In a tough fundraising climate for startups, conversations at JPM 2023 shift to partnerships

In past years, the buzz at the J. P. Morgan Healthcare Conference centered around who raised and how much.

This year, as the flow of venture capital dollars starts to dry up, health tech and digital health startups shifted their focus from dealmaking to partnerships, investors told Fierce Healthcare during the conference last week.

"This is a tricky year, as thousands of companies that have been funded are sitting at valuations that are not appropriate because three years ago we decided the only thing that mattered was growth and not unit economics, " said Hemant Taneja, CEO and managing director at General Catalyst, during a panel discussion at JPM.

After a wild ride in the past two years, digital health startups are adjusting to a new reality faced with difficult economic changes and investor pullback.

Digital health startups pulled in $15.3 billion in funding dollars across 572 deals last year, according to Rock Health's annual funding report. While still a hefty number, that $15.3 billion is just over half of 2021's blockbuster $29.3 billion. And digital health funding in 2022 barely sneaked past 2020's total of $14.7 billion, according to the report from Rock Health, a venture fund dedicated to digital health.

2022's downhill ride signals the tail end of a macro funding cycle centered around the COVID-19-era investment boom.

Health tech startups' customer bases also are in a fragile position, Taneja noted. "If you're selling to health systems, they are struggling, and there are not enough budgets. Employers are trying to figure out the impact of inflation on their businesses. In all those cases, the emphasis on [return on investment] becomes far greater. So, models around risk sharing and stepping up and taking on ROI will be more welcome."

Startups will need to get creative in how they navigate the next few years, Taneja said, and will need to strategize how to grow into valuations at normalized multiples and "how to be more robust about ROI."

"Healthcare generally has not been as rigorous about proving ROI. It’s a tricky time. There’s some consolidation that needs to be thought of well as you're not going to get there being point solutions. So, you need to think about how to become more comprehensive solutions," the VC investor said.

For digital health and health tech startups, partnerships to "strengthen the value proposition collectively" also will be critical in 2023, Taneja said.

"I’m hoping there is an operating model that’s less around 'I want to competitively win my market' and more around 'I want to win with an ecosystem together in a way that’s robust.' To me, that mindset will matter," he added.

Vineeta Agarwala, M.D., Ph.D., general partner at Andreessen Horowitz, noted a change in tone at this year's JPM away from transactions and deals and "What did you ink this week?"

"The only way to get through 2023 is locking arms and forming trust-based relationships and feeling like I can trust what the person on the other side of the table was saying when we're working together," she told Fierce Healthcare on the sidelines of the conference. 

A practicing physician, Agarwala leads investments for the firm’s bio + health fund across therapeutics, life sciences tools and diagnostics and digital health. A16z's portfolio includes Cedar, Firefly Health, Thyme Care, Pearl Health, Headway and Komodo Health, to name a few.

"I'm really excited about creative collaboration, syndication with other investors and partnerships that provide interesting sources of nondilutive revenue and runway," she said.

While JPM was relatively quiet from a news perspective, a partnership between CVS Health and digital health company Carbon Health announced early in the week caused quite a bit of buzz. CVS plans to pilot Carbon Health's primary and urgent care clinic model in its retail stores. CVS' corporate venture arm also led a $100 million investment to accelerate Carbon Health's expansion into new markets. 

Talk about partnerships was a dominant theme during the conference.

Cigna CEO David Cordani told investors that the insurer's national strategy around primary care focuses on identifying the right partnerships where assets available at Evernorth can be deployed to both enhance the primary care provider as well as Cigna itself.

Cordani pointed to the company's recent investment in VillageMD as an example, which was announced alongside the news that VillageMD would acquire Summit Health, senior editor Paige Minemyer reported.

And it's not just startups that are excited about the potential for partnerships.

"Fundamentally, it feels like the major players in the last two or three years are willing to just do much larger things with startups than they ever were before," Jacob Effron, principal at Redpoint Ventures, told Fierce Healthcare in an interview.

"In the past, you come as a startup to one of these health systems and they'd say, 'OK, but only this specific department or customize it these five ways.' Now, I think there's like much larger strategic relationships," he said, noting that health systems are willing to partner with digital health startups to power an entire remote patient monitoring program or a kidney care initiative.

"I think just the size of these partnerships, in terms of just scope of responsibility, is really interesting," he noted. Within its portfolio of companies, Redpoint Ventures backs Cityblock Health, Collective Health, Hims & Hers and Strive Health, among others.

2022 was marked by a great deal of uncertainty with volatile changes in the public market. Effron expects the investment market will settle down in 2023. "Markets hate uncertainty. I feel like last year nobody knew what a series C or D company should be worth. As this hopefully settles down, I think there will be some understanding of 'This is the new normal,' and that will lead to more deal activity picking back up later in 2023," he said.

As the market contracts, startups need to think carefully about their use of proceeds and execution plans, Agarwala said.

"I wouldn't characterize it as 'Do only what's necessary mode' because that's just not appropriate for startups. Fundamentally, you have to be opportunistic, and they have to follow the exciting science that emerges. We're guiding companies to be ruthless in their prioritization," she said. "But that doesn't mean that they shouldn't be very ambitious about prosecuting their biggest ideas and opportunities in a really skilled way."

Effron said startups should take a conservative approach and aim to have two to three years of cash on the balance sheet.

"I think the market will value potentially slower growth in a way that's done in a much more cash efficient way. These are not new concepts—gross margins always mattered, efficiency always mattered. But before, the public markets were rewarding the growth at all costs and that message was trickling back to the private market. Now, the message is certainly different," he said.