Telehealth startups are struggling to raise financing after a boom in valuations during the height of the Covid pandemic, says Jill Frew, managing director at healthcare investment bank Cain Brothers.

“They’re having a hard time raising additional equity,” says Frew. “Some were expecting to do another growth round but can’t get capital. Some have had meaningful down rounds.”

In early 2021, says Frew, digital health stocks traded at 20-times forward revenue. Now publicly traded Teladoc Health and Amwell, formerly known as American Well, are trading at two- or three-times forward revenue.

The problem with the sector is few are profitable, says Frew. “Over the last couple of years, $30 billion was invested in digital health. Last year, one thousand companies got funding, and they went back to the markets every 18 months. Now one hundred a quarter get funding, and investors and boards are telling startups to revisit burn rates and are announcing layoffs.”

Reports surfaced that unicorn Cedar, which had a $3.2 billion valuation during a $200 million Series D funding in 2021, would lay off 24 percent of its workforce. Forward Health, valued at $1 billion, was reported to have cut 5 percent of its workforce – just to name two in the month of July.

“Once investors funded growth at all costs,” continues Frew. “Now startups have to mentally pivot to more thoughtful spending.”

The idea of engaging remotely with patients has been around for decades, says another healthcare investment banker. “Pre-pandemic it was 10 percent of physician encounters. When the pandemic was in full force, everyone stopped going to physical locations for healthcare. They stopped going to clinics. They started engaging with doctors remotely.”

“Seventy percent of doctors’ visits were virtual engagements during the peak,” says the banker. “It’s come down. Some question if the digital health trend is sustainable long-term or just another way of engaging with a doctor. They wonder if the future of medicine is physical plus virtual, or if it’s best to keep physical and virtual medicine separate. No one is sure.”

As for private equity interest, Frew says private equity firms look for strong Ebitda posture and cash flow, qualities hard to find in a fragmented market with thousands of companies.

In February, SOC Telemed agreed to be taken private by Patient Square Capital for a 366 percent premium at $3 per share in cash.

Both bankers say they expect continued consolidation in the sector. Though some deals, like Teladoc’s $18.5 billion acquisition of Livongo in 2020, caused a $6.6 impairment charge months ago, technology companies like Amazon are active acquirers, says Frew. Amazon is acquiring One Medical for $3.9 billion.

-Sarah Cohen