Navigating the New Era of Digital Health Investment
Unravelling the Shifts in Funding Landscape and the Implications for Startups
The digital health sector is navigating a new era of investment, starkly contrasting the feverish capital influx witnessed in 2020 and 2021. Startups in this space now have to adapt to a fundraising landscape characterised by smaller investment amounts, fewer deals, and a reduced pool of investors, as highlighted in a recent report by Rock Health.
If the current pace of digital health investment continues, 2023 is projected to record the lowest annual fundraising total for the sector since 2019. This is a significant shift from the risk-taking investment behaviour seen in 2020 and 2021, driven by low-interest rates, which led to a massive influx of investment dollars into digital health startups. However, the investment landscape experienced a slowdown in 2022, with the global funding total for the digital health industry falling to $25.9 billion, a 57% decrease from the record high of $59.7 billion in 2021.
The first half of 2023 (H1 2023) has seen this downward trend continue, with U.S.-based digital health startups raising $6.1 billion across 244 deals. The average deal size has also shrunk to $24.8 million, down from $31.2 million in H1 2022 and $39.6 million in H1 2021. Despite this, the number and size of megadeals (deals totalling $100 million or more) in H1 2023 were comparable to previous years, with twelve such deals accounting for 37% of total funding dollars.
Interestingly, these megadeals occurred at various funding stages and were concentrated mainly in companies focusing on value-based care enablement, at-home care, or technology to improve healthcare workforce management. For instance, in the value-based care sector, Strive Health, Arcadia, and Vytalize Health raised $166 million, $125 million, and $100 million, respectively. In the home health space, Monogram Health and Author Health secured deals worth $375 million and $115 million, respectively.
Another notable trend in H1 2023 was the reduced number of investors participating in digital health deals. The number of investors fell to 555, down from 775 in H1 2022 and 832 in H1 2021. Furthermore, nearly three-quarters of these investors were repeat digital health investors, indicating a decline in generalist investors pursuing one-off deals in the digital health space.
This new fundraising landscape presents a challenge for startups as they grapple with how to raise new capital without significantly reducing their valuation or attracting negative press associated with a down round. As a result, 41% of deals in H1 2023 were unlabeled funding rounds, meaning that startups raised money without publicly assigning a series or round title to the effort. Rock Health states this is the highest proportion of raises since it began tracking digital health funding in 2011.
Source: Medcitynews