By MATTHEW HOLT

There’s been a lot of discussion lately about whether digital health is a legitimate place for venture capital. There have been lots of huge failures, very few notable successes (and certainly no “biggest companies in the world” yet, while some real giants (Walmart/Walgreens/Amazon) have come in and then got out of health care.

I don’t have to tell you again that most of the publicly traded digital health companies are trading at pennies on the dollar to their initial valuations. But I will. Look at that chart below.

Heck even Doximity– which prints money (45% net margins!)–is trading at well under its post IPO high. My quick overview is that there are not very many publicly traded companies at unicorn status. With really only Doximity, HIMS and Oscar being very successful (We can have a separate argument as to whether Tempus and Waystar are “digital health”). And there are many, many that are well off the price they IPOed at. All that at a time when the regular stock market is hitting record highs.

Which makes it interesting to say the least that Define Ventures just came out with a report saying that in general digital health has done well as a venture investment and that it was likely to do even better, soon.

The report isn’t that long and is well worth a read but their basic argument is based on comparing digital health venture investments to those in fintech and consumer tech. Essentially it took digital health a lot longer to get to 10% of total venture investment than fintech or consumer tech, but it got there after 2020. Now more than 10% of all VC backed unicorns out there are health tech companies. Yes there was a retrenchment in 2022-3 but health tech investment fell less than other sectors in 2022-3 and is basically back in 2024.

The Define forecast forecast is interesting (it’s the chart below). Define posits that it took 4-5 years after the fintech and consumer tech sectors became 10% of VC dollars for them to start pumping out exits and IPOs. There are 30-50 each in those sectors now, but health tech was ahead of that with 18 exits already in the first 5 years after getting to 10% of VC dollars, and those exits were on average double the size of the fintech/consumer tech exits. (Although to be fair the health tech exits were when the market was higher after 2020)

In fact their analysis is that capital returned was about 10x investment.  You might say, but hey Matthew didn’t you just show me a chart that most of those 18 companies were public market dogs? And you’d be right.

If we look at the 18 companies Define examines, they don’t actually match the list of 11 unicorns I have on my chart earlier but in general they haven’t done well in the long run.

Some have gone under (Science 37 & NueHealth sold for parts), some have been bought for real money, if way less than they once traded for (One Medical was at one point $50 a share but bought for $18, but that was $3.9 billion including debt, Accolade was just bought by Transcarent for about $600m), whereas most have slowly declined to well less than IPO price (Amwell, Talkspace, Health Catalyst, and all the bits currently inside Teladoc, including Livongo & InTouch).

But Define compared those public companies’ performance to some other unprofitable early stage public companies and saw that those companies they defined as “services” and “payers” did worse but “hybrid” and “SaaS” did better than other tech companies. 

(By the way, it’s pretty amazing that someone put together an index of loss making public tech companies but apparently Morgan Stanley did! It’s called MSUPTX although my Googling can’t find it!)

Define is also suggesting that the next set of digital health companies to go public or exit via M&A will do so faster and at a higher value. In general that’s because “component parts tech” is more easily available to buy off the shelf, with AI being the obvious “component” example. Therefore these companies will get to scale quicker, and AI will accelerate that. Here’s their list, which includes one services company, Carebridge, that already had a good exit.

But I’m still highly concerned that these companies can’t get to a sensible valuation based on what they have raised. Let’s compare them to the darling of what Define calls “Wave 1” of health tech IPOs. Livongo raised $237m before its IPO. Ok that’s not chicken feed but it was valued below $1bn before the IPO and around $4bn soon after the IPO. 3 months later it was trading back down closer to $2bn and then began its pandemic-fueled rise to a $20bn market cap and the famous $19bn merger with Teladoc.

$237m may sound like a lot for total capital raised but Innovacer has raised $675m, Lyra & Hinge Health nearly $1bn each, Included Health’s component parts have raised “only” $500m, and Devoted Health has raised over $2.25bn. So those companies are going to have to get out at multi-billion dollar valuations to do anything like compared to Livonogo’s success, and then public market investors (or their acquiring companies in the case of M&A) are going to expect them to grow from there. Given the performance of the companies in the sector now, and that there are still many similar companies worth a whole lot less on the public market, either these private companies have some tremendous performance going on, or you’d imagine they are going to disappoint their investors.

So how can Define claim that the first wave of companies returned 10 times the capital invested? 

I think that’s relatively simple. 

Many of those companies IPOed or were acquired at a price well in excess of where they ended up. But if you were an early stage investor able to sell at the IPO or shortly after, you may well have made that ten bagger return.

Maybe if you invested early enough in the second wave, you might see that return too. But so many of those companies raised so much money at such a high valuation in the halcyon days of 2021 & early 2022 (not to mention late 2024 and early 2025) that it’s hard to see those levels of returns for most investors. And of course if you are a public market investor buying in the frothy period post-IPO, the chance that you’re a pig being led to slaughter is very high indeed.

But if you’re a VC and you can buy in cheap enough you can make great returns. So long as you do your stock trading carefully, and have some luck!