Digital health bootstrapping takes its place in the spotlight

It’s no secret: Acquiring funding in digital health is more difficult today than it was one year ago.

Broader economic trends paired with changing demand from both providers and customers have pushed digital health funding into a market correction. As such, many companies are opting to build up their businesses by bootstrapping, doing so without any outside investment.

“I think for so many companies, we focus on vanity metrics,” said Erica Jain, co-founder and CEO at Healthie, an EHR platform for digital health companies. “You forget that companies make an impact when they’re around. The value of a business, their customers, their offerings only grow with time if they’re able to steadily execute.”

Jain started Healthie well before the boom of new deals in 2016. The company was self-funded and bootstrapped for five years.

While it received a modest $16 million Series A round earlier this year, the company is profitable and has 63 employees. Jain said sacrificing equity was not in the best interest of the company nor was it ready for a large capital infusion.

“By virtue of having bootstrapped it for five years and operated profitably, we built up a level of product maturation that is really special and unique, and is allowing us to sprint right now,” Jain said.

While data on the specific number of companies deciding to bootstrap is spotty, some experts said there is a growing consensus that more companies will utilize bootstrapping and other types of alternative funding as venture capital interest begins to wane.

According to data from Digital Health Business & Technology’s Q2 report, funding decreased 48% year-over-year compared to $7.7 billion raised across 195 deals in 2021. Venture capital funding in the first half of 2022 totaled $10.6 billion, a 29% decrease compared to the $14.9 billion raised during the first two quarters of 2021. 

As inflation rises, it is becoming clearer investors and Wall Street are favoring profitability over revenue growth.

Experts say this decline will get worse before it gets better. Rodney Altman, managing partner of Wells Fargo Strategic Capital, said earlier this year that private company valuations usually lag the public market by six to 12 months. As such, he said this down market won’t truly be felt until 2023. 

“We’re telling our companies that access to capital is going to be constrained over time,” Altman said.

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Before the current correction, there were increasing opportunities to accept venture funding, according to Christopher Johnson, co-CEO at TeleTracking, a healthcare operations platform that has bootstrapped

“There’s certainly been more opportunities. There’s been a lot of money that was sidelined over the last couple of years,” Johnson said.  

While bootstrappers didn’t completely write off accepting future venture funding, each said it was a calculation between equity and the effect it would have on growth.

“I really wanted to veer away from doing any larger VC round to avoid any of that dilution. So I looked for more innovative financing or funding opportunities,” said Jen Amis, President and CEO at Encounter Telehealth, a provider of mental and behavioral healthcare services to underserved communities and patient populations.

Amis said she wasn’t even aware there were alternate funding options until one of her angel investors encouraged her to pursue them.  The company utilizes revenue-based financing as well as traditional bank funding to supplement initial angel investments. While her growth might be slower and more deliberate than others accepting venture funds, it’s a price she’s willing to pay.

“They’re great because you’re not getting diluted,” Amis said. “You can use that funding to just get you to that next level in your revenue, to get you to that next level in your EBITDA. You’re going to be in an infinitely stronger position to go and do of VC round if you choose to.”

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Jain said bootstrapping can create unique value for customers and help a company’s long-term health.

“The most important thing that we can do for ourselves and for our customers is to make sure that we maintain a trajectory of financial independence,” she said. “We’re still [in the] top of the first inning when it comes to the amount of healthcare innovation that we are going to see in the next five to 10 years.”

Women, founders of color more likely to bootstrap

A 2020 report from Rock Health, a digital health research and venture firm, found women were more than twice as likely to rely on bootstrapping than men. Approximately 57% of companies founded by Black women were bootstrapped vs just 10% of companies founded by white men.

A separate report this month from Rock Health found those who self-identified as Black founders were twice as likely to be boot-strapped as compared to other races.

“I think we all pretty much know the main reason,” Amis said. “VC is a very much traditionally a white male dominated space.”

The report found “despite the diversity among digital health startup founders, there was a marked difference in the types of capital these founders used to scale their companies.”

According to Amis and others, venture investments tend to be network-based endeavors. 

“I’m a horrible golfer,” Amis said. “I’m not going to meet investors on a golf course.”

READ MORE: Investing in Black, female-led companies: ‘The right business decision, period.’

While bootstrapping worked for Jain, she admitted founders operating in other spaces with higher costs might not even have the option.

Jain and other experts say having funds focusing on under-recognized investors could begin to erase some of the inequity. She’s confident investors will find value in capital conscious companies led by women and other marginalized groups.

“If I’m a venture capitalist, and I see a bootstrap company performing top tier. That’s a company I actually want to invest even more money in,” she said. “Because it means that the founders know how to crush in any environment, and they have built a culture that prioritizes and focuses on delivering real business value.”