Why 1 VC is Fed Up with the Concept of Digital Health Unicorns

The term “unicorn” refers not only to a gorgeous and mythical creature, but also to any privately held company valued at more than $1 billion. It’s a word we’ve heard a lot in the past couple years amid the frenzied influx of digital health funding dollars and ballooning startup valuations. 

Examples of the 97 global companies that are currently considered digital health unicorns include Zocdoc, Hinge Health, Omada Health and Papa.

But getting caught up with the idea of digital health unicorns isn’t very sustainable, according to Emily Melton, managing partner at Threshold Ventures. She said so Monday during a panel discussion at HLTH in Las Vegas.

To Melton, the current state of the market is best described using the analogy of when the lights come on at 2 a.m. after a long night of partying. Once you’re confronted with the mess you made and the money you spent, you begin to realize you need to tone it down a bit.

“There’s been so much cash that’s come into the private early stage markets, because there were low interest rates and people were taking risks,” she said. “And so access became something that was challenging. People were willing to pay really high prices to get in on businesses, and that is changing.”

As an investor, Melton said she is turned off by companies that seem overly-focused on the price of their valuation. Instead, she likes to invest in companies that are focused on getting the capital they need in order to reach the next stage of inflection. 

When it comes time to raise more capital, Melton suggested that startup founders ask themselves how they can minimize dilution. She said this can help set them up to get a flat or up round. 

“That is a rational way of doing financing, and it kind of got away from us in the last couple of years,” she declared.

Fellow panelist and Transcarent CEO Glen Tullman agreed. He fondly recalled what Lee Shapiro, managing partner at 7wireVentures, used to say to start every meeting when he was CFO of Livongo: “Repeat after me — you are not your stock price.”

Tullman warned startups not to focus on getting to profitability early. Instead, he recommended they play the long game and lay a clear path to how they can eventually become profitable down the road. 

It’s not about making frantic cost cuts so that your company can last longer, but rather about figuring out how to differentiate your business model and product from the rest, according to Tullman.

Both he and Melton said they think the concept of unicorns puts unnecessary emphasis on stock prices, which certainly isn’t the end-all be-all of company success.

“You are not a great company because you’re a unicorn. You’re not also a bad company if you take it down round — that is fine,” Melton said. “Get the right capital and the right partners on your cap table to be able to build a long term business. And I’m kind of hopeful that after this, we’re going to have to stop hearing the phrase unicorn because I think it’s been a false flag that has actually hurt a lot of people.”

Photo: HLTH