Google’s $2.1 billion takeout of wearables firm Fitbit earlier this month might have made investors a little more optimistic about seeing a return from their own digital-health investments. Or at least it might have, if the acquisition itself weren’t such an aberration.

Capital influx, rather than buyouts, continues to characterize most digital health deals; the cash is pouring in at an unprecedented rate. The bolus of investment has catalyzed some big changes over the years, like the shift from fee-for-service to value-based healthcare, and propelled an armada of tech startups to connect with – and begin to affect – health. 

However, as capital flows and the bull case builds, the limited number of exits is concerning. Partly due to healthcare’s notoriously long sales cycles and the intense competition among products, the net liquidity rate of venture capital—or liquid assets less current liabilities—remains massive.

“More than 80% of the capital invested is still seeking some type of exit, either through an IPO or M&A,” observed Cody Nystrom, managing director at SJF Ventures, a growth-stage venture fund. “A lot of that capital ultimately may not realize an exit.” 

That made the Nov. 1 Google-Fitbit deal, which came on the heels of UnitedHealthcare’s purchase of patient-monitoring startup Vivify Health the week prior, the exception rather than the rule. Moreover, there have been five digital-health IPOs so far this year, yet the mixed public market performance of these companies was taken by some as a sign that the IPO market is cooling off, at least momentarily. 

By contrast, about $6 billion has been invested in digital health so far this year, capping a whopping $28 billion poured in over the last five, according to Rock Heath. Yet as many limited partners and asset owners would acknowledge, there’s no way all of that $28 billion is going to generate the expected returns. 

“Are VCs crazy, or are there reasons to be hopeful?” is the way Nystrom frames the question. Posing it to any venture fund that’s long on digital health isn’t likely to yield a distinct bull and bear case. It’s more likely to reveal varying shades of optimism. 

First of all, having this much capital at risk “is how disruption happens,” said Nystrom. By way of example, she noted that, a short time before our interview, her firm co-led a $27 million series B funding round for clinical genomics informatics firm PierianDx. “This is how you metamorphosize the whole industry.”

That said, many catalysts for digital health offer reasons for hope, if counterbalanced with doses of realism. Take the push for data interoperability. The fax machine still accounts for about 75% of all medical communication, according to a Vox report. This makes the prospect of digital startups being able to paperlessly beam medical records between hospitals seem like a distant utopia. 

Yet by other accounts, what’s holding back interoperability is not technology but rather a matter of hashing out business agreements between competing health systems. “It’s not really a technical challenge anymore to be able to move data into the right places,” said Nystrom.

Telehealth is similarly nuanced. From video chat to kiosk and in-office screens, telehealth is more widely accepted for both episodic care and chronic conditions these days. Still, only 8% of Americans have seen a clinician through a telehealth visit. A host of reasons are to blame, from the lack of a universal definition to the thicket of reimbursement codes.

“Adoption numbers are still rather low, but with millennials showing more interest in engaging with healthcare in non-traditional ways, the trends are there. Physicians need to change their billing practices to match patient preference,” said Nystrom.

Then there’s AI/big data – which, when used in a way that’s non-threatening to clinicians (to supplement, not displace, the doctor’s knowledge), can scale the clinical encounter in a way that’s very impactful for care and can augment physicians’ own happiness and livelihood. As AI is put to work, though, informaticists are realizing that a great deal of data hygiene goes into setting up AI-derived tools and decision support to make sure this technology realizes its bright future in the clinical setting. 

With no shortage of capital being deployed in the above areas, this year could top 2018 in terms of the amount of cash entering the space. That investment pace makes it difficult to manage expectations. Better, perhaps, that there should be a natural consolidation and selloff of some of these companies (which would allow another organization to run or manage them) or that they should go public. 

Financial investors buy a business for quarterly cash flow. Strategic investors, like private equity and venture capital execs, typically have a longer view and are more patient. Nevertheless, unless we see an unprecedented level of IPO and M&A activity in coming years, some investors are bound to be disappointed. 

“Not everyone is a winner,” Nystrom said. “But the optimistic point of view is that it’s not all in vain. It does tip the market in the direction of transformation and disruption in a way you can’t without that level of capital investment.”

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