Many digital health startups are quietly raising down rounds and closing up shop. Here's why.
NEWS | 17 December 2024
Hundreds of healthcare startups haven't raised fresh venture funding since 2021. Now VCs say many digital health startups are cutting their valuations to live another day. Investors said numerous startups were quietly folding, while others hope to get bought out. For a moment at the beginning of 2024, as healthcare investors broke out their checkbooks after a two-year funding desert and gave new life to a struggling class of startups, it looked like starving healthtech founders would be fed once more. This year's new funding reality hasn't given all the healthcare darlings a seat at the table. The healthcare startup Forward abruptly shut down this month after raising a $100 million Series E last November for its AI "doctor in a box," a bet marked by numerous logistical and financial challenges. Many more startups are quietly struggling — cutting their valuations, selling off assets, or closing their doors without any announcement, investors told Business Insider. While in 2021 there were a record 729 healthcare-startup deals, amounting to an eye-popping $29.1 billion, the first three quarters of 2024 brought in only about half of those deals, with much smaller checks: Startups had raised $8.2 billion through September in 379 deals, per Rock Health. The dropoff suggests hundreds of startups that nabbed funding during venture capital's ZIRP period have been left out to dry. PitchBook data showed that as of mid-November, 327 digital health startups that grabbed funding in 2021 hadn't raised since. Not even the AI boom, which has brought back-to-back fundraises for hot healthcare startups like Abridge, can make up for the discrepancy. Investors told BI that dozens of startups were raising funding rounds at a valuation lower than their last round, also known as a down round, or hoping to merge with a competitor to extend their lifespans. Others could shut down altogether. "There are more digital health companies that are selling assets, selling people, or whatever they can," said Greg Yap, a partner at Menlo Ventures. "This is a difficult market. We're definitely not done with companies going out of business." Same companies, different terms After healthcare startups raised big rounds in 2021 at high valuations and then the floor dropped out, plenty of investors threw their startups a lifeline with bridge rounds, meant to give founders a handful of extra cash to get them to their next labeled funding round. But those firms are done propping up portfolio companies that still aren't succeeding as expected, several healthcare VCs told BI. As AI startups explode in popularity, some limited partners just want the funds they're backing to focus on new and exciting deals and cut their losses, said Doba Parushev, a vice president of CareFirst BlueCross BlueShield's Healthworx Ventures. "At least for some firms, the LP sentiment is it was a bad vintage. It's done, move on. That's liberating," Parushev said. "I think that's probably driving some behavior around not doing any more internal defensive rounds." Some VCs are turning to new AI investments as their healthcare portfolios struggle. Getty Images; Jenny Chang-Rodriguez Some startups will thus need to adjust their prices to get the chance to raise more capital from new or existing backers. Alyssa Jaffee, a partner at 7wireVentures, said she was still being pitched some too expensive deals, with hints of the funding expectations left over from 2021's heyday. But she's seeing more healthcare companies accept the need to take a valuation cut to hit their milestones. Related stories "I would actually hope that more companies said, I'm OK with a down round. We recognize that we were mispriced in the market, and we need to rightsize," she said. "There are expectations from earlier investors who don't want to necessarily take the markdown but may need to take it because that's what's right for the business." While down rounds are happening at every stage, investors said Series B and C startups may be the most likely to cut their valuations since they're more likely to have revenue traction that suggests they're worth continuing to bet on. Seed and Series A companies, on the other hand, could be more likely to shut down without that traction. Ruth Health, a startup that provided pregnancy and postpartum care, announced it was closing in November after failing to find the necessary product-market fit. The company last raised a $2.4 million seed round in 2022. "Layoffs are awful. Seeking acquisition is humbling. Selling your baby for parts gets demoralizing," Alison Greenberg, the startup's CEO and cofounder, said in a LinkedIn post about the shutdown. "The checklist for a wind-down is long." Tie-ups and shutdowns Not all healthcare shutdowns this year have happened quietly. Forward made headlines when it announced it was closing up shop a year after raising $100 million to scale its AI-powered kiosks, called CarePods. A BI investigation revealed technical and logistical snags in Forward's style-over-substance strategy — such as its self-service blood draws not working as expected, and patients getting stuck in the CarePods. But investors said many more healthcare businesses shut their doors under the radar this year, especially seed and Series A companies, which have the benefit of fewer eyes on them. This phenomenon hasn't been specific to healthcare — data from Carta indicates 254 venture-backed startups across all sectors went bankrupt in the first quarter alone. And Parushev said he was expecting plenty of healthcare bankruptcies still up ahead. Forward's San Francisco clinic. The startup said on November 12 that it would close its clinics effective immediately. Rob Price/BI To avoid a shutdown, some startups are looking to combine with a competitor. VC firms might move to revitalize two of their portfolio startups at once, as in the case of LetsGetChecked's $525 million acquisition of Truepill. Both startups are backed by Optum Ventures. Axios reported in August that LetsGetChecked was seeking $150 million in a convertible note to help finance the deal. Galym Imanbayev, a partner at Lightspeed Ventures Partners, said he was seeing a fair amount of similar pitches packaged as "consolidation rounds" rather than down rounds — startups raising more money to enable a merger or acquisition. That's generally a more attractive option to investors than a straightforward down round, he said. Menlo Ventures' Yap said other startups were choosing to get folded into a competitor without fanfare. "Nobody wants to make a big deal out of a company that didn't quite work out. A lot of that is happening, but if you don't have to announce it, why would you?" he said. "The surviving company, the acquiring company, can just get a little bigger and announce it whenever it makes sense, or not announce it at all." Umar Afridi and Sid Viswanathan cofounded Truepill. Courtesy Truepill The next chapter Healthcare still has plenty of room for winners. Startups like Hinge Health and Omada Health are expected to test the IPO waters next year, and private-equity firms are looking for healthtech companies to scoop up. Certain areas of healthcare will have to work harder than others to make it to the other side. While healthcare AI deals have taken center stage this year, virtual care has faltered; telehealth startups nabbed $1.4 billion in VC capital in the first three quarters of this year, compared with $2.8 billion in total last year (and $10.2 billion in 2021), according to PitchBook. Broadly, healthcare services have fallen out of favor, with clinic startups struggling to deliver returns against capital-intensive models and retailers like Walgreens and Walmart downsizing their healthcare offerings or ditching them altogether. VCs told BI they were pushing the next generation of healthcare startups to have better discipline in balancing growth with profits. "Hopefully now people have a more sober view of what it takes to be sustainable, and there'll be a set of companies that may choose to grow a little bit more slowly but with good unit economics and with EBITDA, with profits," Yap said. "That can give them the opportunity to not be subject to the vagaries of venture capital, private equity, and other people's money."
Author: Rebecca Torrence.
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