The Health AI IPO Checklist: How to Spot the Next Unicorn or Sniff Out the Next Donkey

I present 21 criteria to assess whether a digital health startup that has gone public (such as last week's Tempus AI) is poised to be a unicorn or just another failure.

Note: The return data is current as of June 21, 2024.

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I’m honestly tired of reporting and investigating digital health failures. So I took the initiative and spent time compiling a basic due diligence list for those investing in digital health and healthcare AI startups. This list is most useful for retail investors - those who came in at or after the IPO - not those accredited investors who have been investing with (or for) VC firms. The reason it’s an important distinction is because of the infamous (and illegal) “pump & dump” scheme perpetrated by VC bros. Yes, I’ll be screaming about this crime until either the FBI or the SEC take notice. The price is overinflated (“pumped”) in the private valuation rounds. The company is paraded around and presented as the next big thing since sliced bread by investment bankers and SPAC operators before the IPO. Poor retail investors listen and buy into it once the startup hits IPO, and of course, lose their shirts as the valuation is adjusted to its “fair value” by the public markets (the “dump” part). Very often that fair value is zero. By that time, VC bros have long monetized their profits, and it’s the “mom & pop” investors, as well as very early-stage angel investors, who pick up the tab.

Not only is it devastating. It’s criminal.

In particular, I’ve been trying to make sense of why AI startups turned IPO - Tempus AI, Zapata AI, in fact,

All recent IPOs that have “AI” in either the name or the ticker - tank seemingly the moment they start trading.

Just look at the list of recent digital health startups turned IPO compiled by Blake Madden. It’s a bloodbath of red.

Source: Blake Madden.

Add the following recent digital health failures to this list (Source: Halle Tecco.):

👎 Science 37: -96.3% (valued at $1.05 billion at SPAC-managed IPO in October 2021, sold in January 2024 for $38 million to eMed, a vulture company preying on dead digital health companies, which also acquired the remains of Babylon Health out of bankruptcy for around $50 million in September 2023.)

👎 Invitae: -100% (filed for bankruptcy in February 2024)

👎 MedAvail: -100% (SPAC-managed IPO in November 2020, filed for bankruptcy in February 2024)

👎 Better Therapeutics: -100% (SPAC-managed IPO in October 2021, shut down in March 2024)

👎 BrightSpring (BTSG): -11.2% since its IPO on January 26, 2024

👎 Waystar (WAY): +2.5% since its IPO on June 7, 2024

And, of course, the company I’m going to discuss in detail today:

👎 Tempus AI (TEM): -37.6% since its IPO only 7 business days ago, on June 14, 2024.

Keep in mind that this disaster of digital health is unfolding while the broad market is hitting new highs almost daily!

So I had to figure this out, and I’ve spent the last few months doing so.

I’ve had the privilege to be on many sides of the industry. Even, unfortunately, the darkest side of Wall Street. I’ve been an investment analyst. I’ve been a portfolio manager of a multi-asset portfolio, including private equity funds. I’ve been an LP investor. I’ve been a digital health startup founder. I’ve talked to over 100 venture capitalists over the past 5 years.

The information I’m providing here is well-informed and not just my sole opinion or speculation.

I’ve come up with a checklist of 21 criteria that any investor, especially retail investors who have probably heard only one side of the story about the company - the founders, the VCs, the SPAC operators, and the investment bankers’ glamorous side of the story - should go through in detail. This checklist will hopefully offer a more realistic picture of AI startups turned IPO.

I run 3 companies through this checklist: Tempus AI, Palantir, and Babylon Health. Why these three? I’ll explain.

But before I present the checklist, I’d like to address the related question of whether we’re in an AI Bubble, as many experts claim. Perhaps the answer to that question will help us address the dichotomy between the AI hype of GPU owners and the devastation of the AI startups.

Here is the outline of the article:

1. Are We in an AI Bubble? Buckle Up.

2. Tempus AI Plummets 38% in First 7 Days: Another Casualty in the Digital Health IPO Drama?

3. Short Sellers Are Stoked to the Max, But They May Be in for a Bumpy Ride

4. The Story of Tempus AI

5. Tempus AI: The Competition You Didn’t See Coming

6. Tempus AI and Health AI Startups: Who Will Survive?

7. The Health AI IPO Checklist: 21 Must-Ask Questions for Every Investor

8. OK. So We’ve Answered the 21 Questions. What’s the Fate of These Startups?

9. Conclusion 

Let’s get the story started…