Signs of Vitality: More of Every Dollar Invested Goes to Healthcare Tech Startups

As market challenges have continued to drag on funding and innovation in 2023, it's interesting to look at the sectors that have continued to show signs of stability. That exercise shows that more stalwart and less cyclical sectors and businesses still capture funding, even if angel, seed, and early-stage funding deals have pulled back.  

Healthcare Tech is an excellent example of this more 'measured' investment mentality. So far in 2023, there has been a drop (nationally) in Healthcare Tech funding rates from its high of 49% in 2020-2022 to 26.2%. Later-stage and venture-growth VC deal values have been lower, with median deals of $6.4 million and $15.1 million, respectively. But the median deal size of angel and Seed deals has risen to a multiyear high of $5.4 million. What's more, the decline was relatively slight compared to many other sectors. And, perhaps most importantly, the funding level has remained above its low point in Q4 2022 when only 28 deals were done, and the total value was less than $20B.  

Many early-stage investors are looking to see a path to profitability. Evidence of stability and strong business fundamentals is necessary. Startups (particularly later-stage businesses) must show an ability to manage environmental issues like a challenging 'exit' environment, long health system and payer sell cycles, and a contracting self-funded employer market. These factors indicate that Healthcare Tech investment is experiencing a 'return to normal.'  

Southeast Healthcare Tech Investments

In the Southeast, venture capital activities since 2022 have reflected national trends, prioritizing more stalwart, proven sectors and businesses. It's not surprising, then, that Healthcare Tech (which includes high-performing Teletherapy and Behavioral Health and Care Coordination companies) and Biotech/Pharma have captured most of the region's funding dollars.  

Especially since COVID-19, Healthcare Tech and Biotech/Pharma startups have outpaced businesses in other sectors by capturing market traction by solving deeply vexing and incredibly urgent challenges. What's more, Healthcare has outpaces most industries with respect to the potential for AI to have a meaningful, transformative impact (not so much on care, but on the ability of caregivers to work more efficiently and with fewer human-powered hours).  

Those two considerations have put Healthcare startups in the spotlight for angel, VC, PE, and government funding sourcing. Between 2022 and 2023, the dollar value of deals rose from 9% to 22%, and (as of Q3 2023) 36% of Mega deals have been in the sector. And, indicating a possible sea change, Healthcare Tech companies are seeing more funding coming from entities like The Centers for Medicare and Medicaid Services, which have begun reimbursing more providers for novel methods of care.  

See the recent news about the $20M funding round into Kythera Labs.

A Healthcare Analogy for the Investment Environment  

The investment environment has had 'the crud' for months. It has spread like a virus, slowing investors and innovators down – in some cases, by a lot. But we are seeing evidence of the proper treatment. And there's reason to believe that the system/sector will be more vital in the long run.  

The overall tempering of deal counts, sizes, and stages in Healthcare Tech is a good reminder that patience and reason should rule the funding process. Though fewer deals are happening, great companies are still capturing funding, and good VCs are seeing those startups through from investment to exit. As more funding goes to startups building real solutions to real problems, the innovations brought to market will become stronger. And with KPIs measured on fundamental business strengths, it's fair to presume more of these companies will gain traction and grow for years to come.  

A healthier long-term investment mentality has replaced the frenzied 'growth at any cost' and desperate innovation environment that characterized the COVID-era (2020-2021) environment. For Healthcare Tech founders and investors, that's reason for optimism.  

Data Sources

• ‍BIP Ventures State of Startups^SM in the Southeast 2023
• Pitchbook Healthcare IT Report 2023  
• ‍Pitchbook Q2 2023 Digital Health Report