Investors 'cautiously optimistic' about the state of the digital health market

At the American Telemedicine Association’s Nexus conference in Phoenix, three investors talked digital health investing trends they’ve observed so far this year. They talked about the state of the market, how artificial intelligence and value-based care models are faring and offered advice to entrepreneurs looking for investment dollars. 

The investors: 

Julianne Roseman: Principal at Plug and Play, an early-stage investing company and innovation consulting shop. Plug and Play is a seed accelerator that does about 20 healthcare investments per year.  

Amil Kekic: Ventures senior director at Banner Innovation Group. The investment arm of Banner Health funds companies with an existing commercial contract with Banner. Their “sweet spot” is earlier stage, in the $1 million to $3 million range.

Witney McKiernan: Principal at HealthQuest Capital, a growth equity investing company. Typical contracts range from $20 million to $50 million.

What does the market look like in 2024?

The consensus among investors is that business is picking up from last year’s historic low in early-stage and growth-stage investing. While investors are not interested in digital therapeutics in the U.S., artificial intelligence products and services are likely to get meetings. 

"For that early-stage perspective, it's better than last year … I'm] cautiously optimistic. But the reality of that is valuations are lower. You can still get a deal done, and you can still fundraise," Roseman said.

“Digital therapeutics … people are not investing right now, because of the issues here in the U.S. Not to say that that's not true in Europe or another market. So part of it is market dependent. And so if your digital therapy company, you may want to go to Europe right now. But in the U.S., it might be hard to fundraise with that pitch, whereas obviously, AI is the hot, hot topic. So you can bet that you'll get a meeting, if you say you're an AI digital health company," Roseman noted.

Kekic noted that he is starting to see contracts, assignments and renewals pick up. 

"There’s a tremendous amount of capital to put to work. This is in part due to many growth-stage companies stalling investments last year," McKiernan said, adding, "I think there’s a lot of desire to write checks."

“Inside investors have been funding companies and bridging companies over the past year and a half, and, now, that money has dried up. So we’re seeing a lot more companies in market and so a lot of opportunity in higher quality companies," McKiernan said.

What are investors looking for right now? 

Defined and proven clinical outcomes are key factors, the panelists said.

In March, an analysis from the Peterson Health Technology Institute poured cold water on the effectiveness of widely used digital diabetes management solutions, stirring up discussion about how best to evaluate the growing market of digital health tools. The blistering report concluded that diabetes monitoring apps "do not deliver meaningful clinical benefits, and result in increased healthcare spending." 

The three panelists acknowledged that the report upset many and some questioned its methods, but McKiernan said the analysis gave digital health companies the kick they need to ensure their solutions have solid measured outcomes and return on investment. 

She added that audience members “would be surprised by the number of companies that come to [HealthQuest] that have revenue and do not have measured outcomes.”

"Not all outcomes are created equal. I think it's being very specific on the outcomes we're going after …  and are those the outcomes that a [chief financial officer] will care about?," she added.

The state of artificial intelligence

Roseman and McKiernan agreed that digital health companies are liberally applying the veneer of AI to their investment pitches. Often AI companies look similar and have solutions built on open source models, which makes them hard to invest in, Roseman noted.

Companies should make clear what role AI is playing in their business and what its use case is.

"Who is it helping? Is it helping the patient? Is it helping the provider and how? How are you specifically leveraging AI to make a process more efficient?" McKiernan said.

Roseman added, “I know that there's really cool stuff around the corner. But it's not most of what we're seeing.”

The future of value-based care

Value-based care could have a huge upside and potential for greater margins, McKiernan said, but not many companies do it well. 

If companies start with a fee-for-service model but hope to move into value-based care, investors should consider profitability of a wholly fee-for-service model first, she noted. Then, investors should factor in the time needed to gather data and metrics to switch to a value-based model. The process can take years, McKiernan said. 

"We're looking for teams that understand and respect the complexity involved with value-based contracting, who have experience doing that contracting," she said.

If companies claim their VBC solution saves money on total cost of care, Kekic said companies need to get payers and plans to agree. Startups need to get down to brass tacks with plans and payers to determine whether their solution is the root cause of savings on cost of care, he added.

"Get the plan and the payer on board and align with their attribution that yes, you were actually able to move the needle. And you were … the root cause of that movement and a reduction in total cost," he said.

Additional advice from the panel for digital health startups:

  • Admit to failure. 

  • Listen to feedback and accept criticism when necessary. 

  • Put together an “Frequently Asked Questions” document for investors.

  • Be deliberate in how you choose your strategic investors. Ask what value they can bring to you and what other customers they could introduce.

  • Follow up—sparingly. 

  • Use past investors for support with valuation and “warm intros.”