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The curtains have come down on the digital health funding party, and while some are reeling from the festivities, others are getting back to work — and back to basics.

Why it matters: The market milieu that birthed bloated valuations and celebrated excessive funding rounds is no more, and stakeholders are readjusting expectations to fit the new market, Erin writes.

Industry observers and founders spoke on an Axios-moderated panel at the Rock Health Summit in San Francisco this week.

What's happening: Investors and builders are working on a smaller and more focused basis with fewer dollars and a renewed emphasis on outcomes, the experts said Wednesday. 

Here's what else has changed for digital health:

More of a focus on affordability and cost-savings: "We need to see a workflow, an offering, and financial terms that I can apply to at least 70% [of patients]," said Town Hall Ventures partner Meera Mani.

An emphasis on more practical use cases for technology, such as using generative AI to ease clinicians' administrative burden.

Sustained growth, rather than growth-at-all-costs: "You can't afford to plant all these seeds and see what blooms," said Carolyn Witte, the CEO of women's primary care startup Tia.

Building slowly and in the right order: "The hardest decision we're making right now is what not to do, and what to do in what order," Witte added.

Staying private rather than focusing on going public: "Where we start rolling our eyes is when [founders] start talking about going public," said Mani. "Just because the company delivers great outcomes doesn't mean they're ready for the public markets."

Focusing on evidence: "We need to see outcomes in order to make any type of investment," said Kiyana Turner, the director of digital transformation at Children's Hospital of Los Angeles. "Peer-reviewed studies are preferred."

Zoom in: Term sheets have seen some specific material changes in the last year, said Fenwick & West partner and digital health startup lawyer Michael Esquivel.

"It's here everybody, and the terms are ugly," Esquivel said Wednesday.

"In the new world, the world we're going to be living in going forward, we're back to historic norms of 3-5x," he continues.

"Great" companies might see multiples of 5-10x of revenue, he said.

"But we're not in the world of, 'I did $10 million in revenue last year, and I'm gonna go raise a billion dollars.' It's just not there. And don't try for it," said Esquivel.

Meanwhile, some fundamentals stay the same, like:

An emphasis on making health care more personalized and more consumer-centric.

For Medicaid-focused companies, building with limited resources: "We're used to innovating in a stark environment — a resource-poor environment," said Mani. "It wasn't fashionable to put money into government programs when the firm started."

The bottom line: "No, it's not like, 'Party like it's 2012,' for sure, but the focus on affordability and administrative ease is great," said Mani.

1 big thing: Digital health playbook 2.0 

Illustration of a pair of scissors about to cut a manila folder with a red cross on it.

Sept. 25 — Rev1 Ventures, Nationwide Children's Hospital and the Ohio State University launched their third fund — the $30 million Rev1 Catalyst Fund III, Aaron wrote.

Why it matters: Two of the group's first four funds — Rev1 Catalyst Fund and Rev1 NCH Fund — have generated more than $450 million in exits, including the acquisitions of Celenex, Myonexus, and Deep Lens.

Go deeper: Read Monday's Health Tech newsletter, plus Monday's Pro Rata on Vista Equity topping $100 billion in AUM.

2. Rev1 Ventures launches $30M fund

Illustration of a microscope with shapes and dollar elements.

Sept. 26 — School-focused telemental health provider Cartwheel raised $20 million in Series A funding, CEO Joe English told Erin exclusively.

Why it matters: Just last month, three high-profile medical associations warned that emergency rooms were buckling under the youth surge in demand for psychiatric care.

Go deeper: Read Tuesday's Health Tech newsletter, plus Tuesday's Pro Rata on recession projections among private market investors.

3. Cartwheel circulates $20M Series A

Illustration of a child surrounded by medical crosses receding into the distance

Sept. 27 — Evvy, a New York City-based vaginal health startup, raised $14 million in Series A funding, CEO Priyanka Jain told Aaron exclusively.

Why it matters: Vaginal discomfort is a leading reason that women seek health care advice in the U.S., with misdiagnosis and recurrence rates higher than 50%.

Go deeper: Read Wednesday's Health Tech newsletter, plus Wednesday's Pro Rata on VC firms developing "responsible AI" guidelines for themselves.

4. Evvy lands $14M for vaginal health

Illustration of a woman in a hospital gown made from a one hundred dollar bill sitting on an examination bed.

Sept. 28 — Small Door Vet is working with Lincoln International on strategic options, including a possible sale, two sources familiar with the situation told Axios' Claire Rychlewski.

Why it matters: Auctions for traditional vet platforms stalled out last year, but investors see promise in Small Door's strategy, one source says.

Go deeper: Read Thursday's Health Tech newsletter, plus Thursday's Pro Rata on preliminary data that shows global M&A activity is trending lower.

5. Small Door Vet open to deal

Illustration of a pet carrier overflowing with money. 

Research associate Natalie Breymeyer here with your weekly digest.

But first: Erin reports back insights from her Rock Health panel. 

🍾 Natalie's good friend is getting married this weekend and she can't wait to celebrate.

✏️ Special thanks to copy editor Mickey Meece for careful edits.

🙏 Thank you for reading us this week! Please ask your colleagues, friends, and family to sign up.

September 29, 2023

1 big thing: Digital health playbook 2.0