Dive Brief:
- Digital health funding is showing signs of improvement after years of slowed investment, according to a report by consultancy and venture capital firm Rock Health.
- In the first half of the year, U.S. digital health startups raised $5.7 billion across 266 deals — putting the industry on pace to exceed full-year funding totals from 2019 and 2023.
- The public markets are showing signs of life too. After 21 months without a public exit, three digital health companies emerged onto the New York Stock Exchange or Nasdaq in the second quarter.
Dive Insight:
Investment in digital health startups ballooned to more than $29 billion in 2021, rapidly outpacing venture capital funding levels recorded before the COVID-19 pandemic.
But funding began to decline in the latter half of 2022 and continued to slow. Last year, U.S. companies raised nearly $11 billion, the lowest funding amount seen in digital health since 2019.
Digital health funding shows signs of momentum
But this year the sector is seeing signs of increased funding, especially due to early stage deals, according to the latest Rock Health report. Seed, series A and series B rounds made up 84% of the labeled raises during the first half of 2024.
Unlabeled rounds, where raises aren’t assigned a letter like A or B, have begun to fall too — another potentially positive sign for the funding environment. Unlabeled raises tend to increase when startups need cash but don’t meet minimum benchmarks for another labeled round, or are looking to delay conversations about their valuations, according to Rock Health.
Overall, 44% of deals were unlabeled last year, falling to 40% so far in 2024. But these rounds are still elevated compared with previous years; only 22% of digital health deals were unlabeled in 2022, and just 19% weren’t labeled in 2021.
The public markets might be showing some signs of improvement too. In the second quarter this year, remote fetal monitoring company Nuvo went public via a merger with a special purpose acquisition company, while precision diagnostics firm Tempus AI and revenue cycle management company Waystar completed initial public offerings.
The number of public exits are an improvement from years past. For comparison, Rock Health tracked zero digital health public exits last year, and just one in 2022.
In digital health M&A, there are still opportunities for startups to be acquired, but deals could face challenges. Larger digital health companies, some of the most likely buyers, are still facing pressure to be conservative with purchases, according to Rock Health. Only 34 startups were acquired by other digital health firms so far this year, compared with 83 last year.
But private equity buyers could be another option for startups looking to be acquired. PE firms bought 10 digital health startups in the first half of 2024. They acquired nine startups over the full year in 2023.
“Even digital health companies in tight financial situations can pass the PE sniff test, as long as they have clear business models and opportunities for operational improvements that lead to growth,” the report’s authors wrote.
