4 Things Digital Health Investors Look for in a Tight Funding Environment

Since interest rates started climbing in 2022, digital health companies have faced a tighter VC market. In fact, funding for digital health organizations dropped from a 2021 high of $29.1 billion to just $10.7 billion last year. That’s the bad news.

The good news: there are still VCs looking to invest in industry-leading digital health companies; in fact, my company closed a $31 million Series B in September.

There are four things that entrepreneurs need to demonstrate to investors to have fundraising success: a large total addressable market, strong unit economics and product-market fit, a world-class team, and a compelling plan for the future.

In this article, I’ll explain why each matters and how to demonstrate these essential indicators the next time you’re raising money.

1. Total addressable market: Are you solving a big problem that people care about?

Since we raised our Series A three years ago, gut health has gone mainstream, thanks to consistent education from those of us committed to making GI care more accessible.

In pitching for our Series B, we focused our efforts on educating potential investors about the size of the addressable market. To do this, we pulled third-party data from CDC and NIH on how many Americans are affected by gut health issues (40 percent), then compared those numbers to more familiar markets, like diabetes, mental health, and musculoskeletal care.

Each of those comp markets is well established – and our addressable market is even bigger, with direct impacts on employee productivity and effectiveness. That kind of framing can help investors understand the potential for a digital health solution.

2. Strong unit economics and product-market fit: Profitability and scalability

These are two separate indicators, but they go hand in hand.

First, unit economics: Investors want to see that you can create your product profitably on a per-unit basis. (Note that this is the opposite of the notorious early-2010s model of companies like Uber, which aimed for growth at all costs, insisting they’d figure out the unit economics later.) Just as important: Can you maintain your unit economics as you scale?

Second, product-market fit: There’s a big market, yes, but does it actually want and need the product you’re producing profitably? If so, you have product-market fit.

When you’re seeking venture capital, there’s also the question of how profitable you need to be to be considered a good risk. That varies by industry, but it’s information you can track down by either talking to investors in your space or tapping benchmarking resources like those published by Rock Health, which outline VC-specific profitability expectations for various industries.

You can expect investors to care about things like your gross margin profile, average LTV of customers, customer acquisition cost, and monthly burn rate. Investors typically have benchmarks for each of those metrics for a business in your industry. For example, a SaaS startup might need to show a 90 percent gross margin profile, but something lower might be acceptable if you can show you’re on a trajectory of improvement.

As for that trajectory, you’ll need solid numbers to demonstrate its likelihood – like past growth and a clearly articulated vision for the future (which I’ll get into below). Key here is to know which category you fall into, what investor expectations are for that category, and how to demonstrate that you’re meeting (or exceeding) those expectations.

3. A world-class team

Investors want to know that, as founder and CEO, you can build and scale a world-class team. Across your team, they’ll look for domain expertise and experience in growing and scaling similar organizations.

Building a great team isn’t just good for raising money, though: surrounding yourself with top-tier talent makes you a better CEO and gives potential investors the confidence that your team will be able to execute against your growth plan.The key to building such a team: you should be constantly recruiting and assessing talent. My suggestion is to invest early in creating processes around building teams: recruiting, interviewing, hiring, coaching, performing ongoing talent assessments, and so on.

The best teams emerge when team-building is an always-on discipline.

4. A compelling plan for the future

Investors don’t want your hopes and dreams here. They want a big vision coupled with a concrete plan that you can execute against.

In our investor conversations, we presented our five-year projections and our detailed plan to get there. We also highlighted our past performance, laying out previous projections alongside evidence of our having beaten them. That context can add credibility. As with unit economics numbers, it’s best to go into this understanding what the expectation is for your industry. What will your investors expect in terms of year-over-year percent growth? Gross margin profile improvement? Lifetime value?

If you’re not sure which metrics to forecast, ask around. Investors and other startups can guide you, as can industry publications. In addition to offering projections for core growth, we outlined structured optionality – additional business segments we can target and product enhancements we can build that expand the TAM and support future exponential growth. These projections help communicate not only that we have a vision for the future but that we are building the company and the platform today knowing that we will move into other markets.

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

A few times in this piece, I’ve suggested asking for input from investors, meaning investors you have relationships with, but not necessarily the investors already funding your company.

Building these relationships – with investors and others in your industry – will make your fundraising journey much smoother. Why? Three reasons:

1. You’ll have a better understanding of what they’re looking for. They can provide the aforementioned benchmarks that they’re looking for in companies.
2. They can give you feedback on your pitch. I strongly advise not pitching for the first time in your first fundraising meeting. Share your pitch with friends, colleagues, and investors you know to get feedback.
3. You’ll decrease the amount of work you have to do when you pitch. It’s much easier to pitch an investor who already knows you and understands what your startup does. How do you get to that point? Build relationships with investors.

In a tight capital market, keep your mission in mind

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

Raising money is an excellent way to accelerate your growth plans, but more than that, it’s one of the most effective ways you can bring more impact into the lives of more patients.

Photo: drogatnev, Getty Images