Dan Galles, Partner at Allumia VenturesCourtesy of FundVenture economics relies on a simple equation: raise a large fund, back dozens of companies and count on a handful of billion-dollar winners to “return the fund” by generating outsized returns that more than offset inevitable failures. The formula has produced some of Silicon Valley’s most iconic companies like Airbnb, Nvidia, Snowflake, Databricks and Stripe. But in health tech, investors and advisors are questioning whether that math still works.After several years of retrenchment following digital health’s pandemic-era funding boom, the market appears to be recovering. U.S. digital health startups raised $7.4 billion across 244 deals during the first half of 2026, $1 billion more than the $6.4 billion raised across 245 deals during the same period in 2025. Yet the headline numbers obscure how narrowly that recovery is being distributed. According to Rock Health’s H1 2026 market report, 20 mega-rounds of at least $100 million absorbed 45% of all capital invested—meaning just over 8% of deals accounted for nearly half of the dollars deployed. Rock Health calls it “a tale of two markets”: a relatively small class of companies being financed as likely category winners, and a much larger group trying to find a sustainable route forward.Mega Deal Funding for Digital Health Startups (H1 2026)Rock HealthLiquidity has been equally uneven. After a brief opening in 2025, when companies including Hinge Health and Omada Health reached the public markets, digital health has not completed a single IPO during the first half of 2026. The market did however record 115 acquisitions during the first half of the year, including 71 in the second quarter, the busiest quarter for sector M&A since 2021. The reality is, digital health startups are more likely to get acquired, according to Rock Health. As M&A adviser Jessica Loché-Eggert, explains, “often, buyers are strategics – PE and VC-backed startups buying other startups.” As a result, a growing group of mature, venture-backed companies now sit in the messy middle: too large for many prospective acquirers but still waiting for public markets to provide a viable exit. Nelson Advisors has called the accumulation of late-stage private companies an “exit backlog paradox.” I spoke with Dan Galles, a partner at Allumia Ventures about whether the exit paradox raises a fundamental question about whether the VC math model needs to change.1 MORE FOR YOUVenture is Hard. Healthcare is Harder. Galles has spent approximately 25 years investing in healthcare, including a decade with Providence Ventures before the health system’s venture team spun out as the independently operated Allumia Ventures. “Venture is hard. Healthcare is harder,” Galles told me.The tension begins with the structure of the healthcare market itself. Many companies are financed using assumptions borrowed from enterprise software: build a superior product, establish product-market fit, add recurring customers and scale revenue faster than operating costs. Yet health systems and health plans are not typical enterprise-software buyers. “I look at friends who are in tech that target other enterprise verticals, and they seem to be able to grow their revenues and install base much, much faster. Disruption is so much harder in this space,” he explains.The primary reason is there are few truly new institutional customers. “There's no new hospitals that are getting built… the logos are all the same and consolidating, both on the health system and payer side.” So, health tech companies have less greenfield space. Even when a startup has built a better product, the customer must weigh that improvement against the financial and organizational cost of change. Security reviews, contracting, data integration, workflow redesign and staff training can turn a seemingly straightforward software purchase into a lengthy institutional undertaking. A product touching clinical care must also overcome legitimate concerns about safety, validation, liability and regulation.“Getting to a million dollars is really hard,” Galles said of early healthcare revenue. The first customers must trust a relatively unproven company enough to put it inside a complex operating environment. He explains the typical flow. “You go do a pilot. It can take forever to sell it, take forever to deploy it, and the health system themselves aren't very good at measuring was that successful? They may not have hard metrics to really prove it.” Then after securing those early adopters, there is a question as to whether the model can be replicated without extensive customization, unusually supportive executives or years-long sales processes.The electronic health record (EHR) behemoth creates an additional barrier. Epic is deeply embedded across large health systems and has continued to expand beyond the core medical record into adjacent workflows. Galles said Allumia is cautious about investing in businesses positioned directly in Epic’s path. Is Private Practice an Easier Way In?Galles discusses Salesforce during its early growth. The sales platform could initially sell to new businesses that needed customer-relationship-management software but did not have an incumbent tool to replace. Those customers allowed it to establish credibility before