VC market survey reveals priorities, challenges, market conditions, sectors of interest, and clinical indications for 2023.
While the overall U.S. venture capital ecosystem weathers stiff economic headwinds with deal counts and exits hovering at pre-pandemic levels, VC fundraising is climbing to record highs. This counterintuitive trend raises a number of questions. For example, with so much money being raised in an obviously hyper-cautious environment, what do investors see as the most promising sectors for startups? Where are the opportunities? The challenges? And just how much will be pumped into new investments in the year ahead?
Amid the market tumult, new research reveals that a growing number of digital health investors view specialty healthcare––particularly health tech startups focused on areas such as cancer care and neurology––as fertile ground for VC funding. And, as the calendar flips to 2023, digital health investors believe that demonstrable return on investment (ROI) along with clinical validation will be the most important factors governing the success of digital health startups.
These were just a few of the findings from a survey fielded by GSR Ventures, an early-stage digital health venture firm with over $3.5 billion under management. GSR polled digital health venture capital investors on topics ranging from the volume and valuations of 2022 deals compared to previous years to industry opportunities and which sectors represented the most and least opportunity for startups.
ROI was deemed “important” or “very important” to the success of digital health companies by more than 94% of investor respondents. And while the ROI factor has always been table stakes for investment criteria, the focus is even more intense today given the current economic climate, as investors prioritize spending on solutions with the strongest value proposition. Looking ahead, it will be the companies that deliver not a more typical 30% or 40% ROI, but those that produce 2x, 3x, 4x and in some cases 10x ROI on every dollar invested that will outperform in this market.
However, what is more telling is that 79.2% of investor respondents cited validation from clinical evidence and trials as a major investment driver today, and 83% indicated that they would be important or very important for most companies in the years ahead. This clearly signals a new direction in health tech investment, one in which patient value is placed on the front burner due to increased expectation from payers, employers, and customers. They all expect these companies to have solid clinical evidence in hand to justify investment.
2023 Investment––The Jury is Out
The 50+ investors who responded to the GSR survey indicated that fundraising in the digital health segment for 2023 will total somewhere between $15 billion and $25 billion. This is a broad spread, considering the fever pitch spending levels of 2021 over 2020, and the relative cooling of 2022. Still, it is not substantially lower than the $29.1 billion invested in 2021.
Another 11.8% of respondents believe total VC investment in digital health in 2023 will be in the $25 billion to $30 billion range, with 1.9% showing more optimism and seeing investments eclipsing $30 billion for the year.
Valuations––Down, But Still Robust
As for the valuations of digital health companies in 2023 compared to today, GSR survey respondents overwhelmingly (59.6%) predict a 20% decrease over current values. Another 23.1% see valuations remaining flat, another 9.6% predicting a 20% increase, and 7.7% forecasting a precipitous drop of greater than 40%.
A solid 48.1% believe Series A valuations will decrease by 20% to 40% in 2022 compared to 2021, and 42.3% see Series B+ digital health company valuations plummeting 40% to 60% year to year.
There’s no doubt that 2021 saw a lot of investor exuberance, and as a result valuations trended toward the higher end of the spectrum. The entire digital health investment ecosystem believes that there’s tremendous potential for value creation. As the survey results reflect, the number one thing that everybody is looking at is the potential to generate high ROI. There is a lot of excitement surrounding new investment, and as some of the current valuations correct to a more normalized level, the amount of investment (from a dollar perspective) will most likely reset to that health 2020 level.
Oncology Tops Clinical Opportunities
The lion’s share of polled investors believe that oncology (51%) is the most promising clinical space for startups going forward, followed by mental health (37.3%), neurology (27.5%), and primary care (23.5%).
These are areas with the greatest unmet need. There is tremendous suffering and patient need in those areas. In neurology, there are promising breakthroughs being made with Alzheimer therapies. And new advances in oncology are happening daily. Both sectors are now seeing increased potential for more specialized tech-enabled care, with early-stage companies innovating services for patients that have not been seen before.
