Since interest rates began rising in 2022, digital health companies have faced a tighter VC market. In fact, funding for digital health organizations fell from a high of $29.1 billion in 2021 to just $10.7 billion last year. That’s the bad news.
The good news: There are still VCs looking to invest in industry-leading digital health companies; In fact, my company closed a $31 million Series B in September.
There are four things entrepreneurs must demonstrate to investors to be successful in fundraising: a large total addressable market, strong unit economics and product-market fit, a world-class team, and a compelling plan for the future.
In this article, I explain why each one is important and how you can demonstrate these essential indicators the next time you raise money.
1. Total Addressable Market: Are you solving a big problem that people care about?
Since we launched our Series A three years ago, gut health has become mainstream thanks to the consistent education of those of us committed to making gastrointestinal care more accessible.
When pitching our Series B, we focused on educating potential investors about the size of the addressable market. To do this, we pulled third-party data from the CDC and NIH on how many Americans are affected by gut health issues (40 percent), and then compared those numbers to better-known markets like diabetes, mental health and musculoskeletal care.
Each of these comp markets is well established – and our addressable market is even larger, with a direct impact on employee productivity and effectiveness. Such formulation can help investors understand the potential of a digital health solution.
2. Strong unit economics and product-market fit: profitability and scalability
These are two separate indicators, but they go hand in hand.
First: Unit Economics: Investors want to see that you can produce your product profitably per unit. (Note that this is the opposite of the infamous early 2010s model of companies like Uber, which pursued growth at all costs and insisted that they would figure out the unit economics later.) Equally important: You can maintain the profitability of your units? Are you scaling?
Second, product-market fit: Yes, there is a big market, but does it actually want and need the product you are producing profitably? If so, then you have product-market fit.
When looking for venture capital, there is also the question of how profitable you need to be to be considered a good risk. This varies by industry, but it’s information you can uncover by either speaking to investors in your space or using benchmarking resources like those from Rock Health, which lay out VC-specific profitability expectations for different industries.
You can expect investors to care about things like your gross margin profile, average customer LTV, customer acquisition costs, and monthly burn rate. Investors typically have benchmarks for each of these metrics for a company in your industry. For example, a SaaS startup may need to have a gross margin profile of 90 percent, but a lower figure might be acceptable if you can demonstrate that you are on an improvement path.
For this trajectory, you need solid numbers to support its likelihood – such as past growth and a clearly articulated vision for the future (which I’ll discuss below). What’s important here is knowing what category you fall into, what investors’ expectations of that category are, and how you can demonstrate that you’re meeting (or exceeding) those expectations.
3. A world-class team
Investors want to know that as a founder and CEO you can build and scale a world-class team. Across your team, they look for domain expertise and experience building and scaling similar organizations.
But building a great team isn’t just good for raising money: Surrounding yourself with world-class talent will make you a better CEO and give potential investors confidence that your team can execute your growth plan. The key to building such a team: You should constantly recruit and evaluate talent. My suggestion is to invest early in creating processes around building teams: recruiting, interviewing, hiring, coaching, conducting ongoing talent assessments, etc.
The best teams emerge when team building is an ongoing discipline.
4. A compelling plan for the future
Investors don’t want their hopes and dreams here. You want a big vision paired with a concrete plan that you can execute.
In our investor calls, we presented our five-year forecasts and our detailed plan to achieve this goal. We have also highlighted our past performance and set out previous forecasts along with evidence that we have exceeded them. This context can increase credibility. As with unit economics numbers, it’s best to understand the expectations for your industry. What do your investors expect in terms of year-over-year percentage growth? Improving gross margin profile? Lifetime value?
If you’re not sure which metrics to forecast, ask. Investors and other startups can help you, as can industry publications. In addition to core growth projections, we have laid out structured options – additional business segments we can target and product enhancements we can build to expand the TAM and support future exponential growth. These projections convey not only that we have a vision for the future, but also that we are building the company and platform today and know we will expand into other markets.
Bonus Tip: Don’t wait until you need money to start fundraising
Several times in this article I have suggested asking for input from investors, i.e. investors with whom you have relationships, but not necessarily the investors who are already funding your company.
Building these relationships – with investors and others in your industry – will make your fundraising journey much smoother. Why? Three reasons:
- You will better understand what they are looking for. They can provide the above benchmarks that they look for in companies.
- They can give you feedback on your pitch. I strongly advise you not to pitch for the first time at your first fundraising meeting. Share your pitch with friends, colleagues, and investors you know to get feedback.
- They reduce the amount of work required when pitching. It’s much easier to pitch to an investor who already knows you and understands what your startup does. How do you get to this point? Build relationships with investors.
In a tight capital market, keep your mission in mind
In all of this, it’s important not to lose sight of why it’s worth investing so much time and energy into fundraising materials. Like many digital health companies, we are a mission-driven organization. At the end of the day (and at the beginning and middle), we care about the impact we have on the patients who use our platform.
Raising money is a great way to accelerate your growth plans, but more than that, it’s one of the most effective ways to improve the lives of more patients.
Photo: Drogatnev, Getty Images