Sorting through the correction with GA's Robb Vorhoff

The severe digital health market correction witnessed over the last six months is not without a silver lining, General Atlantic health care chief Robb Vorhoff suggested in a conversation with Sarah this week.

Why it matters: The massive public market sell-off that followed two years of over-investment has left many well-capitalized startups burning through cash and unable to go public.

The silver lining: This should drive renewed focus on unit economics and profitability — and that's "healthy" for the market, Vorhoff told Sarah during Axios Pro's live event on Monday. Here's what he's looking for:

• "Show me exactly how you improved the health of our covered population or how you proved clinical outcomes or how you improve improved cost trends. Ultimately, the basis of competition is going to be ROI, right?"

Yes, but: For the unprofitable, exit paths are less certain, layoffs are picking up, and raising fresh funds has become increasingly tough.

• "Almost all companies that are in that space now have realized that value creation is not directly correlated with growth," Vorhoff said.

Between the lines: While many companies remain hyper-focused on extending their cash runway, the strongest digital health platforms, and those that have raised a lot of capital, are well-positioned to play offense, Vorhoff says.

• "They can be greedy for talent," Vorhoff says. He expects those players to be consolidators and claim market share in a less competitive environment.
• Likewise, smaller companies will increasingly look to combine with larger digital health platforms with proven out models that may be profitable, Vorhoff predicts.
• With few cash acquirers in this space, most activity is likely to be equity-for-equity M&A, he adds. "The challenge there is coming up with relative value, particularly in an environment where public market valuations have severely corrected."

State of play: The digital health market has gotten crowded.

• The long-term trends around value-based care and telehealth adoption are here to stay, but Vorhoff believes the market is ripe for a "sorting" to determine the right business models.
• "A lot of companies got funded that were just playing on that spike in demand," he said, pointing to the thousands of virtual care companies that have been financed. "Of course, that's not sustainable... A lot of those companies are not well differentiated and, I think, are going to face increasing challenges to continue to raise capital."

Reality check: Many other players for the foreseeable future will have to make tough decisions around expense management—headcount reductions being among them, Vorhoff notes.

• "It'll be heavily influenced by the amount of capital that they have on their balance sheets and the burn that they're experiencing now, as well as that pathway to breakeven," he says. The uncertainty of the financing market makes that math more complicated, he adds.
• Digital health darlings like Ro and Carbon Health are among those that have witnessed layoffs.

Yes, and: Vorhoff expects to see investors lead more internal or follow-on raises for companies in which they already have skin in the game.

• 40% of the capital that GA has invested this year to date has gone back into the portfolio, he notes.
• Extension rounds are picking up, with companies like Florence Healthcare and H1 Insights both adding to existing rounds this month.

One fun thing: When asked which fund he would invest into — besides GA — Vorhoff pointed to Francisco Partners (referencing the firm's recent mega exit in the hospital pharmacy space), and Town Hall Ventures — both of which GA has already partnered with.

Editor's note: This story has been corrected to remove Olive from the list of companies that have witnessed layoffs.