This story is the second in a three-part Q&A series with investors about digital health funding in 2024. Click here to read the first installment.
Digital health funding has decreased following a huge spike in investment during the COVID-19 pandemic.
With less cash flowing to startups, it may be time for increased consolidation. Announced merger and acquisition activity didn’t spike last year, according to a new report by Rock Health. But some of the methods startups used to buy time in 2023 — like extension rounds and unlabeled raises — probably won’t work a second time, leaving companies more likely to consider M&A.
Alex Momeni, partner at General Catalyst, talks about the potential benefits of consolidation for companies as well as digital health consumers.
Editor’s note: This interview has been edited for clarity and length.
HEALTHCARE DIVE: We’re seen digital health funding decline over the past year. How do you characterize the funding environment in 2023, and how do you think it will evolve next year?
ALEX MOMENI: I think the funding in general across sectors has declined. That comes as a response to a broader macroeconomic backdrop. And so, investors as a whole, in the previous period, were financing companies with amounts that were actually providing runway to some of these companies for several years.
As we think about next year, I would expect many of the companies that raised in 2020, 2021, and that had been well-capitalized and who perhaps managed to cut their burn, focus on driving revenue, will come out to market again and raise capital.
With less funding available, M&A is likely to rise. Do you see that happening now? What sectors do you think are ripe for consolidation?
When funding was broadly available, you would often have areas where several companies within a very small period of time were created to serve the same sort of problem. And the goal for everyone in healthcare is to build platforms, right?
You do expect there to be some consolidation across different areas. In software, it will happen, and it does make a lot of sense, because you do have a number of companies that are building complementary solutions, and where there are real synergies that come from that. There are also companies that have very deep talent pools and will benefit from concentrating talent within one company.
And then on the services side, M&A has always been a big driver of growth for companies that are successful. So we expect some of the market leaders to consolidate their position in the market through M&A.