When you invest in healthcare, you’re buying time, science, and a long shot at changing lives. But that ambition comes at a steep price: equity.
Healthcare businesses often raise more capital, wait longer, and give up larger stakes than any other sector. By the time the first clinical trial is complete or FDA approval is in sight, the cap table looks very different from where it started.
So why does healthcare eat up so much ownership, and what should investors and business leaders make of it?
The Capital Curve: Why Healthcare Is a Long Game
Across venture stages, healthcare businesses (particularly those in biotech and medical devices) tend to require significantly higher capital outlays than their peers in SaaS or fintech.
- At the Seed stage, healthcare businesses often raise 1.5x to 2x more than companies in other sectors, yet their valuations don’t always scale at the same pace.
- By Series A, it’s not uncommon for founding teams in healthcare to have already diluted down to 60–65% ownership, compared to 75–80% in software or consumer businesses.
- By Series C or D, founders in biotech frequently hold under 10% of equity, while their tech counterparts may still control 15–20%.
The reason is simple but structural: healthcare innovation is expensive, slow, and regulated. Each milestone, from early research to FDA clearance, requires specialized expertise, clinical validation, and compliance with a maze of standards, in addition to funding.
High-Risk R&D Means High Capital Burn
Unlike digital businesses, which can iterate through code and customer feedback, healthcare innovation is built on years of scientific testing and data validation. R&D costs can consume 40–50% of a company’s total expenditures in its early years.
- Biotech businesses, for instance, often face a 10+ year development timeline before commercialization.
- Medical device companies can spend $20–50 million before their first product hits the market.
- Digital health platforms, though less capital-heavy, still require deep integrations with healthcare systems, HIPAA compliance, and complex data management frameworks.
These costs force companies to raise successive rounds of funding before achieving significant revenue traction. Each round chips away at ownership, leaving business leaders with less equity but (hopefully) a more de-risked, valuable company.
Regulatory Hurdles Stretch the Timeline
The FDA approval process alone can add several years and millions of dollars in expenses, often without immediate revenue. This regulatory drag forces healthcare businesses to seek external capital earlier and more frequently than software or consumer product companies.
Even after approval, scaling a healthcare solution requires navigating payer systems, insurance integrations, and provider adoption, all of which extend time-to-market and delay profitability. Investors, aware of these long lead times, typically demand larger ownership stakes to compensate for extended risk horizons. That translates into deeper dilution for the founding team and early backers.
The Valuation Gap Between Science and Market
The gap between technological proof and commercial viability is humongous in healthcare. A breakthrough in gene therapy or diagnostics might be scientifically groundbreaking, but until it proves scalable, insurable, and marketable, investors will heavily discount its valuation.
This creates a valuation lag. Companies raise large sums to reach each development milestone, but valuations don’t always keep pace, meaning more equity must be sold to secure the next round.
Compare this with a SaaS business that can scale users and ARR with minimal incremental cost, and you’ll learn that valuations in tech often outpace capital requirements. But in healthcare, it’s the opposite.
Sector Fragmentation and Investor Expectations
Healthcare isn’t a monolith. Its sub-sectors behave very differently:
- Biotech and Medtech investors often expect 5-10x dilution before exit because they know these companies require multiple rounds before revenue.
- Digital Health investors are more comfortable with tech-like metrics (user growth, retention, and B2B traction) but still demand higher ownership early to balance integration risk.
- Healthcare Services companies face modest dilution but slower scaling potential, as they often depend on regional partnerships or licensing models.
This sub-sector variability means that angel investors must assess dilution expectations early on and adjust their entry strategy accordingly.
How Angels Can Navigate Healthcare Dilution
If you are an angel investor in healthcare, it is important to know that high dilution doesn’t necessarily mean poor outcomes. It just shifts where and how value is captured.
A few practical insights:
- Invest early, but not too early. Pre-seed rounds in healthcare can be risky before proof-of-concept or clinical validation. Early-Seed or Bridge rounds, when data is emerging, often offer better risk-adjusted entry points.
- Syndicate with sector specialists. Partnering with healthcare-focused angel groups can help identify viable milestones and avoid over-dilution through smarter fundraising pacing.
- Push for a milestone-based approach. Encourage companies to raise capital in stages tied to verifiable outcomes, such as preclinical results, FDA filings, or pilot deployments. This helps preserve equity and valuation discipline.
- Understand exit timelines. Biotech exits often occur through M&A before commercialization, while digital health may exit through strategic partnerships or later-stage IPOs. Knowing which path a company is on informs how dilution impacts your ROI.
Dilution as the Price of Progress
Healthcare’s high dilution rates are not a red flag. They’re a reflection of how innovation in this field unfolds. Capital intensity, long validation cycles, and regulatory oversight make it a uniquely demanding sector.
For business leaders, this situation underscores the importance of strategic fundraising. Raising what’s needed to hit clear value inflection points rather than chasing the largest possible round.
For investors, it’s a reminder that equity percentage is just one metric. Smaller ownership in a successful exit can outweigh larger stakes in shorter-cycle industries.
The sector rewards patience, partnership, and conviction in science-driven impact. And while dilution may take a bigger bite, the long-term returns, both financial and societal, often justify the share surrendered along the way.
