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Digital Healthcare — an Investment Opportunity for Now

Venture Capital is Driving a Healthtech Start-Up Boom

By Jimmy AhernPublished 2 years ago 4 min read
Digital Healthcare — an Investment Opportunity for Now
Photo by Bermix Studio on Unsplash

All indications are that we’re heading toward an historic year for VC investment in healthtech. Looking at the US alone, the healthcare sector as a whole counts for 20% of GDP — a massive $4 trillion. One of the fastest growing parts of this sector is digital healthcare. Some estimates put the global market at $350 billion in 2019, with predictions for rapid growth over the next five years.

Venture capital funding records were destroyed in the first half of 2021, as more than $288 billion was invested by VCs worldwide. To put that in perspective, the amount raised in the first week of the year ($13b) was equal to the total for an entire year just a decade ago.

The recipient of the biggest share of venture capital is no surprise, with financial services taking the top spot. However, digital healthcare comes in at a very respectable second place — and it’s no wonder: With the past few years seeing a record number of Initial Public Offerings (IPOs), healthtech is seen as offering great return on investment.

VC funding for digital healthcare hit record levels in the first half of 2020, a total of $5.4b. But this is no bubble: Funding for the sector has been steadily rising for the past 10 years and the trend is predicted to continue–it’s worth noting that the number of deals has remained constant for the past five years, but the amount of investment has increased.

COVID-19 did nothing to dampen deals, with 2021 seeing 729 deals, bringing in $29.1b for the sector — roughly double 2020’s annual total — with an average deal value of $39.9m.

Different Value Pools Available to Investors

Canny investors realize there are several ‘value pools’ available to throw their digital healthcare dollars into. The key areas where technology has the potential to disrupt are Research & Development (R&D), Wellness & Disease Prevention (W&DP), Screening & Diagnosis (SD), Care Delivery (CD), and Finance Operations (FO). Predictions indicate that the market for all these value pools is likely to grow by 8% per annum over the next two years.

However, one of these outperforms the rest, and it might be a surprise: Care Delivery. Investors see real value here, with the subcategory accounting for 47% of 2019’s deals. The market for this particular pool is expected to rise by 10% per annum to 2024. (In fact, this sector appears to be drawing funding away from some of the other subcategories, with both W&DP and FO seeing around a 10% point drop over the decade.)

What this suggests is that venture capital may have more of a taste for payer-oriented businesses and technologies that impact directly on patient care—as opposed to those, like wellness which focus on the consumer. However, there is also an appetite for any new IP that helps solve problems connected to patient identification and therapy delivery, or those that enhance R&D for new drugs.

Broadly speaking, what all these growth markets have in common is the fact that they offer the potential for cost reduction. Indeed, there is a belief that healthtech has the potential to save the US healthcare system $500 billion, so VCs investing in digital healthcare can do so knowing they are benefiting society at large.

Considerations for Investors Looking at the Digital Healthcare Sector

Physicians are over-stretched; various common conditions are ever more costly to treat or provide care for; patients and medical professionals expect more individualized, high-tech and high-touch (intensive) treatments and therapies than ever before. Digital health start-ups are capitalizing on these pinch points.

Many companies are looking closely at the digital health market and weighing up whether now might be the moment to invest in the sector—and thereby play a part in designing the future of healthcare.

However, the sector is still relatively young and evolving rapidly, so three key considerations are worth bearing in mind for potential investors. First, continue to refresh and review how you assess and define value. Second, collaborate, pursuing partnerships to mitigate risk and benefit from new perspectives. Third, once you have made a decision, commit, and act fast!

Looking to the Future

Digital healthcare offers investors a heady mix of a large market and strong growth, so it’s no surprise that funding levels are expected to continue rising. The market shows no sign of slowing down, with analysts cautiously suggesting that 2022 is set to be another record-breaking year for digital healthcare.

The dynamics of increased capital means that founders are changing their strategy in terms of funding rounds, seeking out subsequent funding faster than ever before. This doesn’t mean rash investment, of course, as VCs are continuing to perform due diligence on any potential company in this sector, as in any other.

Decide, Strategize, Prioritize!

Healthcare is an enormous industry, worth $4 trillion in the US alone. However, it is riddled with inefficiencies, with experts claiming that a staggering $935 billion is lost to abuse, fraud, or wasteful practices. The past few years have shown that the start-ups who are most successful in providing return on investment are the ones that find ways to solve these issues of inefficiency.

With the healthtech sector riding something of a wave, it may seem that the ship has sailed, but there is still vast opportunity for investment. In fact, considering the GDP the sector represents (20% in the US), digital healthcare is still somewhat underfunded.

For investors looking at the healthtech sector, the time to move is now. Decide on which value pool to focus on, develop your strategy, and agree priorities. The digital healthcare landscape is overwhelming, but for the smart investor there is the potential to thrive there — whilst also improving healthcare outcomes for people around the world.

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About the Creator

Jimmy Ahern

Jimmy Ahern is managing partner of Laidlaw & Company UK. As Laidlaw’s ‘rainmaker’, Jimmy builds the firm’s portfolio developing relationships with innovation laboratories and playing an instrumental role in the incubation of many start-ups.

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