024

Digital health startups are running out of cash; immediate sales expected

When telehealth unicorn Babylon collapsed last summer and was forced to sell its assets for less than 1% of what the company was once worth, many industry observers saw it as an ominous sign for the healthcare sector. digital health.

They may have been right. Investors, lawyers, bankers and startups tell Sifted they expect to see more digital health sales in the next 12 months.

In 2023, digital health startups raised just $1.1 billion, according to Dealroom, the lowest amount since 2018 and a long drop from the record $3 billion in 2021. While funding has slowed in European tech , few sectors have experienced a drop of those proportions.

Slower-than-expected adoption of digital health solutions and increased venture capital drawdown by the sector mean startups that emerged during the frothy days are quickly running out of cash.

But while a last-resort M&A seems like a strong possibility for many digital health startups, others smell opportunities in this difficult landscape.

Where did all the money go?

“The entire digital health market has been overvalued,” says Christoph Massner, head of German VC Earlybird’s healthcare technology fund. “We thought we could solve a lot of problems, but adoption was overestimated.”

Throughout 2021 and 2022, major European startup backers such as Accel, LocalGlobe, Index, Balderton and HV Capital collectively participated in 34 digital health rounds. Last year, they participated in only six.

Massner tells Sifted that many digital health startups simply don’t stand up to comparison with others in health verticals like medtech and biotech.

Christoph Massner, director, Earlybird

“There has been a change [away from digital health] and towards those sectors by health technology investors,” he says. “Almost every healthcare investor we know puts more emphasis on biotech and medtech. 1706528588.”

While adoption has been slower than expected, headline-grabbing failures among industry kids have also discouraged venture capitalists, says Johannes Blaschke, head of early-stage healthtech VC Calm/Storm. “Things like Babylon and [US-based digital therapeutics company] Pear Therapeutics happened and had a direct impact on venture capitalists backing digital health companies.”

Other digital health darlings have had to readjust their growth plans as they tighten their finances. All of this has given venture capitalists reason to think twice before backing startups in the sector, Blaschke adds. “It remains to be proven that digital health is a venture capital unicorn case, especially in Europe.”

“2024 will be the year of mergers and acquisitions”

As external funding options dried up in 2023, bridge rounds, generated by existing investors and typically funding a startup for six months to a year, became the norm for digital health startups, Blaschke says.

Across the European tech landscape, around a third of all rounds in 2023 were bridge financing, according to Atomico’s State of European Tech Report, their highest levels in five years.

But as investors double down on their portfolio winners and pull out of others, bridge rounds will decline this year, Blaschke adds. “For many not planning their next round, M&A will become a likely and viable option. 2023 was the year of bridge rounds, 2024 will be the year of mergers and acquisitions.”

Johannes Blaschke, director, Calm/Storm

A lack of alternatives and dwindling cash reserves mean some digital health startups will be forced to sell on the cheap. “There will be a lot of liquidations,” says Blaschke.

But the prospect of startups at cut-price prices opens up a world of opportunity for companies with money in the coffers looking to expand their digital health offerings.

Pharmaceutical companies are a potential group of buyers.

“The pharmaceutical industry has been slower to digitize than other sectors, but it is now rapidly digitizing and acquiring digital health applications,” says Marcus Vass, a partner focused on health technology at law firm Osborne Clarke. “The appetite of the pharmaceutical industry [to acquire digital health startups] It is much higher now than in 2021.”

Big tech companies could also jump on the digital health M&A bandwagon, says Matthew Edwards, another partner at Osborne Clarke.

Marcus Vass and Matthew Edwards, partners at Osborne Clarke

“[Most Big Tech companies] We have venture arms that are looking at health technology and divisions focused on health technology development,” he tells Sifted. “Acquiring digital health platforms is a quick way to enter a market they are already considering.”

Blaschke has heard that traditional healthcare providers, such as private hospitals, are also open to mergers and acquisitions in digital health.

“They have realized that there are other innovative competitors jumping on the digital bandwagon,” he tells Sifted. “To retain the best talent and medical professionals, some digital offering is needed. Staff shortage is a big problem [in the healthcare sector].”

But Massner is more skeptical about the chances of digital health startups finding buyers when the money runs out.

While other health technologies, such as biotechs, have a clear path to an exit from a pharmaceutical company, because they fit perfectly into the drug and treatment development value chains, digital health startups do not always fit with their core business, he tells Sifted.

Then there is also the problem of scale. The revenue those startups generate wouldn’t “make a dent in the revenue of pharmaceutical companies,” Massner tells Sifted.

“We will see many more digital health startups closing [in 2024].”

Startups buying startups

While the funding crisis will likely mean a disappointing sale (or worse) for some digital health startups, others in a stronger financial position are licking their lips.

“Several leading venture capital-backed companies [are] View M&A as a tool to leverage sub-scale competitors, thereby acquiring customers, geographic access and products or features in a capital-efficient manner,” Ashish Patel, CEO of Deutsche Numis, told Sifted earlier of year.

UK-based remote monitoring startup Huma is one of those keeping a close eye on the digital health M&A space.

The company has raised $217 million in funding, according to Dealroom, since launching in 2011 and has acquired two startups in the past two years. It also raised £20.5m in June 2023 to fund the acquisition of a yet-unannounced company.

“Over the last 12 months we have experienced an increase in the number of contacts from companies, their advisors or shareholders looking to see if an acquisition is something we would consider,” a Huma spokesperson told Sifted. “We are more actively seeking [at the M&A market] at this time, given the change in the capital markets.”

French healthcare software company Doctolib, Europe’s most valuable digital health company, also tells Sifted that it plans to be more active in the M&A market in the coming months and years.

And it’s not just late-stage digital health companies that are buying right now.

Blaschke says some of Calm/Storm’s early-stage portfolio companies are already entering into acquisition processes with other startups. Off-price sales are a “huge opportunity” for well-funded startups and pre-seed companies to access talent and expand their offerings, he tells Sifted.

“In the healthcare sector there are many fragmented solutions on small islands, but mergers and acquisitions are needed to achieve horizontal integration. “It is a big step towards a more comprehensive solution,” adds Blaschke.

In a world where many healthcare buyers have begun to suffer from the point solution [healthtechs that focus on one product] fatigue, the struggles of some startups could be just what the doctor ordered for others looking to expand their path to market.

Leave a Reply

Your email address will not be published. Required fields are marked *