This story is the second in a three-part Q&A series with investors about digital health funding in 2024. Click here to read the first installment.
Digital health funding has decreased following a huge spike in investment during the COVID-19 pandemic.
With less cash flowing to startups, it may be time for increased consolidation. Announced merger and acquisition activity didn’t spike last year, according to a new report by Rock Health. But some of the methods startups used to buy time in 2023 — like extension rounds and unlabeled raises — probably won’t work a second time, leaving companies more likely to consider M&A.
Alex Momeni, partner at General Catalyst, talks about the potential benefits of consolidation for companies as well as digital health consumers.
Editor’s note: This interview has been edited for clarity and length.
HEALTHCARE DIVE: We’re seen digital health funding decline over the past year. How do you characterize the funding environment in 2023, and how do you think it will evolve next year?
ALEX MOMENI: I think the funding in general across sectors has declined. That comes as a response to a broader macroeconomic backdrop. And so, investors as a whole, in the previous period, were financing companies with amounts that were actually providing runway to some of these companies for several years.
As we think about next year, I would expect many of the companies that raised in 2020, 2021, and that had been well-capitalized and who perhaps managed to cut their burn, focus on driving revenue, will come out to market again and raise capital.
With less funding available, M&A is likely to rise. Do you see that happening now? What sectors do you think are ripe for consolidation?
When funding was broadly available, you would often have areas where several companies within a very small period of time were created to serve the same sort of problem. And the goal for everyone in healthcare is to build platforms, right?
You do expect there to be some consolidation across different areas. In software, it will happen, and it does make a lot of sense, because you do have a number of companies that are building complementary solutions, and where there are real synergies that come from that. There are also companies that have very deep talent pools and will benefit from concentrating talent within one company.
And then on the services side, M&A has always been a big driver of growth for companies that are successful. So we expect some of the market leaders to consolidate their position in the market through M&A.
We also see this as something that customers will be welcoming. The number of health system executives who have point solution fatigue is abundant. And so we expect this consolidation to also enable a lot of companies to sell enterprise solutions that can drive real ROI for their customers.
IPOs are also at a standstill. Do you think that will change soon? What could push more established digital health companies to go public?
I'll make the general comment, which is, it's always difficult to time the market. We follow the public markets very closely, and we have seen a couple of later-stage companies now come out and go public, which is great for business confidence.
There are many different considerations that you need to take into account when you want to decide to go public, obviously one of them is financing. Another one is around liquidity for some of your employees. And we think the leaders in our firms will take into account all these different considerations as they time their entry into the public markets. Overall, I think confidence is coming back in the ecosystem. And so we should expect more public market activity in the next year or two.
We’ve also seen some digital health companies shut down this year, like Pear Therapeutics, Olive and Babylon. Do you think that’s a trend that will continue?
Without commenting specifically on any of those companies, one of the important questions when you go public as a company is being able to accurately forecast your business, and do so in a way that's consistent quarter across quarter. And so I think one of the important lessons to draw from the public markets is the importance of long-term planning, and having an ability to really control some of the fundamental drivers of your business.
I would say that, in the private market, particularly at the growth stage, investors as well as founders will be more focused on being public market ready earlier and earlier in the process.
