Where digital health investors are hesitant to put their money in 2023

Investors are skeptical of DTC products and medication delivery tech.
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Photo Illustration: Dianna “Mick” McDougall, Source: Carlosvoss/Getty Images

· 3 min read

Venture capital funding in the digital health space cooled significantly in 2022 following a red-hot 2021. Overall, digital health companies raised $15.3 billion last year, down substantially from the $29.1 billion raised in 2021—but still above the $14.1 billion raised in 2020, according to research from Rock Health, a seed fund that supports digital health startups.

Analysts predict investors will still put a good amount of money into digital health in 2023, particularly in alternative care, drug development technology, and software that reduces physician workload. But investors will likely pull dollars away from a few specific sectors this year.

“There is definitely more diligence, a little bit more skepticism in the investments that are made. So you tend to see investments go slower because diligence is taking longer or investors are being a little bit more conservative,” Adriana Krasniansky, head of research at Rock Health, told Healthcare Brew.

Direct-to-consumer products

The first sector in which Krasniansky expects to see funding slow this year is direct-to-consumer (DTC) products. One reason is that with recession fears, “Consumer spend is not as readily available,” Krasniansky said.

But Apple’s new data privacy rules are also partially to blame. As of April 2021, apps sold through Apple’s App Store must ask users for permission to track activity, and users can opt out. That tracking data is crucial for advertisers to create personalized ads.

“Apple's privacy measures have impacted customer acquisition costs, making the DTC channel more challenging for a lot of startups—and not just digital health startups,” said Krasniansky.

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Investors are also more cautious about DTC digital health products because they “haven’t figured out yet how to really market and deliver” those yet, according to Chris Moniz, a market manager in Silicon Valley Bank’s healthtech and devices segment. That’s why many digital health companies choose to sell to employers, he added.

Medication delivery and adherence

A couple years ago, Moniz said there was “a big wave of enthusiasm for home delivery” of prescription drugs. But using technology to deliver prescriptions is a tough business because there are so many regulations around handling medications, he added.

Data on medication adherence—or how closely a patient follows doctor’s orders when taking meds—is “really important” to players in the pharmaceutical industry, according to Moniz. But investors are now more cautious in that space because it’s hard to track medication adherence, as users must self-report medication use consistently and accurately.

Doing their due diligence

Now more than ever, investors are doing their due diligence on digital health companies, according to Kenny O’Neill, a principal for Ernst & Young’s digital health consulting business.

Investors want to see solid numbers on things like how many customers a digital health company has, how long they’ve had those customers, and what their specific clinical outcomes are, O’Neill said.

“VCs and other companies would always do financial diligence. But I see very few of them that do operational and clinical diligence. I think that’s what you’re gonna see much more of going forward,” said O’Neill.

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