Five lessons for healthcare investors

Veteran digital health investors David Buller (founding partner at Ascension Life Fund, exited founder of Avantec Healthcare, and a serial Angel investor in healthtech companies) and Laurent van Lerberghe (a pharma executive - formerly Sanofi's chief strategy officer - turned digital health investor, who has successfully launched healthtech businesses across multiple continents) share their own H1 2024 takeaways, as well as their predictions and advice for H2 activity.

Taking stock: the year so far

Against a backdrop of lingering economic challenges, inflationary and regulatory pressures, 2024 has so far been a year of huge technological advancement: AI innovation has unlocked new healthcare delivery models and modalities; new life science capabilities have powered high-value deals; and new therapeutic classes, such as GLP-1s, have triggered significant downstream effects.

It has all contributed to an environment that could best be described as one of cautious optimism. As science, technology and AI collide to create transformative new opportunities to improve population health outcomes, dealflow is gaining pace again.

Lessons learnt

1. The challenges of navigating uncertain and changing regulatory environments cannot be underestimated

Slow regulatory processes and limited public funding is holding back the growth of digital health startups, and although France, Germany and Belgium have all recently introduced accelerated market access pathways for certain digital health products (PECAN, DiGA and mHealth respectively), these initiatives have been slow to take off.

Companies must have access to specialist support and advice and also ensure there are plans in place to address and mitigate a range of regulatory eventualities.

2. It is becoming more apparent where the real potential of AI lies

We're seeing incredible progress from companies applying AI to improve medical imaging, accelerate drug discovery, enable digitised clinical trials and tackle diseases of ageing, such as CluePoints, Pangaea and Panakeia. Their innovation could have a significant impact on research pipeline productivity, human life expectancy and quality of life in later years.

The market for at-home 'DIY' diagnostics is also growing to meet a public appetite for health self-knowledge - for example, very successful startups such as ExSeed Health and Hertility are stepping in to empower people with knowledge of their fertility status.

Some of them have figured out successful go-to-market strategies and managed to find sizeable sources of cash and revenue. We're not convinced, however, by the majority of the longevity-focused diagnostics offerings from wellness companies. Although their apps, devices and sensors will generate plenty of data, few will generate real health impact or find a sustainable revenue model to unlock profitability and scaling.

3. Big players like pharma, medtech, and clinical research organisations remain the main source of funding for startups

Investors are significantly more risk-averse in 2024 than in 2021 - and with good reason. Viable business models and realistic sales strategies are being prioritised over overambitious, high-risk, and cash-burning hyper-growth.

The European ecosystem, meanwhile, continues to produce a wealth of strong startups and spinouts. Those exhibiting signs of successful global expansion are, notably, those buoyed by partnerships and strategic collaborations.

It is becoming increasingly essential for health startups to build and maintain relationships with life science companies, pharmaceutical companies, and major hospitals to unlock early scale up opportunities whilst they work with regulatory and reimbursement bodies to get access to public markets and patients.

4. Digital health company scale up across Europe is finally becoming a reality

Over the last 10 years, governments have focused on building fertile startup ecosystems in their own countries, producing a large number of companies looking to accelerate growth beyond national borders. These companies have invented a new model to achieve this. Rather than expanding in a linear fashion, country by country, they are building partnerships with similar players internationally to supercharge their own growth potential.

Investors have always questioned the ability of health startups to scale across Europe, but these trailblazers are proving that it's possible. Companies showing how this can be done include LynxCare, which has leveraged an impressive array of partnerships to get a foot in the door across multiple geographies.

5. Increased investment and diversity are necessary to improve fund returns

Earlier this year, a joint report from European Women in VC, Founders Forum Group, and Tech Nation highlighted the need for more institutional investment into European venture capital, and the need for more diversity in the VC sector.

We now know that diversity significantly improves financial performance on measures such as profitable investments at the individual portfolio-company level, and overall fund returns. VCs have begun to recognise this and are increasingly putting diversity high on their list of priorities. Something to be celebrated!

Looking ahead: autumn and winter

By the end of 2024, elections will have been held in at least 97 countries, including eight of the world's 10 most populous nations - Bangladesh, Brazil, India, Indonesia, Mexico, Pakistan, Russia, and the United States. With the possibility of leadership change comes a great deal of market uncertainty.

For the health sector, the second half of 2024 could bring consequential changes to research and development programmes, health service funding, public health initiatives, reimbursement models, cost control measures, support for innovation and startups and more.

Diversifying investments across different sub-sectors of healthcare can help mitigate risks associated with political uncertainty, while engaging with portfolio company management teams — to understand and advise on their strategies for navigating political changes — can either provide a clearer investment thesis or support your existing portfolio companies.

In parallel, high levels of retirement for healthcare professionals and the increased adoption of AI-enabled technology will result in significant changes to how the average person manages their health. This dynamic will create lots of new opportunities for innovation that could significantly increase quality of care if properly scaled and deployed.

Given the current state of the market, it is apparent that the most successful investment teams this year will be those with a diversity of health sector and startup experience. Furthermore, they will need to lean on substantial networks and experience to scout out young companies and subsequently unlock opportunities for their reactive adaptation, market access, global scaling and exit.

Credit: Investors in Healthcare