moving further into the enterprise market and compete with the SAPs and Oracles of the world. Private practices run by independent physician groups often provide a similar entry point for digital health startups. They can make purchasing decisions closer to the clinician and may operate outside Epic’s orbit, creating opportunities for products that would be harder to introduce inside a major integrated health system.But smaller practices present their own commercial constraints. The addressable pool is shrinking as physicians move into hospital, corporate and private-equity ownership. According to the American Medical Association’s 2024 Physician Practice Benchmark Survey, 42.2% of physicians worked in practices wholly owned by physicians in 2024, down from 60.1% in 2012. The AMA estimates that approximately 80,000 fewer physicians were working in private practice in 2024 than would have been the case had the 2012 share remained constant. Percentage of Physicians in Private Practice per Specialty (2024) AMA 2024 Physician Practice Benchmark SurveyThose practices are also financially constrained. Medicare physician payment declined 33% between 2001 and 2025 after adjusting for practice-cost inflation. Commercial reimbursement, claim denials, staffing costs and administrative requirements add further variability. Unlike a large health system with centralized departments and multiple revenue streams, an independent practice may have little flexibility to absorb a payment shortfall while simultaneously investing in new technology.Limited IT capacity compounds the problem. Smaller practices may lack personnel dedicated to evaluating vendors, migrating data, managing integrations, training staff and maintaining cybersecurity. The independent practice market therefore exchanges one type of friction for another. A startup may avoid the multilayered procurement process of a national health system, but the value of each contract is smaller, technical maturity varies widely and the customer base is fragmented across specialties, locations and practice sizes. Reaching venture-scale revenue may require hundreds or thousands of separate customers.The Case For Self-Insured Employers And Consumer-Facing PlatformsIf health systems are difficult to penetrate and independent practices are financially constrained and fragmented, self-insured employers and consumer-facing virtual-care platforms offer health tech companies alternative paths to scale. Employers aggregate large populations under a single contract and pay for interventions expected to reduce medical spending. Consumer-facing platforms create a more direct route into care, although the services may ultimately be funded through cash payments, insurance or employer benefits.Galles describes the employer market as historically one of health tech’s stronger channels because the buyer has a direct financial incentive to adopt products that can reduce claims costs, improve productivity or prevent expensive episodes of care. According to the KFF 2025 Employer Health Benefits Survey, 67% of workers with employer-sponsored coverage were enrolled in self-funded plans, including 80% of covered workers at companies with at least 200 employees. Several prominent digital health companies have scaled through this pathway. Hinge Health reported approximately 20 million contracted lives and more than 2,250 clients at the end of 2024, including agreements with 49% of the Fortune 100 and 42% of the Fortune 500. Omada Health, one of Allumia’s exited portfolio companies, similarly built across employers, health plans and pharmacy-benefit managers. As of March 2025, it reported more than 2,000 customers and 679,000 enrolled members. Hello Heart, a digital cardiovascular health platform that uses connected devices and AI-driven coaching to help members prevent and manage heart disease, has followed a related path in cardiovascular care, serving more than 150 organizations, including employers, health plans, labor organizations and government entities.The employer route is not frictionless. Hinge disclosed a typical five-month sales cycle, extending beyond a year for some large or complex customers. Companies must also persuade employees to enroll and remain engaged after a contract is signed. As employers seek to reduce overlapping point solutions, vendors face growing pressure to demonstrate measurable savings, broad applicability or integration with existing benefits platforms.Consumer-facing telehealth companies offer another route around health-system procurement. Hims & Hers is a clear example at scale. The company ended 2025 with more than 2.5 million subscribers and approximately $2.35 billion in annual revenue, up 59% from the prior year. Its model combines consumer marketing, virtual consultations, recurring prescriptions and fulfillment, with revenue derived primarily from consumers rather than enterprise health-system contracts. Midi Health demonstrates how a consumer-facing model can scale alongside employer and payer partnerships. Founded to close gaps in perimenopause and menopause care, the company provides insurance-covered virtual care in all 50 states while also partnering with employers, health systems and other distribution channels. In February 2026, it raised a $100 million Series D at a valuation