Dive Brief:

• Digital health funding appears to be flagging following record investments during the first two years of the pandemic.
• Global digital health funding reached a six-quarter low in the first quarter of 2022, ringing in at $10.4 billion, according to a new report from CB Insights. That's a 36% decrease from the fourth quarter of 2021.
• Megaround funding more than halved in the quarter, as investors backed fewer deals of $100 million or more. And public exits largely ground to a halt, likely due in part to disappointing IPO returns last year, with just one IPO in the quarter. That's compared to 23 in the fourth quarter of last year, CB Insights said.

Dive Insight:

COVID-19 has spurred historic levels of funding in digital health startups, as the pandemic proved the value thesis of digitally delivered care. Some investors warned of a potential digital health bubble, or at least a market correction, after U.S. digital health startups brought in a whopping $29.1 billion in 2021 — more than double the year prior.

It appears digital health funding is now losing some of the wind from its sails. Despite COVID-19 cases ticking upward once again, funding for digital health startups dropped in all global regions in the first quarter, according to the new report from CB Insights.

In the U.S., digital health funding fell to $7.2 billion in the first quarter of 2022, down 37% from the fourth of 2021.

But a decline in the frequency and volume of funding rounds was seen across the board globally. Megarounds totaled just $4.4 billion in the quarter, making up 42% of all digital health dollars invested. That's down from 57% in the fourth quarter of 2021.

The biggest deals of the quarter were led by a $325 million Series E round for value-based kidney care provider Somatus in February, with investors including major payer Anthem. That's followed by a $300 million private equity deal for health messaging startup TigerConnect; a $290 million Series E round for biotech startup Freenome, led by pharma giant Roche's venture fund; and a $235 million Series F round for mental health tech startup Lyra Health.

Despite flagging investments, M&A activity stayed strong, and is likely to continue this year as companies look to round out their products and the market matures, CB Insights said. Digital health M&A has held above 100 deals for seven consecutive quarters, after taking off in 2021. CB Insights recorded 138 deals in the first quarter of 2022.

Funding to the mental health tech sector, which has seen mammoth growth during the pandemic, reached $792 million globally in the quarter. That's a drop of 60% from last quarter's record, and the lowest funding level since the fourth quarter of 2020, CB Insights said. Mental health startups nabbed 8% of total digital health funding in the first quarter, down from 12% in the fourth.

Telehealth startups have also brought in record funding spurred by COVID-19 that appears to be slowing. Funding to the telehealth sector declined by about a third compared to the fourth quarter of last year, even as the number of overall deals ticked up almost 12%.