Author: Simon Meier

Market Review for Digital HealthTech Investing with a focus on Europe.

Welcome back from your well-deserved summer break and enjoy the summer while it still is nice. To get us started on the remainder of the year, let’s have a look at how the year went so far. Let me share a view on how the funding environment evolved for the startup community with a focus on Europe and the HealthTech sector.

During the first half year, any conversation with other investors, LPs and the startup community quickly turned to the drop in funding. It often had an air of a mantra being repeated to each other but it was hard to ignore the anxiety for the future in the room.

Thanks to the reports from Pitchbook, Rock Health, Galen Growth, Brainwave.de and the SVCA, we can quickly gain a picture of our industry. At Vi Partners we invest in the early stage and therefore have specific attention on that segment.

Let’s have a look at the funding evolution overall.

The funding in the US and in Europe for the first half-year has dropped across the board.US funding was 85bln down from 158bln (-46%) while Europe totalled 25bln down from 65bln (-61%). Back last year the funding in late stage dropped much more than the early stage. This first half year, the data shows the seed and early stage did now follow. In the US the seed and early stage dropped 55%. The same happened in Europe. It is remarkable that the earlier stages (-55%) still held up better than the late stage (-64%). The funding levels have returned to about the levels of 2019 and 2020 across the regions and the stages.

A quick look at the industry breakdown for the US does show some drastic shifts between the industries. While all sectors lost funding levels, the MedTech and Software sectors were relatively more stable while Media, Consumer and Digital HC retreated much more aggressively. As the largest subsector by far, the relative strength of Software increases the market share to almost half of the funding. The Healthcare investment pace maintains the 20-25% market share overall it has maintained over most of the last five years. Given the stories in the market about the demise of the Software subsector this result seems not to confirm such a negative scenario.

What about the nuances within Europe?

The European drop in funding has played out quite differently across the sectors. Completely opposing the trend in the US, the European Software sector had one of the largest impacts. With a reduction of 72% of the funding, it showed a very strong reaction to the shift in market sentiment, with below 30% of the funding has received funding below its long-term market share (35%). A few of the smaller sectors had large swings as well with media almost disappearing (-92%) while IT Hardware and Energy showed resilience in a down market (-17% and -29%). The Healthcare subgroup was able to move back towards the 20% longer-term market share after having been below 15% during the last two years.

Within the European regional breakdown, the correction hit the less evolved markets much harder. The DACH (25.8% Market share, +5.2% vs. 2022) and the France & Benelux (31.4%, +9.8%) region maintained a good pace of investment and gained relative share. The UK & Ireland region did maintain its share quite well (28.3%, -1.4%). The most impacted region turns out to be Israel (3.4%, - 8.3%).

Digital Healthcare and Life Sciences

In the US, the funding for Digital Health at 6.1bln has had the lowest rate since 2019 but if the pace continues will be within 80-100% in the 2020 and 2022 years. Rock Health remarked on the continuation of funding in large rounds for value-based care, non-clinical workflow and practice management as well as at home care with 3, 3 and 2 deals at >;100mln raised. It appears the investors are ready to provide capital for subsectors with proven willingness to pay for the transition to a more digital model.

Galen Growth reports the European funding level to have totalled 1.4bln which is a run rate comparable to the year 2020. While the last year provided some basis for hope for a catch-up of the European market to the US one, the new numbers have both regions back in a similar trend. Galen Growth notes a funding preference for startups with a clear evidence basis suggesting a move to higher quality opportunities in Europe as well.

What about Germany and Switzerland?

For the Digital HC&LS segment, Germany achieved 273 (€M) down from 330 in the first semester of 2022. The subsector held up very well compared to the German market coming down to 3,950 (€M 1H’23) from 8,486 (€M 1H’22). Patient21 and MEDWING have been the main driver of the subsector funding (108M and 47 M respectively). Both echo the overall trend in scaling hybrid healthcare opportunities.

After the surprising record pace delivered by the Swiss ecosystem last year, it has not been able to defy the global trend anymore. The first 6 months saw funding of 1,195 (M-CHF) vs 2,585 (M-CHF) last year. The largest drops were in ICT (dropping 732 to 166 from 898), Cleantech (dropping 535 to 137 from 672) and Fintech (dropping 158 to 191 from 349).

The healthcare sector (BioTech, MedTech and HealthTech combined) remained almost stable with 560 (M-CHF) in 2023 vs. 567 (M-CHF) for 2022. Switzerland has had a very strong healthcare subsector with quite stable fundraising pace through the business cycles. Within the healthcare subsector, the Healthcare IT area has seen a large drop from 122 to 16 driven by the absence of large and late rounds in 2023 compared to the round of MindMaze in 2022 (97 M round).

What about Exits?

Compared to 2022 the public markets in 2023 so far have performed remarkably stable. The focus of many companies in technology and healthcare has been on the improvement of cost structures and managing inflation. Overall, the exit opportunities for VC companies were almost inexistent. Total exit value in the US for the first half was only 12 bln with 3.5bln in Europe. This is down from 75bln in 2022 and 1,966 bln in 2021 in the US and 40bln in 2022 and 135bln in 2021 in Europe. Under these circumstances, the list of good news out of the healthcare subsector on the exit side is quite short. A few biotech, Dx/Tools and MedTech deals have been done, but the pace is very slow compared to the prior 5 years. With Pear Therapeutics, the HealthTech area did experience a high-profile dissolution of one of its champions. This case and many less high-profile have led to an uptick of asset sales to resolve them. As Rock Health indicates, it is a sign of a maturing and learning ecosystem to find ways to resolve such projects in that manner.

At Vi Partners we were able to have our Portfolio company Oculis successfully close a SPAC transaction onto the NASDAQ. With the positive interim data from the Ph3 trial the company was able to support and improve the stock price since the transaction.

What comes next?

Predictions are always difficult, particularly when they are concerning the future. We believe the trend to focus on building businesses with a focus on margins and growth plans at affordable capital outlays will remain in the focus of startups and their investors. We will continue to see companies growing slower and stretching their run rate to achieve better KPIs for their next rounds. We will also see more companies and investors getting desperate and being forced to accept funding and exit terms less attractive than 2 years ago. We believe the rest of 2023 and into 2024 the market will accept the new normal situation where capital is no longer as cheap and where Venture capital needs to return higher than the increased return opportunities in a higher interest rate environment. We continue to see attractive investment opportunities in the HealthTech sector and will observe the evolution of this market again at the end of the year.

We would love to hear from you if you have comments, suggestions or discuss with you if you see the world differently.

Thanks and Acknowledgements

Thanks to rockhealth.com, galengrowth.com for your excellent overviews of the digital HC&LS industry.

Thanks also to brainwave-hub.de for the special attention to Germany. SECA, Startupticker.ch and venturelab.swiss for the specific Swiss angle. And obviously pitchbook.com for their excellent market overviews for the US and the European Markets.

To avoid the general confusion between early stage and late stage reference to stage is based on Pitchbook terminology. Seed are all rounds prior to A. Early is A and B, Late is C and D and Venture Growth is E and later.