Despite a slight decline in investments in digital health startups in 2024 compared with the year before, investors remain optimistic about the landscape.
Artificial intelligence has taken center stage this year, and investors will likely continue to pour millions into startups selling AI-powered healthcare tools for years to come.
This is especially true for companies that can demonstrate their return on investment and align themselves with key metrics customers use to measure success. Since 2023, investors have been focusing less on pure growth and more on startups that can prove themselves as valuable to providers and payers — and that trend is expected to continue.
Investors also predict that startups focusing on value-based care and Medicare Advantage might also become a sought-after category in the digital health space in the coming years, partially influenced by the incoming presidential administration.
What has this year’s funding environment looked like?
Throughout the first three quarters of this year, the U.S. digital health sector raised $8.2 billion across 379 deals.
This is slightly down from 2023 — the first three quarters of last year ended with $8.6 billion raised, and the year finished with a digital health funding total of $10.7 billion from 492 deals.
The dollars raised in 2023 marked the lowest annual investment amount the digital health sector had seen since 2019 — and that trend will likely not be reversed this year. The data so far indicates that the sector is on track to finish 2024 with an even lower funding total — but that doesn’t necessarily mean that the sector is struggling.
In fact, the digital health investment space is moving from irrational exuberance to reasoned investment based on business fundamentals.
The digital health environment is still normalizing after the pandemic-fueled funding frenzy from 2020 to 2022 — in which FOMO (fear of missing out) was rampant among investors and valuations were often exaggerated, noted Prateesh Maheshwari, managing director at Maverick Ventures.
He pointed out that investors have continued to make seed and Series A deals this year because these early-stage investments tend to avoid near-term market risks. On the other hand, he said growth-stage investment “feels acutely different” than a couple years ago.
“There were so many investors — who were traditionally public investors or growth investors, who didn’t have a healthcare focus — who had stepped in during 2021, and those folks have exited,” Maheshwari declared.
It makes sense that these investors would lose some interest in digital health startups, he said.
After all, they are usually focused on growth unit economics, with the expectation that any company they invest in might end up trading in the public market. But “the public markets haven’t been super beneficial to digital health companies over the past year,” he noted. Stock prices from companies such as Teladoc, 23andMe and CVS Health have all struggled this year.
However, the digital health sector saw signs of life in the public markets this year. Last year saw zero initial public offerings, but two digital health companies — Waystar and Tempus AI — have filed IPOs in 2024, and Nuvo went public through a special purpose acquisition company merger.
Maheshwari thinks things will continue to improve in 2025.
“Overall, it’s been a tougher year for founders to raise — but I think one of the interesting observations is that each quarter, it felt like it got a little bit better for founders. If you take that trend line into 2025 — you take the equity markets at all time highs, you take the amount of capital sitting in different venture funds, and the potential for exits on the venture side with some recent IPOs, I think you could see the market really open up again,” he remarked.
AI is having another hot year
Investors have been ebullient about AI this year — especially AI as it relates to administrative use cases, Maheshwari stated.
He said that every healthcare startup should have some element of AI, whether it is a primary offering or being used to enable other parts of the business.
“It seems like if you’re not using it, you’re likely to fall behind competitors. [AI] is something that we typically see incorporated in every pitch — but having clear use cases is critical,” Maheshwari declared.
Revenue cycle management is one AI use case investors are interested in, he noted.
For instance, SmarterDx, an AI startup that provides clinical review and quality audits for medical claims, raised $50 million in May, and Adonis, which also uses AI to ensure accurate billing and timely payments, snagged $31 million in June.
“[Revenue cycle management] is a space that sort of feels like a consensus opportunity. On both the plan and the provider side, the submission of bills, risk adjustment and assessing claims are all things that I think seem like somewhat inevitable use cases for AI. And you’re seeing a lot of early adoption around those use cases,” Maheshwari explained.
Investors have also demonstrated a particular interest in startups using AI to simplify the clinical documentation process, he added. For example, clinical documentation AI startup Abridge closed a $150 million funding round in February, and Suki secured $70 million for its AI-powered voice assistant in October.
Investors are pouring capital into AI-powered documentation startups because these companies are proving their value to their customers, Maheshwari said. Health systems across the country have been launching enterprise-wide deployments of these AI tools this year following successful pilots, with the tools often shaving off hours of administrative tasks each week for clinicians.
