Funding for digital health will be at its lowest level since 2019

Funding for digital health will be at its lowest level since 2019

According to a report from Rock Health, the funding landscape in digital health is experiencing a downturn, characterized by fewer and smaller deals and a reduced number of investors. Unless there is a significant improvement in the latter half of 2023, this year could witness the lowest financing levels since 2019.

In the first half of the year, a total of $6.1 billion was raised across 244 deals, with an average deal value of approximately $25 million. The funding activity has slowed down from $3.5 billion in the first quarter to $2.5 billion in the second quarter. Comparing these figures to the peak of the pandemic in 2021, when $29.1 billion was raised from 737 deals, and the $15.3 billion raised from 579 deals in 2022, it is evident that the digital health sector is experiencing a downward trend.

The report suggests that a new status quo has emerged, with specialist digital health investors remaining active while generalists and crossover investors are becoming less involved in the sector. Start-ups are adapting to this changing landscape by resorting to “unlabelled” fundraising, avoiding categorizing their capital raises as Series A, B, or C rounds. This approach helps them circumvent valuation downgrades and negative publicity associated with weaker funding rounds. In the first half of the year, 41% of all financings were unlabelled, the highest proportion since Rock Health began tracking the sector in 2011.

However, there are still positive aspects amidst the overall decline. Big rounds of $100 million or more, supported by experienced investment groups, remain comparable to previous years. This suggests that investors are doubling down on investments they consider particularly promising. In total, 12 mega deals accounted for over a third (37%) of the financing dollars in the first half, with an average value of $185 million, approaching the peak of $188 million seen in 2021.

These significant deals were concentrated in three main areas: value-based care enablement, non-clinical workflow and practice management, and at-home care. Strive Health’s $166 million Series C round in the value-based care segment, Shiftkey’s $300 million funding for staffing technology in practice management, and Monogram Health’s $375 million raise for their kidney disease management platform in at-home care were among the most valuable financings.

Rock Health predicts that the challenging venture capital environment, combined with a stagnant initial public offering (IPO) market, may lead to increased acquisition activity of smaller companies, although the number of such deals remains limited. This could be due to start-ups waiting for improved conditions and higher valuations before considering acquisitions. Alternatively, deals may be happening but not being publicized due to unfavorable terms.

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