For example, we’re seeing oncology care moving into the home––making the experience more seamless and convenient to the patient, including management of symptoms during chemotherapy. There is also tremendous potential with technologies like remote patient monitoring to get better insights into how patients are managing chronic conditions. Then we can provide them with improved access to the tools, solutions, and medications they need.
When asked which segments in the health technology space hold the most promise, the largest block if investor respondents pointed to AI/Machine Learning (45.1%), followed by Healthcare Data and Analytics (37.3%), Remote Patient Monitoring (29.4%), and AI Drug Discovery and Clinical Trial Technology (each with 27.5%). Social Determinants of Health, which has gained traction throughout the healthcare sector in recent years, was cited by only 17.6 of VC firms surveyed, but outpaced Cybersecurity, with 11.8%. Among the sectors showing the least promise to respondents were Blockchain (3.9%) and Automation of Provider Operations (2%).
On the flip side, when asked what technologies were least exciting, Blockchain was the runaway loser, garnering 36% of respondent votes, followed (surprisingly) by Telehealth (24%), and Virtual and Augmented Reality (12%).
As the pandemic raged on, telehealth looked like it was potentially poised to be one of the most disruptive technologies. At the time, there was an expectation that these companies were true technology companies and would deliver value equivalent to a technology company. However, as impressive as some of these companies are, they are delivering value more like a services company. And today, most telemedicine companies are actually structured like services companies. Yes, there is a technology component, but the efficiency gains that have been realized are not quite there yet. Still, there remains tremendous potential to innovate further in telemedicine and find ways to further evolve from a services-style model to more of a disruptive tech enabled model.
Industry Challenges Presenting Opportunity
When asked which healthcare challenges provided the greatest opportunity for startups, nearly half (48.1%) or VCs polled pointed to provider shortages and burnout. Changing reimbursement models (26.9%) and interoperability (11.5%) were also among the top challenges cited.
What is most exciting here is where the industry is using AI to make fundamental changes. We know how much care a single provider can deliver, and people using computer vision and AI to correctly triage patients, to finish notes, and to allow visits to happen faster. If we’re placing providers more efficiently, that doesn’t solve the clinician shortage, but it helps with efficiency. So we need to think about technology tools that make fundamental changes to efficiency.
Among industry tailwinds representing fertile ground for health tech startups, new value-base care models and consumerization of healthcare were each pointed to by 29.4% of respondents. Meanwhile, increased interoperability/connectivity and reimbursement for digital care each garnered 17.6%––underscoring the importance of two other dominant industry trends.
Looking to the digital health investment landscape over the next year, there are tremendous opportunities to create value, yet there remains so much waste to eliminate. As startups begin tackling real issues and pursuing harder and harder problems, such as those in neurology and oncology, there will be more complicated needs––more labs and aspects of care. Startups are continuing to chip away at some of these tougher problems and the supporting products and services, which is very encouraging.
If you compare where the digital health investment market is this year, and where it is likely to be next year compared to 2021, we are undoubtedly going through a reset. But it is a very healthy reset that can put the entire ecosystem in an even stronger place––especially as we focus on the core metrics around ROI, clinical validation, and delivering value to patients.
Justin Norden, MD
Justin Norden, MD, MBA, MPhil, is a Partner at GSR Ventures, where he focuses on early-stage investments in digital health. Prior to GSR Ventures, he was CEO and co-founder of Trustworthy AI which was acquired by Waymo (Google self-driving). He worked on the healthcare team at Apple, co-founded Indicator (an NLP based platform for biopharma decision making), and helped start the Stanford Center for Digital Health. As an academic he is an award winning machine learning and bioinformatics researcher with 20+ publications. Finally, Justin is a former professional athlete and 3x world champion in ultimate frisbee. Justin received his MD from Stanford University School of Medicine, MBA from the Stanford Graduate School of Business, M.Phil in Computational Biology from the University of Cambridge, and BA in Computer Science from Carleton College.