Going into 2023, investors think the abilities to demonstrate a measurable return on investment and prove technology’s clinical validation will be the most important factors determining the success of digital health companies, according to a recent report from GSR Ventures.
For the report, GSR gathered information from more than 50 digital health venture capital investors. A full 94% of respondents said that ROI was “important” or “very important” to company success, and 79% said the same for clinical evidence and trials.
The ability to demonstrate ROI has always been important for digital health startups, but it has become even more crucial amid a changing economic landscape in which investors are guarding their capital more closely.
In the third quarter of this year, digital health companies garnered the lowest quarterly funding total in the past 11 quarters. The sector raised $4.6 billion in the third quarter — this represented a 36% quarter-over-quarter drop and a 72% drop from its all-time high of $16.8 billion in the second quarter of 2021.
While the ROI factor is a given, it’s a bit more compelling that investors cited clinical validation as a major driver of company success in 2023, according to Sunny Kumar, a partner at GSR. In a statement, he said clinical validation “is the best signal of patient value and historically has been under-captured in digital health.”
Ian Wijaya, managing director at investment bank Lazard, told MedCity News in October that at the pace investment has been going this year, it’s doubtful that 2023’s digital health fundraising amount will reach even half of last year’s $29.2 billion total.
As for 2023, the investors surveyed in GSR’s report said they expect digital health’s overall fundraising total to be between $15 billion and $25 billion.
As the digital health sector says goodbye to the frenzied influx of investment dollars it saw in 2020 and 2021, it will also bid adieu to the ballooning startup valuations it got used to over the past couple of years. The investors that GSR surveyed said valuations will go down in 2023 by around 20% for seed stage investments. They also said valuations would drop by 20% to 40% for Series A and Series B investments.
Survey respondents identified provider shortages and burnout as the operational challenges that will provide the most opportunity for startups to innovate next year. They also pointed toward changing reimbursement models and interoperability.
On the clinical side of things, more than half of investors said that oncology is the most promising space for startups to enter. Respondents also cited mental health, neurology and primary care.
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