After a year of mega-rounds, skyrocketing valuations and a parade of growing digital health startups, the investment landscape looked a lot more tepid in 2022. 

But there are still plenty of opportunities for startups, especially for companies that can demonstrate their value amid a challenging economic environment, said Dr. Sunny Kumar, partner at GSR Ventures. Kumar sat down with MobiHealthNews to discuss digital health funding this year and his predictions for 2023. 

MobiHealthNews: What are some of your big takeaways when you look back at digital health in 2022?

Dr. Sunny Kumar: 2022 has been a year of transition, and a year of a healthy reset, where we saw the exuberance of 2021 come down and, honestly, expectations normalize as a combination of macro factors — whether that be the interest rate, what's been going on in Europe with the conflict between Russia and Ukraine, what's been happening in Asia with "zero-COVID," the supply chain — affecting the entire economy, including the healthcare ecosystem. 

Investors, startups, large companies have all taken a step back and reassessed the ecosystem, saying, "Where are we actually creating real value?" And I think that's been the question that all of us, especially the investor community, are asking.

Digital health at the end of the day can create absolute, potentially even world-changing value. But in some cases, that may have been a little bit overhyped in the past few years, especially during the COVID period. Not to pick on any of them, but you saw some companies, maybe in the tech-enabled services, telemedicine companies like Teladoc, that went at the peak up to 25 to 30X revenue multiples. And most people will tell you today that that was probably too high. 

Today, those companies are trading at 2X, 3X revenue multiples in the public markets. Maybe that's too low, but that's where we are today. I think what we're seeing now is the markets resetting, realigning.

As we look forward, I think the question now is, where are we going to create real value? And I think that's what the future is going to be about. Where's that high ROI [return on investment]? Where do we have the evidence for clinical validation? Where are we going to be able to deploy technology to create transformative outcomes?

MHN: Do you think some of this was predictable last year?

Kumar: Some of it's always easier to see in hindsight, for sure. Some of the signals were definitely there. I think some of the investors probably got a little bit ahead of themselves with how eager we were to invest in some of these companies. 

I'll give you some examples of those signals. Historically, we would take our time with diligence, with making sure that we knew the ins and outs of companies and that we understood not only the entire ecosystem, but the specifics of companies. Some of those practices started getting curtailed. 

You started seeing companies go out to fundraise and term sheets being issued sometimes within a week or two, sometimes even within days of companies going out to fundraise. So, when you start seeing signals like that, I think that's when you start seeing indications that we may be getting into a little bit of a hype cycle. 

It doesn't mean that the companies themselves were bad or are doing the wrong things. But it might have been an indication that we were getting a little bit too much on the overexcited side of things. 

So, I think you're just now starting to see some of that come back. If you look today, there are still fundings happening, still great companies out there. But you're starting to see a normalization back towards the normal diligence cycles, people doing the work. 

We're fortunate that we're not having another Theranos in the healthcare environment – at least, we're not seeing that at that same scale. We're not having another FTX on the healthcare side of things. But I think you see more of those types of things when you don't have that full diligence process, when you have folks that are maybe so eager to jump into companies that they're not doing the full work that they might have otherwise done. They're not demanding the full oversight of companies that you might otherwise have in a more normal environment.

MHN: So, we know that digital health funding fell significantly this year. How did that affect your decision-making? And how did you advise your portfolio companies, or companies you were considering investing in?

Kumar: It's definitely come down. I think it's come down to a relatively normal level, so it hasn't absolutely cratered. If you compare it to 2021, it's absolutely down – there's no doubt. But if you compare it to 2020 or 2019, it's comparable to those levels.

But at the end of the day, it hasn't been a massive, massive change to the point where there's panic in the markets. That said, it has changed behavior. Even prior to 2021, there was a mindset that companies should grow, and to some degree, "grow at all costs." Growth was the number one thing that was valued. 

From a startup perspective, what's changed today — and this is especially seen in the public markets, and this carries upwards into the private markets — is to grow, but grow in an optimal manner. That means that while growth is valued, you shouldn't be prioritizing growth over everything else. You should make sure that your growth is occurring at a pace that is responsible relative to your other costs. 

Do you have a plan to get to profitability, or at least cash flow breakeven? And the interesting thing is, you're seeing that [question] at earlier and earlier stages. It used to be common that most companies would be going public well before profitability. And you would not even hear the words "give a path to profitability" at a Series C or Series D stage. Nowadays, it's not uncommon to hear investors ask a Series A or Series B company going out to fundraise, "Do you have a plan to profitability?" And I think some might say that's a little bit of an overcorrection. But I think, overall, that's healthy for the environment.

MHN: What do you think the investment landscape will look like in 2023? Do you think it will improve compared with 2022? And what do you think are going to be some of the attractive therapeutic areas and value propositions next year?

Kumar: I think if you look at it on a run rate basis, the total amount of dollars will probably look similar to 2022. From a run rate basis from where we ended up in Q3, Q4, I actually expect us to bounce back a little bit above where we end up at the bottom of Q3, Q4. So, I actually think this will probably be the overall lull in the market. 

If you look at who's out there in the ecosystem today, the valuations are still correcting. Some folks out there are still normalizing, with the correction in the public markets to the private markets. And I think that's very normal. Valuations got very, very high, multiples got very, very high in 2021. Many companies went out to fundraise, and I think some of that is still percolating throughout the private markets. 

Many companies who raised in 2021 haven't felt a strong need to go out to the private markets to fundraise again. We'll start to see many of those companies come back to market in 2023. And I think that will kick off another round of fundraises. If you look at the data, there are still actually quite a few companies fundraising in the seed and Series A and, to some degree, the Series B. But you haven't seen as much in the Series C and series D stages. I think that those companies will start coming back to market in 2023, especially in mid-2023 and later. So, overall, I expect things to normalize and then start to come back, especially in the latter half of 2023. 

If you look at specific sectors, I think that there's going to be a number of areas that are going to be interesting. But I think the most important drivers of areas of interest are going to be where there's going to be a high ROI and value proposition. It's very, very likely that the U.S. and the world is going to enter a more contractionary period. It's likely we're going to have a recession, and it is probably going to affect healthcare. 

So, if you look at all of the buyers — whether that be health systems, payers, pharma, even consumers themselves — all of them are going to be a little bit more conscientious with their spending. So, what we've seen already is that anybody selling to those customers has to make sure that their solution is either mission critical or generating an extremely high value proposition. So, if you're generating $5, $10 back for every dollar spent, that's something that's going to be able to justify that spending even in that contractionary environment. If it's nice-to-have, if it generates 10% to 20% ROI or has a really long payback period, those are solutions that I think are going to be a little bit more challenging in the near term.