exceeding $1 billion, reporting insurance coverage reaching more than 45 million women and more than 25,000 patients using its platform each week.Does AI Change The Equation?The canary in the coal-mine that continues to drive adoption even inside of large health systems – platforms powered by AI. OpenEvidence, the medical search engine that gives clinicians citation-linked answers from medical literature, raised a $250 million Series D in January 2026 at a $12 billion valuation, reporting daily use by more than 40% of U.S. physicians across more than 10,000 hospitals and medical centers. Qualified Health, an enterprise platform that helps health systems deploy, govern and monitor AI across clinical and administrative workflows, raised a $125 million Series B round in March 2026 financing following enterprise deployments with Mercy, Emory Healthcare, University of Rochester Medicine, Jefferson Health and all eight health institutions in the University of Texas System. And Aidoc, which assists radiology, cardiology, and neurovascular teams by scanning medical imagery and detecting abnormalities on CT scans and X-rays, raised a $150 million Series E in April 2026 after expanding to nearly 2,000 hospitals. Galles is optimistic about AI applications that automate administrative work, extend limited clinical capacity or enable less expensive models of care. What he questions is whether reducing the cost of building and operating a product necessarily changes the economics of selling it. AI may make software faster and less expensive for startups to build, but it gives the same capability to established vendors. Because many companies now draw upon the same underlying large-language models, competitive advantage increasingly depends on workflow integration, proprietary data and distribution—areas in which an incumbent may already have a significant lead.What Does the Fresh Playbook Look Like? Galles’ preferred model is not to cap every company at a modest outcome. Allumia will still pursue investments capable of producing billion-dollar exits when the market and business model support that possibility. And in fact, Galles does not have to look beyond Allumia’s own portfolio to find evidence that healthcare can still generate enormous outcomes. Allumia Ventures TeamCourtesy of FundThe firm's portfolio includes One Medical, which went public before its $3.9 billion acquisition by Amazon; Lyra Health, which reached a private valuation of $5.85 billion; Omada Health, which completed its IPO in 2025; and, most recently, Press Ganey, which develops and administers patient experience surveys, healthcare employee engagement metrics, and clinical quality analytics software and was acquired by Qualtrics in a $6.75 billion transaction in May 2026. But the firm generally wants companies to retain the option of generating an attractive result at an exit value between approximately $150 million and $250 million. “We’ll take our shots on things that can be that billion-dollar exit,” Galles said. “But I think way too many shots are being taken in that way.”A $200 million acquisition may represent a strong result for a founder and an early investor that entered at a modest valuation. It may be immaterial—or even disappointing—for a large fund that invested tens of millions of dollars after the company had already reached a billion-dollar valuation.In Galles’ view, companies selling primarily to financially constrained providers or health plans should prove commercial adoption early, raise capital efficiently and preserve the ability to reach profitability. A business that becomes EBITDA-positive can eventually attract a strategic buyer, growth-equity investor or private-equity firm even if it never becomes the dominant platform in healthcare. A company financed exclusively around revenue growth and an assumed multibillion-dollar outcome may have fewer alternatives. A fresh playbook would therefore involve more than encouraging founders to think smaller. It would require investors to match valuations, dollars deployed and the structure of capital to the customer, distribution channel and likely range of exits available to the company. It would preserve several paths to a successful outcome rather than financing the company in a manner that makes anything short of a unicorn economically irrelevant.The current market will continue to produce a small group of exceptionally valuable companies, and those winners may justify every dollar invested in them. The mistake is assuming that every health tech company faces the same market—or that the existence of a few extraordinary outcomes makes the underlying venture equation work for all the rest.(1) Allumia Ventures is an independent healthcare venture capital firm that spun out of Providence Ventures in 2025 after serving as the strategic investment arm of Providence Health & Services, a not-for-profit Catholic healthcare system, from 2014 to 2024. Allumia is actively investing from its latest $150 million fund, and writes initial checks of $5–10 million into U.S.-based digital health, tech-enabled services, and commercial-stage medical device and diagnostics companies. The firm targets three to five new investments annually, typically revenue-generating companies (~ $2–20 million in revenue) at the Series A–C stage.