Maheshwari said the success of administrative task-focused startups might cause investments to pick up for startups using AI for more clinical use cases, such as treatment optimization or diagnostic assistance.
In alignment with Maheshwari, Steve Kraus, a partner at Bessemer Venture Partners, also highlighted AI startups that are going after administrative inefficiencies as the hottest category within digital health.
A couple of his portfolio companies that fit into this category are Plenful and Qventus. Plenful sells a software platform that automates the manual tasks that burden pharmacy workers, and Qventus offers technology to automate surgery scheduling.
There is another area where AI might find a good home.
Rising pharmacy costs are a significant problem for payers and employers, which is driving demand for automation solutions in the pharmacy operations space, Kraus noted. He also pointed out that with hospital margins under pressure, tools that improve revenue capture in high-cost areas, like Qventus’ solution for filling open surgery slots, are particularly appealing.
“{AI on the] administrative side has really gotten incredible traction — these companies are growing really fast, and sales cycles are pressed compared to traditional healthcare sales cycles,” Kraus declared. “Hospitals are signing up and paying for this software that’s AI-powered in kind of record numbers versus what I’ve seen before in my 20 years in healthcare.”
Could investment in specific areas pick up under a new presidential administration?
Kraus predicted that 2025 may see more investment in the Medicare Advantage space.
He noted that Medicare Advantage has faced challenges in recent years, including public policy scrutiny and health systems dropping Medicare Advantage contracts. However, he thinks the sector will rebound under the incoming administration of President-Elect Donald Trump, which will likely be in favor of privatized healthcare.
Investors may start paying more attention to value-based care startups as well, Kraus said. Value-based care has received bipartisan support across every presidential administration in the past decade, he pointed out.
He also highlighted Robert F. Kennedy Jr.’s “Make America Healthy Again” vision — which emphasizes preventive care and whole-person treatment strategies.
“‘Make America Healthy Again’ is sort of about preventive, proactive care management — how to get ahead of things. Honestly, that’s what value based care is trying to do, right? It’s trying to treat someone in a holistic way — treating the whole course of someone’s life, rather than just an episode when they show up to the dialysis center or when they show up to get their knee operated on,” Kraus remarked.
What do startups do to be successful in 2025?
To be successful in today’s investment landscape, digital health startups need to understand their customers well, said Chirag Shah, a partner at Define Ventures.
“I think more important than the actual use case is going to be making sure folks really understand how their buyers are actually evaluating them,” he remarked. “In 2025, people are looking for how you deliver near-term ROI and how integrated you are into their workflows for what their clinicians and other professionals are doing day-to-day.”
Additionally, digital health startups need to have a strong cybersecurity plan, Shah added.
Ensuring robust data security and access controls is essential — and startups must be able to clearly explain how they address these concerns before any health tech investor will take them seriously, he explained.
Shah also pointed out that startups may want to make their business models more flexible.
“One of the things [investors] tend to think about is how companies can operate in very different payment models — whether it’s fee-for-service, value-based or something in the middle, and also how they can extend across multiple parts of the healthcare system,” he stated.
To illustrate this idea, Shah highlighted Centivo — a startup that raised $75 million in September. The company is a health plan that only sells to self-funded employers, but it also works with providers and payers.
“Employers are their customers. That said, they absolutely leverage providers, because providers help create their product. They have direct contracts with health systems across the country, and they also work with payers to support members who may not be the right fit for Centivo’s network of providers. So they sit in the middle of all three of these ecosystems as their customers make decisions,” Shah remarked.
Going forward, he thinks it will become more and more rare for healthcare startups to remain engaged in just one vertical. Smart founders pay attention to the broader healthcare market, so they are aware of this and can adapt their business models as need be, Shah noted.
Despite somewhat choppy waters over the past few years, the digital health sector has remained flexible, he said.
Investors’ growing interest in supporting AI, value-based care models and tools that tackle administrative bottlenecks show that the sector is aligning itself more closely with the needs of providers, payers and patients. While this transformation has been gradual, Shah thinks it points to a more sustainable future for digital health.
Photo: abluecup, Getty Images
