Layoffs affected Cerebral, Carbon Health and other digital health companies.

Layoffs have begun to hit the digital health industry as two digital health unicorns have said they are cutting staff this week.

Cerebral, a mental health startup, has confirmed that the layoffs will happen by July 1st. The company said it was restructuring its operations and eliminating a number of positions, although it did not specify how many.

According to an internal memo obtained by Digital Health Business & Technology, the affected areas will include support and operations teams at the company’s headquarters.

The layoffs come as Cerebral faces a Justice Department investigation into its prescribing practices for possible violations of the Controlled Substances Act. It’s also a fight three former employees in court, including former VP of Product and Engineering Matt Trube, who alleged that the company sought to increase customer retention rates with ADHD drug prescriptions.

Cerebral CEO Kyle Roberston was kicked out two weeks ago, replaced by company president Dr. David Mow. CVS, Walmart and TruePill have it all stopped prescribing from Cerebral.

In December 2021, Cerebral received $300 million funding round and is valued at nearly $5 billion.

Another digital health unicorn, Carbon Health, which combines traditional traditional clinics and telemedicine, said it is cutting 8% of its workforce, which equates to 250 employees.

Carbon CEO Eren Bali cited volatile capital markets as the reason for the layoffs. He said the company needs to focus less on growth and more on profitability. The company is seeing a decline in revenue from COVID-related business lines, Bali said. Revenue is still projected to double from 2021.

In July 2021, San Francisco-based Carbon received a $350 million Series D funding round led by the Blackstone Horizon platform. The company is valued at $3 billion.

Dr. Justin Norden, partner at GSR Ventures, said companies that have been focused primarily on growth are recognizing the reality that venture capital is no longer cheap and easily available. He said that while healthcare is largely recession-proof, he advises companies to focus on profitability and more prudent growth.

“It’s not the end of the world, we’re still excited about our investment,” Norden said. “But we also encourage companies to think differently and make sure they can expand their runway. Yes, growth is important, but don’t waste money for no reason.”

Overall, Norden said investors are months ahead of the trend. He advised companies to raise money when conditions were still favorable because it would not last long. As conditions are no longer favorable, he said, companies should focus on short-term ROI and smart hiring strategies.

Skip Fleshman, partner at Asset Management Ventures, a Palo Alto-based venture capital firm that invests in digital health, technology and life sciences companies, said companies should be careful about increasing headcount and capital spending.

Amid the turmoil in the market, Fleshman advises the companies he works with to have enough cash, but “many of them don’t have healthy balance sheets.”

These fundamental factors, combined with higher investor expectations, make it difficult for companies to attract investors. As a result, funding is drying up, Fleshman said.

“Once investors start pulling back, lenders start pulling back,” he said.

Other digital health companies that have suffered layoffs in the past few weeks include Bangalore, India’s Mfine platform; New York consumer health company Thirty Madison; Noom, based in New York; and DivvyDose Digital Pharmacy in Davenport, Iowa. Thirty of Madison’s layoffs were linked to its merger with Nurx, while Mfine cited financial difficulties in laying off 75% of its staff. Noom has stated that it is changing its strategy to wellness coaching.

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