Common problems for venture capital backed HealthTech founders in the current market

Common problems for venture capital backed HealthTech founders in the current market

The Nelson Advisors team engage and interact with 10 founders a week on average. Below is a summary of the most common problems we see for venture capital backed HealthTech founders in todays market, shaped by economic, regulatory and industry specific dynamics. We also share our thoughts on what we believe founders should focus on to be successful and navigate their way through the next 12 months.

Fundraising Challenges and Valuation Pressure:

Market Correction and Down Rounds: After the funding boom of 2020–2021, driven by the COVID-19 pandemic, the healthtech sector has seen a contraction. Companies that raised at high valuations during the boom are now facing "golden handcuffs," struggling to secure follow-on funding or facing down rounds (raising at lower valuations). In 2024, publicly disclosed down rounds surged, particularly for smaller Series C raises (less than $50M), with only 17% of these deals being up rounds.

Reduced Early-Stage Financing: Early-stage financing has trended downward, with Q3 2024 seeing the lowest early-stage investment in two years. Many founders rely on bridge rounds (44.3% of health sector rounds in Q1 2024) to extend runways, indicating difficulty in securing primary rounds.

Investor Selectivity: Economic uncertainties and rising interest rates have made investors more cautious, prioritising startups with clear paths to profitability, strong teams, and scalable models. Founders face intense scrutiny over cash flow, profit margins, and market fit.

Regulatory and Commercialisation Hurdles:

Complex Regulatory Pathways: Healthtech startups, especially those developing medical devices or diagnostic software, must navigate stringent regulatory requirements from agencies like the FDA. Underestimating the time and cost of clinical evidence or approvals is a common pitfall.

Slow Adoption by Clinicians and Providers: Convincing healthcare providers to adopt new technologies is challenging, especially if the solution disrupts workflows or requires behavior changes. Founders often overestimate clinician acceptance without robust evidence of improved outcomes or cost savings.

Long Sales Cycles: Healthtech solutions, particularly those targeting hospitals or payers, face extended sales cycles due to complex decision-making processes and budget constraints. This delays revenue generation and strains cash reserves.

Market and Value Chain Misalignment:

Misjudging Market Needs: Founders sometimes focus on innovative products without fully understanding the market or value chain. For example, solutions may lack clear consumer awareness or access pathways (e.g., via employers or providers), leading to poor adoption.

Over reliance on Hype: Some founders get swept up in the excitement around trending technologies (e.g., AI, digital therapeutics) without validating market demand or competitive positioning, resulting in misallocated resources.

Choosing the Wrong Indication: Startups with technologies applicable to multiple indications may pursue the founder’s area of expertise rather than the most commercially viable option, draining resources before pivoting.

Capital Intensity and Scaling Challenges:

High Capital Requirements: Healthtech businesses, especially tech-enabled services, require significant capital to scale. For example, companies like Lyra Health and Hinge Health raised over $600M to build their models. This capital intensity clashes with investor caution in a tighter funding environment.

Balancing Growth and Profitability: Investors now emphasise sustainable growth over rapid, unprofitable scaling. Founders must balance innovation with financial discipline, which can be difficult in a sector with long development cycles.

Limited Exit Opportunities: M&A activity and IPOs have slowed, with healthtech exits remaining elusive. Of companies raising mega-deals ($100M+) in 2021, more have gone out of business than gone public, leaving founders with fewer liquidity options.

Team and Leadership Issues

Inexperienced or Misaligned Leadership: Investors prioritise strong, adaptable teams, but some founders lack the experience to navigate healthcare’s complexities or pivot when needed. Overconfidence, lack of transparency, or dismissal of feedback can erode investor trust.

Founder-Investor Misalignment: Venture capital’s focus on rapid scalability and exits can conflict with a founder’s mission-driven goals, especially in healthcare, where impact may take years to realize. One founder on X noted that VC funding may not suit most healthtech innovations due to this mismatch.

Talent Acquisition and Retention: Building a team with both healthcare and tech expertise is challenging, particularly in a competitive labor market. Investors expect founders to demonstrate strong team dynamics and execution capabilities.

Quality Control and Evidence Gaps

Lack of Robust Evidence: Investors and adopters demand rigorous clinical and economic evidence, but many startups struggle to fund or conduct studies proving efficacy and cost-effectiveness. This is critical for technologies like digital therapeutics or AI-driven diagnostics.

Privacy and Quality Concerns: Ensuring compliance with data privacy regulations (e.g., HIPAA) and maintaining high-quality standards is resource-intensive. Failures here can erode trust and delay market entry.

Economic and Sector-Specific Headwinds

Post-Pandemic Market Reset: The healthtech sector is still adjusting from the 2021 funding peak ($29.1B globally), with 2024 seeing $14.8B in total investment—a 17% increase from 2023 but far below 2021 levels. This normalisation has left some founders unprepared for a tougher fundraising climate.

Competition and Market Saturation: Popular sub-sectors like telemedicine and mental health tech face crowded markets, making differentiation difficult. Investors are shifting toward underserved areas like women’s health or AI-driven operations, but founders in saturated niches struggle.

Economic Pressures: Rising interest rates and financial belt-tightening by employers and consumers limit willingness to adopt unproven solutions, particularly for direct-to-consumer models.

Recommendations for Founders

Focus on Fundamentals: Prioritise cash flow management, clear regulatory pathways, and evidence-based value propositions to build investor confidence.

Engage Stakeholders Early: Solicit feedback from providers, payers, and patients to validate market fit and avoid echo-chamber assumptions.

Leverage Niche Opportunities: Target underserved areas like women’s health, elder care, or AI-driven back-office solutions, which are attracting investor interest.

Build Strong Teams: Assemble diverse teams with healthcare and tech expertise, and be open to pivoting leadership roles if needed.

Explore Alternative Funding: Given VC mismatches, consider corporate venture capital, grants, or strategic partnerships to reduce reliance on traditional VC.

These challenges reflect a market in transition, but opportunities remain for founders who can demonstrate resilience, adaptability, and a deep understanding of healthcare’s unique dynamics. If you’re a founder seeking specific guidance, sharing details about your startup’s stage or focus could help tailor further advice.

Nelson Advisors > HealthTech M&A

Nelson Advisors specialise in mergers, acquisitions and partnerships for Digital Health, HealthTech, Health IT, Healthcare Cybersecurity, Healthcare AI companies based in the UK, Europe and North America. www.nelsonadvisors.co.uk

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