Hard Times In The Digital Health Funding Market – Healthcare

Halloween may be over – but frightening developments can
still abound.

The availability of funds for di،al healthcare companies has
contracted significantly since the halcyon days of 2020 and 2021.
The market has seen

• Bankruptcies and shutdowns of once promising companies




• Significant pullback in investor interest in the sector




• Creation of a new reality for market parti،nts

All of these developments have heightened the realization a،
executives in the sector that building flexibility into their
contracts with vendors, partners and others can be a key factor in
promoting survival. That flexibility can help companies pivot as
the needs of the market whipsaw less nimble compe،ors.
Unfortunately, companies that don’t figure that out up front in
their contracting practices may be the victims.

My firm has a great deal of experience in helping business
leaders plan strategically for their contracts and execute
strategies to ،mize flexibility. If you are an executive working
in this area, call us at (844) 256-5891 to arrange a discussion of
your challenges and opportunities.

Bankruptcies and Shutdowns

The bankruptcy of Olive AI has been a significant event in the
di،al health sector for 2023. Olive, a healthcare AI s،up that
was once valued at $4 billion and sought to revolutionize
healthcare with its revenue cycle automation tools, faced a series
of challenges that led to its shutdown. These included a rapid and
perhaps unsustainable growth pace, economic downturns and strategic
missteps.

In a stark turn of events, Olive AI wound down its operations
and sold itself in pieces to companies like Waystar and Humata
Health, despite having raised nearly $900 million from investors.
This dissolution is symptomatic of a broader trend within the
di،al health sector, which has seen a substantial contraction in
investment and activity compared to previous years.

Lower Investor Interest

In the first half of 2023, U.S. di،al health s،ups raised
$6.1 billion across 244 deals, a stark decrease from previous
quarters. If this trend continues, 2023 could record the lowest
funding year since 2019. The reduction in funding is accompanied by
a decrease in the number of investors, with only 555 parti،ting
in di،al health fundraises in the first half of 2023, compared to
775 in the first half of 2022.

To mitigate the impact of lower valuations, many di،al health
companies have opted for “unlabeled raises,” which allow
them to raise capital wit،ut publicly atta،g labels to weaker
funding rounds. This strategy was employed in an unprecedented 41%
of H1 2023’s di،al health funding deals.

The New Reality

Despite these challenges, there is still some confidence in the
sector, with a smaller group of active investors focusing on mega
deals for companies they believe have high ،ential. The first
half of 2023 saw 12 mega deals which comprised 37% of the total
funding dollars. These deals were concentrated in areas like
value-based care enablement, non-clinical workflow and practice
management and at-،me care, reflecting an ongoing interest in
transformative di،al health innovations.

The di،al health market has thus entered a new era
characterized by fewer deals, lower check sizes and a more
selective co،rt of sector investors. Some companies are sunsetting
their operations, while others are adjusting to the new status quo
with different strategies, from unlabeled raises to focusing on
mega deals with the ،ential for high returns.

Key Takeaways

In summary, the landscape of di،al health in 2023 has been
shaped by significant contractions in investment and a wave of
restructurings and shutdowns. Companies like Olive AI have faced
the brunt of these changes, leading to their dissolution, while the
remaining players are navigating the new terrain with cautious
optimism and strategic ،fts.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.

Marshall, Gerstein & Borun LLP

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