Dive Brief:

• Venture capital funding for digital health companies has stabilized after a major drop in investment coming out of the COVID-19 pandemic, according to a PitchBook report.
• Startups raised $1.1 billion across 77 deals in the first quarter, similar to the previous three quarters, according to the market research and data firm. However, deal value in the quarter declined nearly 27% year over year, while deal count fell more than 9%.
• Some sectors are still in flux. Digital therapeutics developers have struggled to receive reimbursement for their products, while Optum and Walmart have recently closed their telehealth businesses, Pitchbook said.

Dive Insight:

Digital health funding soared during the COVID-19 pandemic, with investors pouring a record $21 billion into startups in 2021, according to venture capital firm and advisory Rock Health. 

However, the sector began to cool down the following year, and investment fell back to pre-pandemic levels in 2023. Some digital health companies — even those that raised large amounts of capital, including through public offerings — shut down. 

PitchBook’s latest report finds funding in the space has evened out at far lower levels compared with pandemic highs.

Down rounds, when a startup raises money at a lower valuation than previous rounds, haven’t been widely reported, according to the research firm. However, the sector has seen a rise in silent raises, or unlabeled rounds with existing investors.

Fewer than 20% of startups have reported a priced round within the past 18 months, so digital health valuations “should be considered outdated to an extent,” according to PitchBook. 

The sector has also seen few digital health exits. The drought of initial public offerings continued in the first quarter, though the space did see some movement this summer with healthcare payments firm Waystar and precision medicine company Tempus AI going public.

However, these IPOs might not signal an immediate flood of digital health companies entering the public markets.

“Heading into 2024, we believed several digital health IPOs could be forthcoming; however, we now expect the highest quality startups to wait until 2025, as these companies often have balance sheets strong enough to weather the storm and may be comfortable letting others test the public markets first,” the report says. 

Another exception to the exit drought in the first quarter was mental health app maker Twill, which was acquired by public chronic condition management company DarioHealth.

That type of deal — wherein a digital platform buys complementary assets to create a consolidated offering — is likely to continue going forward, according to PitchBook.

Consolidation among digital therapeutics companies, which have so far faced challenges building a stable reimbursement structure for their products, could be another driver of M&A, PitchBook said. 

Some digital therapeutics developers have shut down, while Akili, which offers a video game treatment for ADHD, recently said it would go private — leaving no publicly traded digital therapeutics companies in the U.S.

Virtual care has also seen turbulence in recent months, with Walmart and Optum shuttering their telehealth businesses. Major public telehealth players like Teladoc Health and Amwell have seen their stock market performance wane as they struggle to boost their bottom lines. 

“Still, there is meaningful evidence that telehealth has an overall positive impact on healthcare costs, and we still see a positive investment case for the next evolution of telehealth services with a focus on specialty telemedicine, [business-to-business] platforms, and hybrid-care models,” the report’s authors wrote.