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.

  1. Hype that outweighs business fundamentals.
  2. High cash burn rates.
  3. A rapid rise in valuations.
  4. A surge of fresh capital from new investors.
  5. Unclear exit pathways.
  6. 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.”