This year, venture capital investment in the health tech sector is expected to decrease 65% from its $29 billion peak in 2021 to about $10 billion. 

But despite the decline, a recent report by Bessemer Venture Partners indicates that health tech is on the cusp of a transformative era.  The recent annual report, titled “State of Health Tech 2023,” delves into the recent performance of the health tech sector, identifies industry benchmarks and best practices, and provides compelling predictions for the emerging landscape in 2024.

Despite some hurdles and market corrections, the report presents an optimistic outlook of health tech industry, concluding that it has the necessary elements for a successful future: resilient founders, patient capital (in venture, private equity, strategic and public markets), and a $4 trillion market opportunity with unsustainable cost trends that requires business model innovation and application of technology. 

Let’s take a look at Bessemer Venture Partners’ report and what the future holds for the health tech sector.

2023 Public and Private Market Performance

The health tech sector has been on a rollercoaster ride in recent years, with public companies underperforming major market indices. The report highlights that this underperformance can be attributed to a “hype cycle.” By studying a cohort of publicly traded health tech companies, Bessemer Venture Partners identified three phases typical of this cycle:

Phase 1: Technology and Regulation Trigger

During the early 2010s, changes in regulation and the adoption of cloud technology triggered the birth of digital health companies. The COVID-19 pandemic accelerated growth in the sector, with companies reaching their peak valuation in February 2021.

Phase 2: Peak of Inflated Expectations

The sector experienced a significant decline in 2021, correcting for early pandemic-driven exuberance. Health tech stocks lost an average of 60% in value during this period.

Phase 3: Trough of Disillusionment

Since hitting the bottom in May 2022, the health tech sector has stabilized. Recent gains are driven by large acquisitions, suggesting that the industry may be at the bottom of the market.

The report also highlights the resilience of sub-sectors within health tech. Biopharma companies remained relatively stable, while tech-enabled services showed improved share performance compared to healthcare SaaS. Revenue multiples within these sub-sectors varied widely, leading to a shift away from relying on revenue multiples for valuation.

The report identifies three silver linings amidst the market challenges:

• The sector has generated over $90 billion in public market capitalization in the last five years, with new companies going public during this period.
• The contraction in valuation multiples has led to a surge in acquisitions, indicating progress toward more efficient care delivery.
• The health tech sector’s journey mirrors that of the cloud market, which also took time to mature.

Benchmarks and Best Practices

The report underscores that health tech companies often require more time and capital to achieve meaningful scale compared to software counterparts. However, it’s crucial to differentiate between different types of health tech revenue. For example, value-based care companies can achieve multi-billion-dollar revenues but often have lower gross margins.

The report introduces the concept of a “scalability score” to assess the balance between growth, unit economics, and profitability. Companies with higher scalability scores tend to have stronger moats and shorter sales cycles, making them more attractive to investors.

The analysis also reveals that health tech is one of the best-performing sectors, with healthcare SaaS companies showing average returns of 3.1x and healthcare services businesses averaging 2.6x.

Emerging 2024 Predictions

The report provides insights into emerging trends and predictions for 2024. Four key predictions for the future of health tech include:

AI Gives Rise to Services-as-Software

Advancements in generative AI and large language models are enabling the development of software applications that deliver services as final products. This shift presents an opportunity for health tech companies to capture a larger market share and offer solutions that were previously impossible.

Healthcare Payments Companies Win by Aligning Incentives

Efficiency and transparency in healthcare payments present significant opportunities. Companies that can align incentives between payers and providers and streamline the payment system have a competitive edge.

Health Tech Businesses Leverage Indirect Monetization for a Distribution Advantage

Health tech companies can shorten their sales cycles and gain a distribution advantage by providing free or low-cost software to customers. These companies leverage indirect monetization strategies, such as billing and payments, to strengthen their moats.

Startups Focus on Making the Biopharma Value Chain More Efficient

The biopharma industry is under pressure to become more efficient and cost-effective. Startups that leverage AI to expedite target discovery, streamline clinical trials, and enhance commercialization processes have the potential to transform the industry.

The “State of Health Tech 2023” report by Bessemer Venture Partners paints a nuanced picture of the health tech sector. While there have been challenges and market corrections, the sector is poised for transformation. Resilience, innovation, and a focus on business fundamentals will be key to its future success. The report provides valuable benchmarks and insights that can guide founders, operators, and investors as they navigate the evolving landscape of health tech. Want to learn more? Read the full report here.