State of digital health investment, part 7: General Catalyst

Holly Maloney, managing director at General Catalyst, says there has been a shift from the exuberant investments made during the COVID era to a more stable and strategic funding environment, creating a healthy investment climate for long-term growth and innovation.

Maloney sat down with MobiHealthNews to discuss how this shift has affected General Catalyst's strategic evolution in digital health investment and the opportunities for high-quality teams with solid business models. 

MobiHealthNews: How do you see the state of digital health investment now as opposed to a year and a half ago when AI was making its way into healthcare?

Holly Maloney: We're kind of coming into a steady state of digital health investing. There is a sense of who is really committed on the investor side and who wants to back long-term builds and long-term change in the industry.  

The reality is that a lot of those folks have significant capital to deploy. So, I'd say there are fewer tourists in healthcare than we saw back in the days of COVID, but there is still great interest and significant capital available to invest in longer-term builds and longer-term transformation.  

We're in a really healthy spot right now, and I'm incredibly energized about where we are in the current landscape of digital health investing, both in terms of what I'm seeing with existing portfolio companies and their ability to raise attractive rounds of funding, the engagement we're seeing from our partnerships, from our health system partnerships, and then obviously on the net new investing side. I'd say that has skewed earlier than we had seen in recent years, but these things always ebb and flow. There is sort of a pipeline, and I think we'll start to see some exciting growth stage opportunities later this year, heading into next year.

MHN: Do you think the market is saturated by companies touting their AI-powered offerings? In other words, is almost every company saying they're AI-enabled lessening the perceived effects of having AI as a part of a company's portfolio?

Maloney: I think companies believe it's important to have an AI strategy, regardless if it is your core product or if you're a services business and are trying to figure out how to optimize your margin structure. I think if you are not talking about it in any way, shape or form, people may question why that is. Are you really forward-thinking? Do you really want to build a long-term enduring business if AI has not even entered the chat?  

But there are obviously companies that are AI native. There are companies that are applying AI to the businesses they've been focused on building. So, there is nuance to it, but I would say most companies believe that. It's up to investors to be diligent about the depth of the roadmap, but I think it's important to have it as a part of the narrative. 

MHN: When a company approaches you for investment, what are a lot of them doing right, and what are some of them doing wrong? 

Maloney: Obviously, it depends on the stage of a company. But it's always hard to answer this question. Being an entrepreneur is like the most courageous thing you could ever do, and so to say something someone is doing right and something someone is doing wrong, I feel badly because it's so courageous what they're doing.  

But I think entrepreneurs have pretty quickly come up the learning curve in terms of how investors are thinking about the long-term enduring characteristics of a business and the importance of the healthy unit economics of a company. Entrepreneurs have done a really good job across the board. So, I'd say there's a lot of that happening, you know, the balance of dreaming the dream, painting the picture of how you can transform an industry, but also keeping the fundamentals in mind because that's what most investors are really thinking about even if they don't lead with that.  

What we see are, unfortunately, some examples of over-course correcting and over-emphasis on the path to breakeven, optimizing for profitability, because I think if you look at the trends over the long term, the value that is associated with higher growth is many multiples of that, that is associated with profitability. 

And so, if you have overly course corrected or are just focused on getting to breakeven or if you get to breakeven and you're not wildly profitable but growth has slowed, you're in a really, really tricky spot. And that's not any one person's fault because all of these things are joint decisions, but that's what I've seen in those tricky situations.

This is why we're actually really excited. We have a product called our Customer Value Financing that could be interesting for companies like that, that have solid unit economics, may have a cash balance such that they need to consider raising equity dollars, but they're in this zone of growth not exactly where it wants to be, profitability not exactly where it wants to be. So you can use these sorts of synthetic equity-like products to re-accelerate your growth and then potentially raise additional equity or not raise equity again because you'll have an occurring cash balance to play with. 

MHN: At the height of COVID, investors were throwing money at digital health companies. Since the pandemic has slowed, how has your investing strategy changed?

Maloney: Our strategy has certainly evolved and grown. We now have more capital under management to deploy against healthcare than ever before and multiple funds from which we can invest. So, everything from the ideation phase to our creation stage – we have a creation fund where we start companies all the way through pre-IPO – and now we're actually thinking about consolidation and potential buyout opportunities, etc.  

We've only expanded our thinking and been more bullish on the full lifecycle of capital that's available in healthcare. Because there was so much capital that flooded into the market, that means we're in this phase right now where there is likely to be consolidation. So, we have to think about that and be really proactive, whether it's vis-à-vis our portfolio companies or through kind of net new consolidation opportunities in partnership with like-minded funds.

So, we have seen new, kind of, flavors of investing that we're really leaning into, and we've also become much more intentional around our partnership strategy and understanding what really matters to health systems to really enable them to be better businesses and prioritizing investing activity to help us get there. It's only when the ecosystems or health systems prepare to become better businesses that resources can be freed up to do what they're here to do, which is delivering really high-quality care at a lower cost, driving better outcomes and then underwriting that care. 

MHN: Is there anything you want to add that I have not touched on?

Maloney: Again, I'm incredibly energized. We're still seeing companies within our portfolio that raised a couple of years ago north of a billion dollars now raising up rounds, so there's still a lot of excitement for world-class teams and sound business models. 

We're entering a really interesting and creative phase as investors. There's no better time to be an investor, especially at GC [General Catalyst], where we can really do anything from a stage perspective. So, much more to come.