4 things digital health investors are looking for in a tough funding environment

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Digital health companies have faced a tight VC market since interest rates started rising in 2022. In fact, funding for digital health organizations has fallen from a high of $29.1 billion in 2021 to just $10.7 billion last year. That’s bad news.

Good news. There are still VCs looking to invest in industry-leading digital health companies. In fact, my company completed a $31 million Series B in September.

To successfully raise capital, entrepreneurs need to demonstrate four things to investors: It has a complete addressable market, strong unit economics and product market fit, a world-class team, and a compelling plan for the future.

In this article, we’ll explain why each is important and how you can demonstrate these key metrics the next time you raise money.

1. Total Addressable Market: Are you solving a big problem that people care about?

Since our Series A launch three years ago, gut health has gone mainstream thanks to our consistent education and dedication to making gut care more accessible.

Our Series B pitch focused on helping potential investors understand the size of our target market. To do this, we obtained third-party data from the CDC and NIH on the number of Americans suffering from gut health issues (40%) and translated that number into more closely related areas such as diabetes, mental health, and musculoskeletal care. compared to the market.

Each of these compensation markets is well established, our addressable market is even larger, and they have a direct impact on employee productivity and efficiency. Such a framework helps investors understand the potential of digital health solutions.

2. Strong unit economics and product market fit: profitability and scalability

Although these are two separate metrics, they work together.

First, unit economics: Investors want to see if they can make a product at a profit per unit. (Note that this is the opposite of the infamous early 2010s model of companies like Uber, which claimed to figure out unit economics later and aimed for growth at all costs.) Equally important. : Can you scale to maintain unit economics?

Second, product-market fit: Sure there’s a big market, but does that market actually want and need the product you’re profitably producing? If so, product market fit has been achieved.

When looking for venture capital, there is also the question of how much return is considered an appropriate risk. This varies by industry, but you can track it by talking to investors in your field or by using his resource published by Rock Health, which outlines VC-specific profitability expectations for various industries. This is information you can do.

Investors are expected to care about things like gross profit profile, average customer LTV, customer acquisition cost, and monthly burn rate. Investors typically have benchmarks for each metric for businesses within their industry. For example, a SaaS startup may need to demonstrate a 90% gross profit profile, but a lower value may be acceptable if it can show that it is on a trajectory of improvement.

When it comes to that trajectory, you’ll need hard numbers to prove its potential, including past growth and a clearly articulated vision for the future (more on this later). The key here is to know which category you fit into, what investors’ expectations are for that category, and how to prove that you are meeting (or exceeding) those expectations. .

3. World-class team

Investors want to know that as a founder and CEO, you can build and scale a world-class team. Across the team, you will seek domain expertise and experience in growing and scaling similar organizations.

But building a great team doesn’t just help you raise money. Surrounding yourself with top talent will make you a better CEO and give potential investors confidence that your team can execute on your growth plans. Key to Building For such teams, you need to constantly recruit and evaluate talent. My suggestion is to invest early in creating processes around team building, including recruiting, interviewing, onboarding, coaching, and conducting ongoing talent assessments.

The best teams are created when team building is an ongoing discipline.

4. Attractive future plans

Investors don’t want your hopes and dreams. They want a big vision coupled with a concrete plan they can implement.

In our conversations with investors, we laid out our five-year forecast and detailed plan to get there. We’ve also highlighted our past performance, listing past predictions and evidence that we’ve beaten them. The context can increase credibility. As well as the unit economics numbers, it is best to understand what is expected from the industry. What are investors expecting in terms of year-over-year growth? Improvement in gross profit profile? Lifetime value?

If you don’t know which metrics to predict, ask around. Investors and other startups will be able to guide you, as will industry publications. In addition to providing core growth forecasts, we offer structured options – additional business segments you can target and products you can build to expand your TAM and support exponential growth in the future. We have outlined the enhancements. These predictions help us communicate that not only do we have a vision for the future, but we are currently building our company and platform with the premise of expanding into other markets.

Bonus tip: Don’t wait until you need money to start fundraising

Several times in this article, I have suggested seeking input from investors, those with whom you have a relationship, but not necessarily those who have already funded your company. there is no.

Building these relationships with investors and peers will make your funding journey smoother. why? Three reasons:

  1. You will be able to better understand what they are looking for. They can provide the aforementioned benchmarks that you are looking for in your company.
  2. You can give feedback on your suggestions. We strongly recommend that you do not make your first pitch at your first fundraising conference. Share your pitch with friends, colleagues, and investors you know to get feedback.
  3. Reduces the amount of work you have to do when pitching. It’s much easier to pitch to investors who already know you and understand what your startup does. How do you get to that point? Build relationships with investors.

Keep your mission in mind in tight capital markets

In all of this, it’s important not to lose sight of why your fundraising materials are worth investing so much time and energy into. Like many digital health companies, we are a mission-driven organization. At the end of the day (and at the beginning and during the day), we care about the impact we have on the patients who use our platform.

Fundraising is a great way to accelerate your growth plans, but more than that, it’s one of the most effective ways you can make a bigger impact in the lives of more patients.

Photo: Dorogatnev, Getty Images

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