GSR Ventures survey: 87% of healthtech VCs changed strategies due to generative AI

The majority of VCs plan to keep the same investing pace, but expect valuations to drop

Digital health investments have been on a rollercoaster ride for the last couple of years, dropping in every single quarter in 2021, before bouncing back a bit in Q1, and then slowing down once again in Q2 and Q3 of this year. This is potentially signaling the emergence of a new normal, one where investments drift away from pandemic-era spaces and toward workflow solutions and value-based care.

So, what does the future of healthcare investing look like in the coming year? GSR Ventures, an early-stage digital health investment firm with over $3.5 billion in assets under management, went right to the source, surveying over 40 healthcare technology VCs to ask how they view the market, and what sectors excite them the most. 

What it found was that nearly two-thirds, 62.5%, of investors expect to make the same number, or more, investments for the remainder of this year, compared to 2022. Yet, most also expect valuations for seed stage, Series A and Series B companies to decrease by 20% or more compared to last year, with the vast majority expecting lower valuations to continue for the remainder of 2023.

When asked if that means these investors will be putting fewer dollars into more companies, making their money go further than in previous years, Justin Norden, partner at GSR Ventures, said, "yes."

"Rounds decreased in valuation and amount of capital raised. Additionally, companies are all being told to make capital last longer. Previously, companies were growing at all costs, now companies are looking for efficient growth," he said.

"It is certainly more difficult for companies to raise money than it was before. Expectations have increased especially for series A compared to the prior few years."

All of this is resulting in more down rounds this year than previous years, Norden explained, a trend he believes is likely to continue into 2024.

"We are seeing this data in Carta which tracks it in aggregate across venture deals," he said.

The survey also asked the VCs about generative AI, a space that has seen a huge spike this year, with $280.64 million invested across 48 seed stage deals alone in Q2, nearly doubling the amount of money from the previous quarter, while the number of deals rose 33% in that time.

There have also been some move from big healthcare companies, with Oracle integrating generative AI tools into its EHR and Microsoft teaming up with Mercy on generative AI to develop chatbots for both patients and staff. 

Yet, for healthtech investors, the response to generative AI was a bit more muted: while 87% said generative AI solutions have influenced their investment strategies, only 16.7% said that it had done so significantly, while over 70% said it was somewhat or a little.

Norden express surprised by how few investors believe generative AI solutions significantly changed their investment strategies.

"I think most investors are still learning about the technology and waiting to see what the impact will be. It is true that to date, generative AI has not changed healthcare. My personal belief is these technologies are transformative and will change healthcare, but I’m also biased playing with the tools daily and teaching the Generative AI and Medicine course at Stanford," he said.

In terms of which areas hold the most promise for startups, 55% said the oncology specialty, followed by 37.5% who said cardiovascular care, and 31% who said ophthalmology. The areas with the least promise, meanwhile, were ophthalmology, with 32.5%, allergy/immunology, with 25%, and mental health, with 20%, despite it consistently being the highest funded clinical indication.

"Mental health is the 'most controversial' sector for investors with many seeing it as very promising, and many seeing it as least promising. This is likely due to the incredible need still for mental health care, and yet the area of the most VC funding for the past ~5 years. The competition and price to acquire a patient is very high making it difficult for new startups today," Norden explained. 

Digital health funding

In Q3, digital health startups in the U.S. raised $2.5 billion across 119 deals in Q3, making it the second-lowest quarter by funding total since the fourth quarter of 2019, aka the one right before the pandemic hit. 

This is also the fourth of the five past quarters to log funding in the $2 billion range, the exception being Q1 of this year.

2021's total funding was a record breaking $29.2 billion; 2022 ended up down 48% from that sum, and 2023 is looking like it will see another significant downturn: there was $8.6 billion raised across 365 deals in the first three quarters of the year, down 32% from the $12.6 billion invested at the same time in 2022, and down 20% from the 458 deals in the first three quarters of the prior year. 

That means this year is on track to see total investments of around $11.5 million, which would be down 25% from 2022, and a whopping 60% from 2021.

(Image source: democratandchronicle.com)