Dive Brief:
- U.S.-based digital health startups raised $2.5 billion across 119 deals in the third quarter this year, marking the second-lowest quarter of funding since the fourth quarter in 2019, according to a report by consultancy and venture capital firm Rock Health.
- Digital health startups have raised $8.6 billion in 365 deals so far this year, a little more than half of 2022’s total.
- The results cement a move toward decreased funding compared with pandemic boom years, the report found. While funding and deal count has fallen significantly, trends have now stabilized for several quarters in a new normal for the digital health sector.
Dive Insight:
Digital health funding soared in 2021, with companies raising more than $29 billion across over 730 deals, according to Rock Health’s report. But funding began to cool down throughout 2022, putting this year on track to more closely resemble pre-pandemic digital health investment.
The current funding environment has reached a “smaller but mighty” equilibrium, the report found. Funding for four of the last five quarters have hovered in the $2 billion range, with deal counts remaining in the hundreds for more than a year.
High interest rates and the fear of a slowing economy have affected venture capital funds’ ability to bring in cash, which cuts the amount available for investment in startups, Rock Health’s Adriana Krasniansky and Uday Suresh wrote. Lowered company valuations and a frozen IPO market decreased fund valuations and delayed distributions to limited partners, further diminishing the amount available for startups.
Those factors make investors more cautious when inking deals, pushing them to choose fewer companies to invest in.
“Ultimately, we expect this incipient funding cycle will bring with it a new market equilibrium where startups and investors are both able to find upside,” the report noted. “In the meantime, as digital health companies transition between the old equilibrium and new, founders and investors will need to continue navigating difficult conversations around valuation adjustment and ownership dilution.”
The changing funding environment is impacting what types of companies are raising capital. Investment is shifting away from pandemic-era trends like on-demand care and research and development.
For example, nonclinical workflow tools, which ranked as the seventh-highest value proposition in 2021, moved up to the number two spot so far this year, with funding reaching $1.6 billion. Meanwhile, R&D startups fell to the fourth-highest value proposition from the top spot in 2021 and 2022.
The public markets have looked particularly dim for digital health after companies like Babylon and Pear Therapeutics filed for bankruptcy earlier this year. NextGen Healthcare is also exiting the public markets after announcing a sale to a private equity firm.
But publicly traded digital health companies are seeing some momentum, improved by positive performances by companies like Teladoc Health and Hims & Hers.
“Relatively stable stock performance, in part fueled by new innovation opportunities (GLP-1s, generative AI), helps instill confidence in the public market’s ability to value and support the overall digital health cohort,” Krasniansky and Suresh wrote.
