Healthcare Startups Face Consolidation Pressure as AI Dominates Investor Interest

Healthcare Startup Landscape Shifts Toward Consolidation

Digital health startups are facing what industry insiders describe as a pivotal moment, with many companies realizing they must merge with competitors to survive in an increasingly challenging funding environment, according to reports from the HLTH conference in Las Vegas. As investor attention concentrates on artificial intelligence, non-AI healthcare companies are finding themselves at a crossroads where consolidation has become their primary survival strategy.

M&A Activity Shows Signs of Acceleration

Healthcare merger and acquisition activity has been slower than anticipated in 2025, multiple sources indicated, though the pace appears to be picking up. Sasha Kelemen, a director in Baird’s healthcare investment banking group, noted during a panel discussion that while digital health startups have historically been reluctant to merge, she’s beginning to see changing attitudes as companies “recalibrate expectations.”

“You’re seeing kind of a ‘come to Jesus’ moment where a lot of companies are realizing across digital health that if they are going to survive, they’re going to have to come together in different ways,” Kelemen stated, according to conference reports. “But it’s a painful process to do that.”

AI Investment Boom Creates Two-Tier Market

The surge in artificial intelligence investment has created a divided landscape in healthcare venture capital, analysts suggest. While VC investment across healthcare slipped in the first half of 2025, health tech funding received a significant boost thanks to AI-focused companies. This divergence is creating what one investor called “a tale of two cities” with struggling startups standing alongside AI peers facing rising investor and buyer demand.

M&A activity is seeing a similar trend, reports indicate. The total value of healthcare M&A deals in the first half of the year rose 56% compared to the previous six months, despite deal volume seeing a 1% dip, due in part to higher-priced healthcare AI transactions, according to KPMG analysis.

Two Types of Struggling Companies Emerge

Industry experts identified two distinct categories of healthcare companies facing particular challenges in the current environment. Nick Richitt, global cohead of healthcare services investment banking at JPMorgan, described the first group as late-stage companies that raised large sums of capital in 2021 at lofty valuations.

“Many of those startups are taking longer than expected to grow into those valuations and shore up their economics as the standards for healthcare IPOs get higher,” Richitt stated, according to conference reports.

The second type consists of earlier-stage startups stuck in what Richitt termed the “doom loop,” where funding dries up, forcing companies to rely on venture debt and cash flow management, which subsequently slows growth and reduces valuations.

Valuation Challenges Complicate Mergers

Even when founders can identify complementary businesses interested in merging, the process remains fraught with difficulties, sources indicate. Kelemen noted that founders often struggle to agree on their startups’ relative valuations or who should lead the combined entity.

Recent transactions illustrate the valuation adjustments occurring across the sector. Telehealth startup RemedyMeds acquired consumer health provider Thirty Madison for $500 million in September—a significant discount to Thirty Madison’s $1 billion valuation from its 2021 funding round. Similarly, DocGo announced it would buy virtual care startup SteadyMD for up to $25 million, despite SteadyMD having raised nearly $40 million to date.

Healthcare AI Deals Command Premium Valuations

While traditional digital health companies face consolidation pressures, healthcare AI companies are experiencing a surge in interest, particularly those focused on hospital revenue management. Recent major transactions include R1 RCM’s acquisition of General Catalyst-backed Phare Health and Waystar’s $1.25 billion deal for Iodine Software.

“We’re seeing a lot of the large incumbents think about, do we buy or build, especially in the AI space,” Kelemen stated, according to conference reports.

Venture-backed AI startups are also joining the acquisition trend. Abridge, an AI medical scribe company, is reportedly reserving part of the $700 million it raised over the past 18 months for potential acquisitions as it expands into revenue cycle management.

Market Still Grappling with AI Valuation Metrics

As AI startups command high valuations relative to their revenue, investors and bankers are still determining how to structure deals and evaluate risks in this emerging segment, Richitt indicated.

“How do you value an AI company? We don’t really know what the margin retention looks like, or what the endgame looks like for this company,” Richitt stated. “The M&A market is going to adjudicate some of this, figure out the answers, and the IPO market will do the rest.”

Despite the challenges, industry experts suggest the valuation corrections and resulting M&A activity represent a healthy maturation for the digital health sector, even as individual companies face difficult decisions about their future paths.

References

• http://en.wikipedia.org/wiki/Digital_health
• http://en.wikipedia.org/wiki/Valuation_(finance)
• http://en.wikipedia.org/wiki/Startup_company
• http://en.wikipedia.org/wiki/Artificial_intelligence
• http://en.wikipedia.org/wiki/Mergers_and_acquisitions

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