Dive Brief:
- U.S. digital health startups raised $10.7 billion across 492 deals last year, marking the lowest funding level in the sector since 2019, according to a report by Rock Health.
- But M&A activity and company shutdowns didn’t spike, even as startups seemed strapped for cash. Many companies were quietly raising funds from existing investors as well as seeking extension rounds and unlabeled raises, the venture capital firm and consultancy said.
- Those measures likely won’t work again in 2024, forcing some companies to raise at a reduced valuation, look for M&A opportunities or shut down, according to Rock Health.
Dive Insight:
Digital health funding soared to record-breaking levels during the COVID-19 pandemic in 2021, boosted by the rapid uptake of telehealth and other digital health technologies that aimed to preserve access to care.
But investment began to decline in 2022, and dipped even further last year. The fourth quarter of 2023 marked the lowest investment quarter for digital health since the third quarter in 2019, with startups only bringing in $1.9 billion across 122 deals, according to Rock Health’s latest report.
Digital health funding hits lowest level since 2019
But the low levels of funding probably don’t fully explain what happened in the sector last year, report authors Madelyn Knowles and Mihir Somaiya wrote.
Some startups likely looked to extend previous funding rounds, or turned toward unlabeled raises, where rounds aren’t assigned a letter like series A or B. Last year, 44% of deals were unlabeled, Rock Health found.
Silent raises from existing investors also may have helped some startups stay afloat in 2023. But these strategies aren’t long-term fixes.
“For startups continuing forward, these creative financing measures are realistically one-time assists, and can’t be continuously relied upon if additional financing is needed,” Knowles and Somaiya wrote. “Startups that aren’t able to leverage funding to reach the requisite standards of their next deal stage will face tough decisions in 2024.”
Labeled raises could come back next year, as some startups will likely need more substantial raises than they could scoop up in 2023, the report predicted.
M&A will likely pick up too, as startups run low on funds and buyers see opportunities to pick up assets on the cheap. Though industry watchers have been warning about impending consolidation in digital health, Rock Health tracked only 146 announced mergers or acquisitions last year, compared with 190 in 2022.
The public markets may change in 2024 as well. Zero companies completed an IPO last year, but some late-stage companies could make the jump in the coming months.
Other companies that have struggled financially may delist. At least 17% of public digital health companies trading on Nasdaq or the New York Stock Exchange weren’t compliant with rules that require them to consistently trade above $1 per share.
“We may see select startups that have eyed an exit and delayed their debuts finally take the plunge next year, especially those that have achieved strong financials,” Knowles and Somaiya wrote. “With the combined measures of delisting and new IPOs, we expect a recalibration of the private digital health market will result in a stronger and more stable publicly traded cohort in the years ahead.”
