A stellar report from Flare Capital Partners suggests that there’s some surprisingly sound justifications for the sky-high valuations we’re seeing with healthcare AI companies.
Numbers talk. The report – based on an analysis of 4,500 digital health VC rounds and an exec survey – found that a record 58% of deals involved AI companies in H1 [Chart: AI Funding].
- Over 10 healthcare AI startups joined the unicorn club in the last year, and the investor enthusiasm only kept surging after five exits over $1B: SmarterDx, Iodine Software, Machinify Health, Office Ally, and Tempus AI.
- That’s resulted in AI-focused companies commanding valuations 50% higher than the healthcare industry average [Chart: Valuations].
What’s fueling the fire? Companies that handle administrative tasks like revenue cycle management and contact center operations are leading the pack, at least for now.
- Administrative AI companies are shining by having LLMs help turn messy data into measurable ROI, but clinical support based on structured sources (ex. OpenEvidence) continues picking up steam [Chart: Category Adoption].
- One of the best charts unpacks the DNA of market leaders, and it turns out quick deployments and immediate ROI work well regardless of category [Chart: Leaders].
It’s not just FOMO. Flare’s exec survey found that half are already carving out over 10% of their IT budget for AI, and 83% plan to dial that percentage up going forward.
- There’s a meaningful level of product-led “pull” driving AI adoption, especially compared to the “push” that drove past cycles like EHRs.
- There’s also a high amount of confidence that AI startups will push into new areas (ex. scribing to RCM), and investors are giving them a lot of credit for unrealized growth based on what customers are saying about future budgets and expansion plans.
The Takeaway
Healthcare AI has moved from experimentation to execution, with wider adoption, bigger budgets, and value concentrating around market leaders. Flare doesn’t necessarily believe that justifies billion-dollar valuations for companies that are years away from profitability, but it at least sheds light on why the top players are blasting into orbit.
