How Are Investors Thinking About Healthcare Investment Trends for 2023?

This article is part of a series sponsored by HLTH highlighting topics that will be discussed at the HLTH conference November 13-16 in Las Vegas.

If you were to sum up healthcare investment trends in 2022, behavioral health, healthcare on demand and automation would be among the most active areas of investment. Although digital health funding fell in the third quarter, investors attributed it to factors such as the rise in interest rates, limited market for initial public offerings, and preparation for the risk of a recession.

Other noticeably attractive areas include pharma tech and health equity. Here’s how some investors are looking at healthcare investment. They each responded to emailed questions.

Steve Kraus is a partner with Bessemer Venture Partners which invests across stages seed to growth. He described the firm’s investment strategy as taking “a roadmap-driven approach to investment”. He said they like to understand where trends in technology, and regulation are driving change and adoption of new products and services in healthcare.

“We’ve also spent the last year revamping our views and also studying key trends of how health tech businesses scale over time across business models (initial report here)… In the last two years we invested earlier in seed and A [stages], given froth and valuation disconnect with fundamentals of scalability of business models, but we are looking to invest more around A, B and C stages more in the coming quarters.”

Each year, the healthcare industry sees more consolidation. Although this has happened on an institutional scale among hospitals and health systems as well as payers —it’s happened at a much greater volume in health tech, especially in certain sectors.

“We will likely see consolidation of care delivery point solutions treating specific conditions across specific channels or across specialties e.g., mental health or employer platforms for better navigation,” Kraus said.

This year has also seen considerable staff cuts in the healthcare sector, particularly in health tech. Kraus observed that the cost of capital has increased across cloud, healthcare Software as a Service (SaaS) and tech-enabled services businesses. He also pointed out that entrepreneurs will need to extend runway and be more diligent on making investments that drive efficient growth. 

“This will feel more acute on tech-enabled services businesses given the capital intensity of early stage models but those that understand the drivers of improvement for scaling their models will be successful at raising capital in any market,” said Kraus.

Dennis Depenbusch, director New Ventures Initiative with Corporate Venture Capital at BlueCross BlueShield of Kansas and president of Mid America Healthcare Investors Network (MHIN) also shared his take on health tech layoffs this year.

“There’s been so many market entrants to some verticals, the market cannot sustain all of them (if you have 10 companies assuming they will take 10% of the market, what can the other companies get if they hit their projections?) – once they hype settles down and reality to make revenue and grow it intelligently comes to the market, then change will happen.”

Kraus also highlighted several emerging investment trends he’s watching in healthcare. He highlighted drug pricing but also referred to the successful evolution of risk-bearing models in primary care but also noted that his firm is starting to see innovation across specialty care focused on providers “who act as quarterbacks for specific high-cost patient groups, such as kidney care, cardiology and oncology”.

“The success in models in public market will help accelerate adoption and sharpen the focus on how to scale these businesses. Increasing data liquidity driven by regulation is driving adoption of new use cases where the consumer has access to their own data, providers are empowered to break siloes and monetize datasets. For the first time, we are seeing action around drug pricing which will push various stakeholders to develop novel pricing models, better accessibility to patients, etc.”

Women’s health has also been in the spotlight due most recently to the overturning of Roe v Wade but also in recognition of the inequities in maternal health. Kraus said his firm has invested in women’s health companies, pursuing a roadmap across categories including maternity, fertility, primary care as well as specialties that affect predominately women.

Asked if there are any areas of healthcare where they have not invested or have invested little that they plan to invest in next year, Hubert Zajicek, the CEO, partner and co-founder of Dallas-based accelerator Health Wildcatters, said they would allocate funds to “more predictive and genetic medicine startups”.

“We’re also ready to invest in more, new and non-invasive sensor technology.”

When it comes to bullish bets in healthcare, Kraus highlighted technology and platforms that enable clinicians to take more risk and perform care at the top of their license. He also pointed to modernization of the healthcare payments stack to align incentives between payers and providers and reduce administrative costs of the (fee-for-service) system

For his part, Depenbush said he’s bearish about “all things value-based care (except Medicare Advantage)” and bullish about the pharmacy sector.

“Pharmacy seems to have great opportunity since this cost sector is rising dramatically. New solutions will be interesting and there’s space to be cost effective through adherence and substitution – and better pricing of specialized drugs.”

He added: “There’s no virtual solution that replaces the human touch and human accountability. There’s more approaching an integrated method, but it costs gross margin and VCs generally don’t like that even though those competitors are growing revenue faster.”

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