As the influx of venture capital (VC) dollars flowed—and have since slowed—into digital health startups, we’ve seen many companies soar to great heights, only to meet their demise months later. The question at hand is why does this happen? 

Was it due to bad leadership? 

Was it bad luck?

Who, or what is to blame for these negative business outcomes, and more importantly, for the lost lives and negative health impact? 

The negative outcomes have led some to ask, “Is venture capital just bad for health care?”. And many have concluded the answer is “yes.”  

But the answers to questions as complex as this are rarely black or white. Instead they are different shades of gray. As it relates to this last question, I’ll argue that venture capital is not “bad” for health care as a whole. Yes, certain venture capital investments have led to value destruction, lost lives, and decreased health and well-being. But others, like Omada Health and Maven Clinic provide success stories

We can’t apply the specific reasons why one organization failed or succeeded to all organizations receiving the same type of funding. But, what we can do is use proven theory to explain what we are seeing. 

Good Money Bad Money Theory lends some insights into why we’ve seen the rapid growth and quick demise of many entities in the VC-backed health care arena in recent years. Let’s dive into why that is and what leaders can do about it. 

“There is good money, and there is bad money.”  

For startups to get off the ground, they need funding. But whether that funding is made of good money, or bad, will make or break their trajectory. As Clay Christensen outlined in The Innovator’s Solution, “Because the process of securing funding forces many potentially disruptive ideas to get shaped as sustaining innovations that target large and obvious markets, the very process of getting the money to start a venture actually sends many of them on a march towards failure.” 

The reason many ideas get shaped into sustaining innovations, and thus forced on a “march towards failure” is because funders require these potentially disruptive ideas to grow quickly. By definition, disruptive markets are small as they start to get off the ground. If growth is the primary objective, a potentially disruptive idea will fail by these standards before it has an opportunity to prove its value. 

In an organization’s early days, it must iterate its business model to prove that it has a viable way to make money and can be sustainably profitable. Proving desirability and profitability, not proving the ability to grow, is the first critical step of a successful venture. Scaling an unprofitable venture simply scales a money-losing machine. 

Leaders can avoid this focus on growth in their early days by taking only “good money” from funders. Good money is funding that is patient for growth but impatient for profit in an organization’s early days. 

The opposite of good money is “bad money.” This type of funding is impatient for growth but patient for profit. Bad money is unfortunately what we have seen the most of in VC-backed digital health entities in recent years. Funders put pressure on founders to grow quickly, scale their solutions, and prove they can attract more consumers to their service offering or platform. 

This is what founders—and funders—want to avoid in order to create value through venture investments in health care.  

How to avoid giving and receiving bad money 

As venture funding slowed in H2 2022 and is continuing to do so into 2023, founders and investors alike must be more diligent about whom they seek funding from, and to whom it is granted. Investors have enhanced their focus on organizations with demonstrated health outcomes improvements, high and sustained consumer engagement with low churn, ability to withstand economic downturns, and additional quantitative measures that enhance their likelihood of betting on a good egg. 

Founders should be equally diligent in ensuring they pursue good money. By completing the following steps, they are more likely to avoid bad money: 

  1. Ensure they are aligned with funders on being patient for growth and impatient for profit in the entity’s early days. 
  2. Define a realistic timeline around this patience and articulate clear and attainable expectations for profitability. Health care is a highly regulated, slow industry that doesn’t create returns as quickly as most other industries. 
  3. Rigorously test and then iterate their most critical business model assumptions. The faster and more effectively they test, pivot, and reassess, the more likely they are to create a path to sustainable viability. 

To bring us back to where we started, is venture capital bad for health care? Not inherently. But it can be if the investing organization grants founders bad money. With a greater focus on giving and receiving good money, founders and funders alike can help prevent the recent past from being a predictor of the future. 


  • Ann Somers Hogg
    Ann Somers Hogg

    Ann Somers Hogg is the director of health care at the Christensen Institute. She focuses on business model innovation and disruption in health care, including how to transform a sick care system to one that values and incentivizes total health.