The digital health sector has entered a new era in terms of funding, now decoupled from the feverish flow of capital in 2020 and 2021. Startups in this space must quickly adapt to a fundraising landscape characterized by smaller check sizes, fewer deals and a smaller cohort of investors, according to a new study report out of Rock Health.
If digital health investment continues at the pace it maintained in the first half of the year, 2023 will be the sector’s lowest annual fundraising since 2019, the report said.
In 2020 and 2021, investors took risks in the face of low interest rates. There has been a huge influx of investment money into digital health startups, and companies and investors have quickly become accustomed to high valuations and high fund-raising totals.
Last year, the digital healthcare industry experienced an acute decline in investment – the sector’s global funding volume in 2022 was US$25.9 billion 57% less above 2021 record high of $59.7 billion. The funding decline has continued in the first six months of 2023 (H1 2023), marking a new status quo.
According to the Rock Health report, digital health startups in the US have raised $6.1 billion through 244 deals in the first six months of this year. The average deal size in the first half of 2023 was $24.8 million — down from $31.2 million for the year H1 2022 and $39.6 million H1 2021.
However, the mega deals in the first half of 2023 – those with a total volume of USD 100 million or more – were comparable to the mega deals of previous years. Twelve mega deals went to US-based digital health startups in the first half, accounting for 37% of total funding. The average megadeal size for the first half of 2023 was $185 million, which is close to the average megadeal size of $188 million in 2021.
The report noted that the megadeals in the first half of 2023 occurred in different funding phases – there were two megadeals in Series A, one in Series B, two in Series C and six in Series D or higher.
Most of these mega deals involved companies focused on value-based care, home care, or technology to improve healthcare workforce management. In the area of value-based care, for example Strive for health raised $166 million, arcadia snagged $125 million and Vitalize health Raised $100 million. In the home health sector monogram health received a $375 million deal and author health Grossed $115 million.
There were also some mega deals for start-ups that wanted to help providers improve the nursing workforce – shift key got 300 million dollars, ShiftMed $200 million captured and MedShift received $108 million.
Another key trend in the first half of 2023 was that fewer investors were involved in digital healthcare deals. A total of 555 investors participated in digital health funding rounds in H1, up from 775 in H1 2022 and 832 in H1 2021. The report also found that nearly three-quarters of dealmakers in H1 2023 were repeat digital health investors . According to the report, this means many generalist investors have stopped making one-off deals in digital health.
Digital Health’s new fundraising landscape poses a challenge for startups – figuring out how to raise new capital without significantly lowering their valuation or getting bad press related to a down round.
Because of this, 41% of deals in the first half of 2023 were unqualified funding rounds. That means startups have raised money but have chosen not to publicly label the effort with a series or round title. Rock Health said it was the highest proportion of untagged donations since digital health funding began tracking in 2011.
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