Recession is looming, but it’s not all bad for femtech start-ups

As the International Monetary Fund (IMF) is signalling the unofficial start of recession, digital health funding slows amid investment uncertainty.

The past six months have brought new challenges for both investors and entrepreneurs. With higher-than-expected inflation, global financial conditions are becoming tighter and the world economy is on the brink of facing one of its weakest years since 1970.

The outlook for the global economy has “darkened significantly” in recent months, said IMF chief, Kristalina Georgieva, predicting a tough 2022, and an “even tougher 2023”.

IMF officials announced that inflation was higher than forecast with prices in the US raising at a 40-year high of 9.1 per cent in June. In Britain inflation has jumped from almost zero during the pandemic to 9.1 per cent and is expected to top 11 per cent by October.

Although modest inflation can be attractive to consumer goods companies, very high inflation rates could make planning and investment decisions harder, analysts say.

Femtech has been a growing area of interest with funding reaching US$2.5bn in December 2021. However, experts believe that investment in the buzzy sector will slow down.

“Femtech is still a very immature market in many ways,” says Becky Warnes, business consultant and NHS advisor. “Getting tech into health systems is going to be very difficult for all start-ups, but particularly for those in femtech.”

According to data from the venture fund, Rock Health, digital health start-ups banked over US$29.1bn in 2021, but femtech companies enjoyed three per cent of the funding.

“Women’s health is a very specific investment vertical,” says Priya Oberoi, angel investor and founding general partner at Goddess Gaia Ventures. “However, women are starting to realise the need for differentiated health care and the demand is going up.

“We are in an era where entrepreneurship has been slightly glamorised and for that reason alone, more start-ups and entrepreneurs will emerge. The process will remain the same. What is going to change is the speed of the investment.”

Indeed digital health funding fell in the first half of 2022, according Rock Health, suggesting that a drop in funding could be caused by start-ups looking to trim costs and reduce positions.

The report has shown that investment fell significantly in the first quarter of 2022, with digital health start-ups raising US$6bn compared with US$7.3bn in the fourth quarter of 2021.

The funding slowdown means the environment is shifting and start-ups need to learn how to navigate the new economic landscape and adapt to competition.

“Investors will be willing to invest where there’s historical return on their investment and where there is going to be a real profit,” says Warnes.

“Femtech has certainly many values-driven driven businesses, but I think when it comes to putting money on the table, investors will look for start-ups with valid solutions to valid problems.”

For Tess Cosad, former research analyst and founder of the London-based femtech start-up, Bea Fertility, the economic consequences of the pandemic are complex.

“At the seed stage, we are all having to figure out how to contend with smaller rounds, lower valuations and longer runway.

“Any business that was going to take longer to get to profitability is now going to struggle to raise more capital. There is definitely potential for some incredible companies to come out of this and I’d love to see more investors ‘taking a risk’ and backing more women’s health companies.”

Oberoi advises entrepreneurs to start talking to investors earlier on.

“Make sure your pitch deck is very clear and that your lexicon illustrates what you are trying to solve with much more clarity. Find out what’s the economics of solving those problems and use those statistics to build a global picture.

“Start-ups are doing a brilliant job. Now they need to adapt and think more carefully about their numbers, their unit economics and ultimately, about what they are trying to achieve.”