Digital health’s reckoning: Where once-hot startups suddenly find themselves in dire straits for cash

Laying off employees has been a common strategy for healthcare startups trying to stay afloat.

According to insider audio, Elemy, an autism-care startup, told employees in December that its CEO Yury Yakubchyk believed the layoffs were good.

Elemy is not interested in providing therapy for children. Instead, Elemy plans to create software that therapists can use at their own. This will mean Elemy will have fewer employees. Yakubchyk stated that Elemy would have been out of business if it hadn’t retreated in 2021 due to the market downturn.

He added that Elemy’s board of directors and investors were “150% behind” him.

“Why? Yakubchyk stated that they have companies in their portfolios right now that are about to collapse and run out of cash.

Yakubchyk stated in an email statement to Insider that he was trying to make a broad point regarding startups from all sectors. Elemy remains focused on helping families with child autistic care, Yakubchyk said.

As investors become more picky, digital health entrepreneurs like Yakubchyk have to make sacrifices in order to keep their cash. It won’t be enough for many.

As patients sought care online during the coronavirus pandemic, 2021 saw a record $29 Billion for digital-health startups. This was twice the total of 2020. Investors were willing to support startups that would fundamentally change the way healthcare is delivered in the US . Today, things have changed. The recession was looming and companies cancelled plans to go public in 2022. Private funding has fallen from its peak in 2021.

Insider has heard from several CEOs and analysts that more than half the 1,800 digital-health startups could disappear by 2024.

Founders have had it easier — raising money with less scrutiny in a shorter time because investors didn’t want to miss the opportunity, Teresa Lee, who is responsible for healthcare investing at OMERS Growth Equity in North America said.

She said, “Now I believe everyone’s more sober and thought-provoking.”

2023 will be an important year for winners and losers.

Value of private companies is largely determined by how they compare to their public counterparts. This is a very painful benchmark in digital health.

Richard Close, Canaccord Genuity’s top healthcare analyst, stated that some prominent health-tech companies trade at less than five percent of their revenue. This is a common way to determine the value and viability of unprofitable businesses.

Close stated that one reason for the slump could be the belief of public investors that the companies may need to raise additional capital before they can start producing revenue. This is becoming increasingly difficult.

Daniel Grosslight, Citi’s healthcare analyst, stated that publicizing a company is a more difficult task.

Digital-health startups must be financially sound and have predictable revenue streams. He said that their public peers are not likely to have such qualities.

Grosslight stated, “It takes much more to go public than it does to stay public.”

Insider reported that two major healthcare startups, Komodo Health and Included Health have abandoned plans to go public in 2022.

Komodo raised $200 million more from investors in November, despite not having IPO funds and running out of cash quickly. Web Sun, one cofounder, said to Fierce Healthcare that he was restructuring the company and had laid off 9%.

A spokesperson for Komodo said that the “structured equity deal” didn’t impact Komodo’s valuation. Structured equity is a form of capital that favors the investor. It’s designed to protect their cash in times when companies are at risk.

Multiple industry experts told Insider that deals with more structure will be the norm by 2023. Companies can also raise venture capital which will not affect their value. Venture debt must be repaid with interest.

A healthcare banker spoke on condition of anonymity in order to talk more candidly about deal dynamics. He cautioned that debt investors should structure their deals to guarantee a minimum return.

He said, “They might rip your face off. So be sure to read all the fine print.”

Many startups make sacrifices in order to please investors.

Two former employees of Truepill told Insider that the online pharmacy Truepill spent its money on inefficiently filling prescriptions.

Truepill was backed by an investor in November when it raised new funds. The condition was that Truepill reduce its expenses. This was the agreement of two former employees and one current employee.

Truepill would run out of money without this new funding by 2023, according to one of the experts.

Insider was informed by Truepill’s spokesperson via email that its burn rate was consistent with projections.

She explained that November’s raise will be used to continue the company’s growth.

Carbon Health’s January fundraise from CVS Health Ventures was “significantly more diligent” than other rounds. Investors became more cautious about the startup’s spending on urgent- and primary-care clinics, CEO Eren Bal said.

Carbon also announced that it is abandoning its original plan to open 1,000 clinics in the US.

To avoid having to agree to stricter terms, Bali also stated that Carbon was valued at a lower level.

Many companies will not accept any reductions if they want to win investors.

OMERS’ Lee stated that businesses that need a large upfront investment to build clinics, or advertise heavily online are particularly vulnerable.

Julie Yoo, general partner at Andreessen Horowitz said that certain companies that fail to transform their sector sufficiently, especially in areas that investors consider overfunded like digital pharmacy, would be eliminated this year.

Insider reported that Medly, a startup pharmacy company that raised $100 million in July 2020 laid off more than half its staff and closed down stores after it ran out of cash. Insider reported November . It filed for bankruptcy on December.

Many of Medly’s patients were left without medication after the sudden store closings. Patients were also left without medication after Elemy’s withdrawal from several states in the early part of last year.

Elemy’s Yakubchyk stated that the startup offered families services for transition over several months.

Although digital-health valuations have dropped in the public markets but not much has changed regarding their underlying financials. Many of them are actually still growing, which indicates that demand for virtual healthcare is not going away.

“Ultimately, at the end, the pendulum probably went too far in terms euphoria,” Canaccord’s Close stated. He also added: “And the penndulum certainly has swung probably far in terms valuation contraction.”

Yoo of Andreessen Horowitz said that companies with strong business fundamentals such as low operating costs compared to high earnings and a plan for becoming profitable will succeed even in downturns.

Despite these qualities, some startups still get the funding they need at their terms.

Maven, a women’s-health startup, landed $90million before it needed additional cash. CEO Kate Ryder said that Maven was able to land $90million . Maven’s value rose from $1 billion to HTML35 billion after Ryder suggested that the deal had clean terms. This meant it did not include any protections for the investor.

Stephen Smith, CEO of NOCD, said that the app, which offers therapy for people suffering from obsessive compulsive disorder (OCD), raised $34 million in January. The valuation was higher than expected and there were no restrictions.

Both Maven, NOCD and a host of other providers are looking to grow in 2023. Maven plans to hire 200 additional employees in the coming year. NOCD will double its provider network before 2024.

Experts told Insider that while the wider economic pressures may hurt many startups that are unable to raise funds, they could also help others. The financial pressures of hospitals are already helping startups to cut administrative waste , according to Rock Health.

Many startups are comfortable enough to avoid raising capital. Virta Health and Cedar, as well as Medable, told Insider that they intend to achieve profitability without raising more money from investors. CEO Zane Burke stated that Quantum Health, which helps patients to navigate their healthcare benefits is now earning enough money to finance itself.

Some startups will never be acquired.

Giants like the retailer CVS Health and Amazon, looking to defend themselves against a potential recession, could invest further in healthcare, an industry that continues to Grow each year.

Companies in digital-health are also expected to consolidate and cut costs.

Grand Rounds and Doctor On Demand combined to form Included Health, which is the entity that includes Grand Rounds, a navigator, who helped patients connect with care.

Insider was told by Owen Tripp, CEO of Included that each company raised enough money to sustain the combined company for the period between 2021 and 2025 before they merged.

Tripp still hopes to grow, even though Included is in a financial position. He said that the startup will be looking to acquire clinics in 2023 or to partner with local care providers to enhance the care it provides through its screens.

Tripp stated, “Now is not the time to daydream.” It’s the time to determine what is most important and then execute on it.