Digital Health’s Survival Strategy: Why 2025’s M&A Wave Signals Industry Transformation

The Consolidation Imperative in Digital Health

Digital health startups are facing unprecedented pressure to consolidate as investor priorities shift dramatically toward artificial intelligence. What began as a cautious exploration of merger opportunities has accelerated into a strategic necessity for survival. Industry leaders describe this transition as a fundamental recalibration where companies must either find complementary partners or face extinction.

The Consolidation Imperative in Digital Health
The AI Investment Shift Reshapes Healthcare Funding
Valuation Realities Drive Deal Making
Two Distinct Struggle Patterns Emerge
The Complex Reality of ‘Merger of Equals’
Healthcare AI Creates Separate Investment Universe
The Path Forward: Adaptation or Obsolescence

According to banking executives and private equity investors speaking at the recent HLTH conference, the digital health landscape is undergoing what Sasha Kelemen of Baird’s healthcare investment banking group calls a “come to Jesus moment.” Companies that previously operated independently are now recognizing that collaboration through mergers or acquisitions may be their only path forward in an increasingly competitive environment.

The AI Investment Shift Reshapes Healthcare Funding

The dramatic reallocation of investment toward AI technologies has created a two-tiered market in digital health. While AI-focused companies command premium valuations and abundant capital, traditional digital health services providers face increasing funding challenges. This divergence is forcing non-AI startups to reconsider their standalone viability.

Nick Richitt, JPMorgan’s global cohead of healthcare services investment banking, observes that companies are now asking the fundamental question: “Why are we pursuing parallel roadmaps when we could pool our resources?” This pragmatic approach represents a significant shift from previous quarters, where founders demonstrated more reluctance toward merger discussions.

Valuation Realities Drive Deal Making

The merger activity occurring across digital health reflects a new valuation reality. Several high-profile transactions have occurred at significant discounts to previous funding rounds, indicating that both founders and investors are accepting market-driven price adjustments.

Recent examples illustrate this trend clearly. RemedyMeds acquired consumer health provider Thirty Madison for $500 million—approximately half of Thirty Madison’s 2021 valuation. Similarly, DocGo’s acquisition of SteadyMD valued the virtual care startup below its total raised capital. These valuation resets, while painful for stakeholders, are creating opportunities for strategic combinations that might not have been feasible at previous valuation levels., according to market developments

Two Distinct Struggle Patterns Emerge

Industry experts identify two primary categories of companies driving current merger activity:

Late-stage companies that raised substantial capital at peak valuations during the 2021 funding boom now face extended timelines to grow into those valuations. As Robb Vorhoff of General Atlantic notes, these companies are turning to M&A to “manufacture the growth or extra runway they need” amid higher standards for public market exits.
Early-stage startups caught in what Richitt describes as a “doom loop” where limited funding options force growth compromises, leading to valuation reductions that create additional financial pressure.

The Complex Reality of ‘Merger of Equals’

While the logic behind consolidation appears straightforward, the execution presents significant challenges. Kelemen emphasizes that even when companies identify complementary partners, negotiations often stall over valuation disagreements and leadership questions for the combined entity. The emotional and practical complexities of merging two organizations with distinct cultures and operational approaches cannot be underestimated.

Simultaneously, investors face their own pressures as venture capital and private equity firms must return capital to limited partners, creating additional urgency for portfolio companies to find viable exit or growth strategies.

Healthcare AI Creates Separate Investment Universe

While traditional digital health services companies struggle, healthcare AI ventures are experiencing unprecedented demand, particularly in hospital revenue cycle management. Recent months have seen several billion-dollar transactions in this sector, including Waystar’s $1.25 billion acquisition of Iodine Software and R1 RCM’s purchase of Phare Health.

This bifurcated market presents both challenges and opportunities. As Vorhoff observes, strategic buyers and private equity sponsors currently show limited interest in virtual care investments while aggressively pursuing AI-enabled healthcare solutions. This dynamic is pushing traditional digital health companies toward consolidation while AI startups enjoy multiple exit options.

The Path Forward: Adaptation or Obsolescence

The digital health sector stands at a critical inflection point. Companies must honestly assess their strategic positioning and available options. For many, consolidation represents the most viable path to continued operation and growth. However, successful navigation of this landscape requires pragmatic valuation expectations, strategic alignment with complementary partners, and recognition that the market fundamentals have permanently shifted., as previous analysis

As Richitt concludes, the market itself will determine which business models and technologies ultimately succeed. “The M&A market is going to adjudicate some of this, figure out the answers, and the IPO market will do the rest.” For digital health companies facing today’s challenging environment, the message is clear: adapt through strategic combination or risk becoming irrelevant in an increasingly competitive ecosystem.