TLDR:
- Debate in venture capital community on whether growth or profitability is more important to digital health investors
- Sapphire Ventures partner, Cathy Gao, believes there is a nuanced conversation with a focus on profitability while still valuing growth
In the digital health investment landscape, there is currently a debate about whether growth or profitability holds more weight for investors. Cathy Gao, a partner at Sapphire Ventures, shared her perspective at the ViVE conference in Los Angeles, emphasizing the complexity of the discussion. Gao highlighted that, compared to previous years, there is a renewed emphasis on profitability alongside the ongoing premium placed on growth by investors. While higher growth is still preferred over higher profitability, companies that are growing rapidly but not yet profitable may face scrutiny from investors.
Gao pointed out two key reasons why the growth versus profitability conversation is crucial in the realm of digital health investing. Firstly, many digital health startups incorporate service components that can impact margins, especially during periods of rapid growth. The presence of these service elements may affect the efficiency metrics of a company, particularly when it is rapidly onboarding new customers. Furthermore, digital health startups often experience irregular growth patterns, characterized by significant strides followed by periods of stagnation. This sporadic growth trajectory can be attributed to lengthy sales cycles, even though they are compressing in the current landscape.
Gao also shed light on the unique challenges faced by digital health startups in capturing the attention and trust of health systems, which involve intricate decision-making processes spanning multiple committees. She noted that the unconventional nature of healthcare software investing adds layers of nuance for investors to consider, especially in light of cautionary tales from public companies in the healthcare sector. While startups are not required to have fully developed profitability metrics to attract venture capital funding, an absence of a clear path to profitability may raise concerns among investors.
