The healthcare startup landscape is experiencing a dramatic shakeout in 2024, with AI-powered health companies among those struggling to survive after the venture capital boom of 2021. The most prominent casualty was Forward, which abruptly shut down in November 2024 after raising a $100 million Series E just months earlier for its AI “doctor in a box” CarePods—self-service kiosks that faced significant technical and logistical challenges.
The funding environment has deteriorated sharply since the ZIRP (zero interest rate policy) era. While 2021 saw a record 729 healthcare startup deals totaling $29.1 billion, the first three quarters of 2024 brought only 379 deals worth $8.2 billion—less than half the deal volume and a fraction of the capital. PitchBook data revealed that 327 digital health startups that secured funding in 2021 haven’t raised additional capital since, leaving hundreds of companies struggling to survive.
Even the AI boom, which has fueled back-to-back fundraises for hot healthcare AI startups like Abridge, cannot compensate for the massive funding gap. Investors report that dozens of startups are now raising down rounds—funding at valuations lower than their previous rounds—or seeking mergers with competitors to extend their lifespans. Others are quietly shutting down without announcements.
Greg Yap, partner at Menlo Ventures, confirmed the grim outlook: “There are more digital health companies that are selling assets, selling people, or whatever they can. This is a difficult market. We’re definitely not done with companies going out of business.” Venture capital firms that previously provided bridge rounds to struggling portfolio companies are now cutting their losses, with some limited partners viewing the 2021 vintage as a write-off.
The consolidation trend is accelerating, with startups packaging fundraising efforts as “consolidation rounds” to facilitate mergers rather than admitting to down rounds. Examples include LetsGetChecked’s $525 million acquisition of Truepill, with both companies backed by Optum Ventures. Meanwhile, Ruth Health, a pregnancy and postpartum care startup, announced its closure in November after failing to achieve product-market fit following a $2.4 million seed round in 2022.
While healthcare AI deals have taken center stage this year, other sectors like telehealth have faltered dramatically—dropping from $10.2 billion in 2021 to just $1.4 billion in the first three quarters of 2024. The next generation of survivors will need to balance growth with profitability, as investors demand better unit economics and sustainable business models.
Key Quotes
There are more digital health companies that are selling assets, selling people, or whatever they can. This is a difficult market. We’re definitely not done with companies going out of business.
Greg Yap, partner at Menlo Ventures, describes the ongoing crisis facing healthcare startups, including AI-powered companies, as the funding environment remains challenging and more shutdowns are expected.
At least for some firms, the LP sentiment is it was a bad vintage. It’s done, move on. That’s liberating. I think that’s probably driving some behavior around not doing any more internal defensive rounds.
Doba Parushev, vice president of CareFirst BlueCross BlueShield’s Healthworx Ventures, explains why venture capital firms are no longer propping up struggling portfolio companies from the 2021 funding boom, forcing startups to find alternative paths or shut down.
I would actually hope that more companies said, I’m OK with a down round. We recognize that we were mispriced in the market, and we need to rightsize.
Alyssa Jaffee, partner at 7wireVentures, advocates for healthcare startups to accept valuation cuts to secure necessary funding, acknowledging that 2021 valuations were inflated and need correction for businesses to survive.
Layoffs are awful. Seeking acquisition is humbling. Selling your baby for parts gets demoralizing. The checklist for a wind-down is long.
Alison Greenberg, CEO and cofounder of Ruth Health, shared this reflection on LinkedIn after announcing her startup’s closure in November, capturing the emotional and practical challenges of shutting down a healthcare company.
Our Take
The collapse of Forward’s AI-powered CarePods despite $100 million in recent funding exposes a critical vulnerability in the AI healthcare sector: technological ambition without operational viability. This crisis reveals that the AI boom has created a bifurcated market where proven AI applications like clinical documentation (Abridge) continue thriving, while speculative AI healthcare concepts struggle to survive.
The timing is particularly significant—this shakeout occurs during an AI investment frenzy, suggesting that even AI’s current hype cycle cannot overcome fundamental business weaknesses. The shift from bridge rounds to consolidation or shutdown indicates that investors have lost patience with the “grow at all costs” mentality that characterized 2021.
For the AI industry broadly, this healthcare crisis serves as an important reality check: AI capabilities must translate into sustainable business models. The survivors will likely be those combining AI innovation with disciplined unit economics, potentially creating a healthier, more sustainable AI healthcare ecosystem—but at the cost of reduced experimentation and innovation in the near term.
Why This Matters
This healthcare startup crisis represents a critical inflection point for AI-powered health technology, revealing that even promising AI applications must demonstrate sustainable business models beyond technological innovation. The collapse of Forward’s AI “doctor in a box” despite $100 million in recent funding serves as a cautionary tale about style-over-substance AI implementations that fail to deliver practical value.
The funding contraction disproportionately affects the AI healthcare ecosystem, as investors become more selective about which AI applications warrant continued investment. While some AI healthcare startups like Abridge continue thriving, the overall market correction suggests that AI alone is not enough—companies must prove product-market fit, revenue traction, and path to profitability.
This shakeout will likely accelerate consolidation in AI healthcare, potentially creating stronger survivors but also eliminating innovative approaches that might have succeeded with more patient capital. The shift toward demanding profitability over growth could slow AI healthcare innovation at a critical moment when these technologies could transform patient care. For the broader AI industry, this serves as a reminder that even during an AI boom, fundamental business principles still apply, and technological sophistication cannot substitute for viable economics and genuine customer value.
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Source: https://www.businessinsider.com/digital-health-startups-raising-down-rounds-bankruptcy-2024-11