How could the Software sell off and AI bubble in early 2026 affect Digital Health, HealthTech and MedTech funding and M&A for the rest of 2026?

The software sell-off and AI bubble fears are likely to create a more selective, valuation disciplined but still AI‑hungry environment for Digital Health, HealthTech and MedTech funding and M&A across the rest of 2026.

Big picture: what’s changed

Listed software and software‑services are down c. 20–25% YTD, with c. USD 1tn of market cap wiped out and hedge funds materially short, which is pushing investors to reassess software and AI business models and compress multiples.

At the same time, IT and AI capex are still growing strongly into 2026 (Gartner sees >USD 6tn IT spend in 2026), so AI adoption and infrastructure build‑out are continuing even as “AI bubble” talk rises.

HealthTech / MedTech strategics entered 2026 with expectations of an acceleration in M&A, driven by better credit markets, easing antitrust in the US, and the need to acquire AI capabilities in RCM, provider ops and analytics.

Funding: Digital Health & HealthTech

For the rest of 2026, expect:

Tighter terms and lower valuations for generic SaaS‑like digital health: The public software derating will be used as a benchmark, driving lower revenue multiples for loss‑making workflow tools, point solutions and non‑differentiated SaaS.

Capital rotation toward AI with proven ROI: In 2025, AI‑enabled digital health companies already captured a majority of VC dollars; that share is rising into 2026, but LPs and GPs are concentrating on use‑cases with measurable cost savings (RCM, billing, provider productivity) rather than speculative “AI platforms”.

Longer diligence and more technical scrutiny: Investors are now explicitly testing AI defensibility (data moats, model performance, workflow integration) and resilience to disruption from hyperscalers / agentic tools, mirroring the discrimination now happening in listed software.

Later‑stage rounds harder, earlier‑stage still active but smaller: Cross‑over and growth investors burned in software will demand clearer paths to profitability and payback periods in healthtech; seed and Series A will stay active but with smaller round sizes and stronger focus on regulatory / reimbursement path.

Illustration: a Series C digital chronic‑care platform that would have raised at 12–14x NTM revenue in 2021–22 may now be guided toward 6–9x, with more structure (ratchets, liquidation preferences) and heavier evidence demands on outcomes and gross margin improvement, while an AI‑RCM or coding automation startup with strong unit economics can still command premium terms.

M&A: HealthTech & MedTech

Strategic and PE M&A are likely to accelerate but become more barbelled and opportunistic:

Strategics use the sell‑off to buy AI and software assets cheaper: Large payers, providers and MedTech OEMs already planned to buy AI‑enabled platforms in RCM, workflow automation and analytics; lower public and private valuations increase the universe of “digestible” targets and improve deal economics.

Big Tech health bets become more disciplined: Interoperability and data‑exchange mandates in the US and elsewhere are still pushing Big Tech toward health data platforms, but the broader AI re‑rating will likely shift them from “growth at any price” to acquiring proven, scaled assets that slot into their cloud / data strategies.

MedTech focuses on AI‑augmented devices and services: OEMs will keep acquiring AI‑enabled imaging, surgical planning, robotics software and post‑op monitoring platforms, as AI is now viewed as core infrastructure rather than optional add‑on; the derating in software helps de‑risk multiple paid on these targets.

PE leans into carve‑outs and roll‑ups: With valuations down but AI adoption still necessary, PE will look to carve out under‑invested software units from corporates and build scaled platforms in RCM, rev‑ops, and specialty‑specific software, expecting to benefit from eventual multiple re‑expansion.

Practical implications for 2026 strategy

For the rest of 2026, this environment supports a “quality and efficiency” thesis:

For founders: emphasise quantified ROI and defensibility (proprietary data, deep workflow integration, regulatory assets) over generic “AI” narratives; be prepared for down‑round optics but pursue strategic investors who value the asset in their P&L.

For acquirers: build pipelines around AI‑native assets in RCM, ops, and device‑adjacent software that are now cheaper relative to 2021–22, but subject them to stringent tech and reimbursement diligence.

For investors: expect dispersion, winners with real AI leverage and healthcare economics still command healthy valuations and see exit routes via strategics, while “me‑too” digital health SaaS may face a lost vintage

To discuss how Nelson Advisors can help your HealthTech, MedTech, Health AI or Digital Health company, please email [email protected]