Dive Brief:
- Digital health startups raised $2.7 billion across 133 deals in the first quarter, as the sector notched more transactions at lower check sizes, according to a report by consultancy and venture capital firm Rock Health.
- The first quarter this year was the lowest funded first quarter since 2019 — important because the first quarter had the highest funding of the year in 2022 and 2023, Rock Health said. But deal count during the period beat out each of the previous six quarters.
- Artificial intelligence funding was a key priority for investors. Forty percent of the first quarter’s funding pot went to AI-enabled companies, compared with 33% of last year’s digital health investment total.
Dive Insight:
The digital health funding landscape has undergone significant upheaval since an investment boom in the wake of the COVID-19 pandemic.
Funding has declined since the pandemic-era spike, with investment last year marking the lowest levels seen in the sector since 2019, according to an earlier Rock Health report.
Digital health sees lowest funded Q1 since 2019
Some companies have moved toward “creative” fundraising tactics to extend their capital, according to Rock Health. For example, nearly half of first quarter deals were unlabeled raises, where funding rounds aren’t assigned a letter like series A or B, compared with 44% in 2023 overall.
Some startups are also looking at different types of deal structures to entice investors. Transcarent, which offers a platform for self-insured employers, structured its $125 million series D raise to offer funders more than double their investment if the company completes an IPO or is acquired, according to Rock Health.
Outcomes and evidence behind digital health products is becoming more common too. Last year, the Peterson Health Technology Institute launched with the goal of providing independent evaluations of digital health tools, and the institute recently published its first assessment that was critical of digital diabetes management products’ value.
As the digital health sector becomes more crowded with products, companies will need to provide information about outcomes to differentiate themselves and show their value to investors.
“As outcomes data becomes a moat and a customer draw-in, investors are seeking out companies that can demonstrate efficacy early,” the report said. “This makes outcomes data more central to fundraising conversations—and at earlier stages.”
Public digital health companies experienced turmoil during the first quarter too. Three companies — including decentralized clinical trial firm Science 37, digital therapeutics developer Better Therapeutics and healthcare IT company Veradigm — recently delisted.
The public markets now include 43 digital health companies, down from 53 at its peak in 2021, according to Rock Health.
That could be an opportunity for some companies to reorganize without quarterly reporting pressure from shareholders or analysts. Delistings can recalibrate investor expectations for startups too.
“[...] Public market delistings have a direct relationship to downshifts in startup valuations, which we see as an important reset in this market cycle,” the report said. “The publicly-traded players that remain, especially those that model margin management and revenue visibility, set a clear path toward success for others to follow in their footsteps.”
