If there were any doubts that digital health funding, especially in the U.S., is on a rocket ride straight to the stratosphere, they were removed with the latest funding report from CBInsights. Are we in a bubble? Is there irrational exuberance? Before we get to what investors said, let’s do the numbers from the State of Digital Health 2021 report:
- $57.2 billion in global digital health investment, up 79% from that in 2020. A record.
- 154 mega deals (funding of $100 million and more) nearly doubling from 2020. Also a record.
- U.S sets a funding record — $37.9 billion, 75% above 2020 levels.
- Median late-stage deal valuation has jumped 3 times that in 2020 to $73 million.
- Time between Series C and D rounds shrunk to 15 months. It took 22 months back in the more laid-back, pre-pandemic world of 2017.
- There are 84 unicorns now, including 13 born in 2021. That’s up 49% from 2020. Yes, a record.
- 574 M&A deals in the market created a new record. (Are you tired yet?)
When Investment Rhymes with Canada
Canada has a proud history of achievement in the areas of science and technology, and the field of biomanufacturing and life sciences is no exception.
The U.S. as usual accounted for the largest share of investor dollars — in the fourth quarter of last year, it was almost half of the global total, followed by Asia and Europe. However, Latin America set a new funding record in 2021. It raised $341 million in 57 deals.
Investor interest was not equally shared among startups as late-stage companies could raise money faster than earlier stage companies. It took 15 months between a Series C and D rounds — faster than in previous years — whereas between Series B and C, the timing remained flat at 17 months, according to the report.
Late-stage companies felt the love from all stripes of investors. In fact, the median amount spent by angels, corporate venture capitalists, private equity firms, asset managers, corporations and traditional venture capitalists on late-stage deals rose across the board.
Now let’s come to valuations. The fact that valuations are sky-high seems like an understatement — even a casual observer who hasn’t read the CBInsights report has probably registered how many companies proudly announced funding rounds proudly flaunting their unicorn status last year. CBInsights found that in 2021, the median late-stage deal valuation was a frothy $1.5 billion, 195% higher than in 2020, when it was a mere $508 million.
So, the burning question is, are we in a bubble and is there irrational exuberance? MedCity News reached out to a few investors for comment on this thorny issue. Here’s how each responded through email.
Michael Greeley, Partner and Co-founder, Flare Capital Partners
Greeley firmly said “no” to the question about being in a bubble.
Categories are enormous and I would argue we are in an ‘anoint the winner’ phase of this sector’s development, maturation. We continue to see tremendous innovation in virtual care solutions (many of which are developing novel risk-bearing approaches), solutions selling to pharma, infrastructure and analytics.
He added that no one category within digital health can be regarded as a higher priority area from an investment perspective because, “the healthcare system is having to become virtual, on-demand, real-time, intelligent, empathetic, accessible all at the same time so these advances need to be completed in parallel.”
However, Greeley acknowledged that valuations were an issue.
Clearly, valuations are quite high now although there has been significant public market volatility in this sector over the last few months which may start to be reflected in early-stage valuations. My suspicion is that we might start to see slightly more investor-friendly terms while keeping the stated valuations high before we see a significant re-set in valuations.
Christina Jenkins, Venture Partner, Phoenix Venture Partners
Unlike Greeley, Jenkins is observing a big fat bubble.
Yes, I do believe that for digital health writ large, we’re in a bubble though I understand the excitement, given Covid’s acceleration of consumer-driven and at-home care, and our historical failures in the U.S. to improve the infrastructure, policy, and behaviors required to deliver and achieve health.
Digital health is a critical enabler of health, at scale, and there will be some big, enduring winners. That said, there’s an awful lot of junk out there, and there’s a more nuanced conversation to be had about the sectors within digital health facing imminent correction (I’m looking at you, RPM). [Remote Patient Monitoring]
The pace of innovation will only escalate, and we think there will be selective opportunities, particularly in the convergence of sensors, data and AI.
Michael Yang, Managing Partner, OMERS Ventures
Yang sees dark clouds ahead.
I am a little bearish at the moment and think many digital health companies are not going to be in a good spot at the end of this year. The market has been too hyped up, the money has been flowing too liberally, and the top line growth expectations are not sustainable.
I’m worried about the lack of operational discipline. I don’t think everyone can hire as fast or as much as they are hoping, and I expect a lot more labor mobility too (Great Resignation or otherwise). These year-in-review funding reports are all rear-view looking and I think we should be having a greater discourse on the speed bumps looming in front of us. Trust me, in certain board rooms, management teams are already replanning their 2022 budgets as their board of directors are sounding the Defcon alarm.
Justin Norden, Partner, GSR Ventures
Unlike Jenkins and Yang, Norden believes that the market is not in a bubble and digital health has plenty of room to grow.
Digital health investment has skyrocketed in 2021—fortunately much of this is driven by strong fundamental business growth, and belief that more healthcare will shift digitally in the future
He did concede, however, that there is “a growing gap between private market valuations and public market digital health performance.”
“I would not be surprised in 2022 if there is more discipline on private market valuations and round sizes.”
Chris Garabedian, Chairman and CEO, Xontogeny; Portfolio Manager, Venture, Perceptive Advisors
Garabedian is expecting things to slow down in 2022 and laid the blame for sky-high valuations at the feet of newbie investors inexperienced in healthcare and life sciences.
The innovation in therapeutics has converged with an equally exciting convergence of digital technology and computational power (AI/ML/Quantum) that is unlocking new targets, screening methodologies, and more predictive diagnostics. This trend has generated much exuberance about the opportunity to transform how we think about healthcare and the application of digital technologies across discovery research, therapeutics, diagnostics and devices, which has led to an equal level of exuberance about investing in these sectors and outperformance on value appreciation across the entire sector.
As often happens, this exuberance often invites generalist investors, and new investors with less experience. This can create market dynamics that move away from the fundamentals of advancing these technologies and establishing a proof-of-concept, but begin to attract investment and outsized valuations based on a compelling narrative story. The investor groups that stick to fundamentals and focus on advancing these technologies toward commercialization will be able to weather any volatility that the sector may experience in the short term.”
Garheng Kong, Founder and Managing Partner, HealthQuest Capital
Kong appeared like he was hedging his answer on the question of whether we are in a bubble.
We’re aware of the momentum in the markets, and of course increased capital flow to support innovation in healthcare is a positive. We’ve tried to remain disciplined in our investment approach – I’d say we’re more conservative than most when assessing entry valuation, and we underwrite business plans that aim to get to self-sufficiency in several years, vs. relying on public market outcomes. We aim to support healthcare transformers that are improving value in healthcare, which is a massive unmet need. Yes they’ll perform well in an exuberant market (like we’re currently in), but we trust they will also exhibit strong fundamental growth if/when the capital market dynamics change.
Draw what conclusions you will from the above, and who knows this time next year, we may yet be discussing another record-breaking year, but at some point these unicorns and other prominent startups will likely need to perform and show ROI. It can’t forever be all hat and no cattle, can it?
Photo: Jikaboom, Getty Images
