There was a massive influx of capital provided to digital health companies in 2021, but there's since been a contraction in the public market, with digital health funding decreasing. 

Still, with the increased investments seen last year, companies' valuations rose and many gained unicorn status, a term given to privately held companies valued at a billion dollars or more.

But were companies valued at these high prices too early, allowing for unrealistic growth expectations?

"We don't look for operators that are focused on that price at all. It's how much capital do I need to get to the next phase of inflection? When I need to raise more capital, and how can I do that by minimizing dilution so the team is motivated, but also setting myself up so the next round I can still actually get a flat or up round?" Emily Melton, managing partner at Threshold Ventures, said during a discussion at the HLTH 2022 conference last week. 

Companies now have to learn to navigate the downturn in the market where there was once essentially free money, Andrew Adams, cofounder and managing partner of Oak HC/FT, said. That led to high 409A valuations that may have pushed teams into areas that didn't make sense to the core ethos of the business.

"I think what you do with your precious cash resources and time in the day is really refocus on those efforts and reprioritize," Adams said. "It's kind of more of a logical process as opposed to trying to turn the ship immediately." 

Overall, the panel agreed that the investment downturn would continue, with some saying the lack of funding may even worsen as time progresses. 

"There's any number of things that would change what the macro picture looks like, but I'm looking at it and expecting the rest of this year, whatever remains of it, and maybe going into '23 to look worse and then really kind of a challenging situation in '24. So, largely, what I'd like is for companies to have a perspective of how they can make their cash last into '25, if possible," said Krishna Yeshwant, general partner at Google Ventures.  

Melton agreed with that sentiment. Still, each investor noted the importance of focusing on having a unique offering and leveraging technology in a way no one else has done to ensure investment sustainability.

"I think the message ought to be how do we build a great company and how do we do it in a way that everybody's going to say, 'Wow, I want to invest in that company because I see the path," said Glen Tullman, CEO of Transcarent and managing partner at 7wireVentures.

Understanding a clear path to profitability, ensuring the company has a suitable capital runway and that its board and investors are supportive of the company's mission is crucial, Tullman said. 

"I've seen a lot of companies say, 'We just want to last. We want to cut whatever we need to cut so we can last three years.' Venture isn't about how long you can last because you can cut and make it last five or six years. It's about how you quickly get to something that is differentiated," he said.

Yeshwant adds it's vital to have a plan as to how the company will reach profitability. 

"We've all seen in the environment 25%, 50% of companies out there, certainly in digital health and digital more broadly, don't actually have that plan of how they're going to get to profitability. They have a plan for growth, but they don't have a clear plan on profitability or positive unit outcomes," Yeshwant said. "I think the environment with low interest rates supported that for a while. I think we're kind of in a moment where that environment just won't tolerate that anymore."

The investors noted specific motifs they'd like to see the next unicorn companies focusing on in healthcare, with Yeshwant stating mental health, senior care and primary care are important to him, and Adams noting he'd like to see future unicorns in the Medicaid space.

Melton emphasized the need for women's healthcare to become healthcare. 

"We're allowing politicians to drive decisions around our bodies, and a lot of that is because we don't have the education or the clinical context to make those decisions. And it's not just a thing about healthcare. It's an economic imperative. Women are driving the workforce. We are expanding the GDP, and we need to actually get access to the right kind of health care if we're expected to continue to be productive members of our society."