According to new research from digital health venture fund Rock Health, the sector is not in a bubble.
Our big question: Really?
Why it matters: Amid sky-high valuations and unprecedented investor attention, industry observers are beginning to wonder whether a burst — and its accompanying freeze on financial commitments — is coming.
Context: Key features of previous bubbles have included the following six elements, the Rock Health researchers write.
- Hype that outweighs business fundamentals.
- High cash burn rates.
- A rapid rise in valuations.
- A surge of fresh capital from new investors.
- Unclear exit pathways.
- Fraud or misuse of funds.
What Rock Health is saying: The firm’s researchers say two of the above six features (hype exceeding fundamentals and fraud) aren’t happening in digital health — at least not yet.
- “Various sustainable business models have been demonstrated in recent years, including value-based, SaaS, payer reimbursement, and D2C models (even B2C2B models),” they write, adding that COVID has only created a more supportive reimbursement environment.
- Further, there have been “few signs of dotcom era-style extravagance or fraud,” the researchers write, beyond “rumblings of misconduct.”
The other side: Investors, entrepreneurs and industry observers tell Axios they believe all six have occurred or are occurring across health tech.
- “Digital health is due for a market correction,” startup advisor and practicing physician Benjamin Schwartz notes on LinkedIn. “A more sensible, sustainable approach that … synergizes with traditional care and values reality over hype will emerge.”
- “I think we’re headed for an armageddon,” says Virta Health CEO Sami Inkinen. “I don’t see valuations popping back to where they were anytime soon.”
- “We’re on a trajectory that will accelerate some disruption and we’re definitely going to hit the trough of disillusionment or some kind of consolidation,” Peter Durlach, chief strategy officer for the digital health company Nuance that was recently acquired by Microsoft, tells Axios.
The bottom line: Bubble or no, there is widespread acknowledgment that the market is “frothy” — and that entrepreneurs should brace themselves for the coming years.
- “Digital health is not in an investment bubble, but it is frothy,” the Rock Health researchers note, adding, “innovators should take concrete actions to prepare for tighter capital markets.”