HTN Discussions: Reactions to the HTN / OMERS Funding Survey

A discussion on the changing health tech market dynamics.

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With the overall market going bananas and a potential recession looming, there is a lot of speculation on the impact to the private health tech market. So we, HTN and OMERS Ventures, teamed up to survey ~150 health care startup operators and investors for perspectives on changing conditions. 

This past week we hosted a follow-up conversation with HTN members Chrissy Farr (Principal, OMERS Ventures) and Alyssa Jaffee (Partner, 7wire Ventures) to discuss the findings of the report. They were kind enough to share their thoughts on the recent market turbulence and perspectives on the road ahead for companies in the space. Below is a summary of topics covered during the conversation, as well as a recording of the conversation for HTN members. 

Conversation Notes

Overview of the New Normal in the Health Tech Market

First things first, a quick recap on key takeaways from the original report:

  1. Growth stage companies appear to be changing course quickly - most are pivoting away from revenue growth to profitability and are, at the very least, slowing down hiring seemingly driven by a concern that it could be a while until they see an exit or another round of capital that isn’t overly dilutive)
  2. Early stage companies appear to be business as usual for the most part - many are still focusing on revenue growth
  3. Sub-sectors within health tech are reacting differently (care and services focused companies are experiencing the most pressure to focus)
  4. Investors generally seem a bit more concerned about broader market turmoil, wanting companies to prepare for the worst in the event funding markets dry up
  5. Yet, at the same time, a number of investors (particularly at the earlier stages) appear to view this as an opportunity to invest more, which suggests we’re seeing a new normal emerge

Now, onto our top discussion highlights…

Early-stage companies should define what a successful business looks like

A big question for founders navigating this turbulent market has been how to adjust funding strategies to reach profitability – accelerate and secure capital now? Or, kick the can and hope the market improves in 18 months? 

For earlier-stage folks, it’s difficult to focus primarily on revenue, so a better question here is: Is there another path entirely to create a successful business? A couple things to consider include building a different kind of business (i.e. local, non-venture scalable, etc.) or considering alternative financing methods (i.e. bootstrapping, grant, etc.).

While the past few years have been riddled with mega-rounds and unicorn valuations, we should remember that these are the exceptions, not the rules of venture.

Under current market conditions, it will be interesting to see if more founders pursue these less traditional approaches moving forward.

Forget about moonshots, we are building durable companies

While there is still capital in the market to deploy – look at fresh funds from General Catalyst and a16z – investors are returning to thorough due diligence, safer investments, and moving away from larger moonshots. 

Going with the old adage, “Vision without execution is hallucination”, it is worth considering how this era of big visions might inhibit transformational innovation in healthcare. Looking back at the past decade of digital health, we have seen a handful of players – like Teladoc and One Medical – emerge as financial winners in the sector. However, we should put into perspective that these models are not necessarily revolutionary ideas, but rather attempts at finding new ways to solve existing problems.

While they might not be “moonshots” in the traditional sense of the word, it is important to think about how smaller, more conversative funding bets will impact the dynamics of the health tech space.

M&A as an alternative strategy for cash management

In our dialogue on cash management strategies, an interesting question from the audience came up asking if the need to manage burn will result in increased M&A and roll-up of the space. On the flip side, is there a future where we see further fragmentation and specialization across the sector? 

On the one hand, M&A seems inevitable looking at the overabundance of point solutions that could be integrated to deliver more holistic care and meaningful patient outcomes. On the other hand, we have seen recent growing investor interest in models that target specific condition states, demographics, generations, and more.

Returning to the acquisition path, it will be important for startups to focus on 1) demonstrating a near term path to profitability to become an attractive target for public companies whose investors prioritize consistent EPS growth and will be hesitant to acquire assets that don’t have a clear path to increasing EPS and/or 2) developing an actual asset with differentiated staying power that has a clear growth value proposition for the acquirer. This means we’re likely to see very different groups of acquirers emerge but expect more selectivity of targets.

Getting the ‘founder-market fit’ story right

While the narrative of the year has been doom and gloom, it’s important to note that several firms – such as Transformation Capital and Oak HC/FT – have recently raised sizable funds, which will have to be deployed. So, it seems to come down to the right founder telling the right story to the right investor.

In a market where discipline and focus will be crucial to emerge as a winner, companies should dedicate the time to mapping out a clear vision of where they want to be in 5-10 years. There is a sort of double-edged sword dynamic to raising venture funding. One view is that having access to capital gives a founder the freedom to experiment – however, it also can lead the unfocused ones astray. Considering this, having a clear, long-term trajectory for your idea from the start can help to maintain focused momentum.

Particularly, in a time when the growth-stage businesses that have previously sucked up all the capital are now focusing on reaching profitability, earlier players have an opening to move fast and secure necessary funding.