The digital health sector has entered a new era when it comes to funding, now divorced from the feverish flow of capital it saw in 2020 and 2021. Startups in this space must quickly adjust to a fundraising landscape that is characterized by lower check sizes, fewer deals and smaller cohort of investors, according to a new report from Rock Health.
If digital health investment continues at the pace it has maintained throughout the first half of the year, 2023 will mark the sector’s lowest yearly fundraising total since 2019, the report said.
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In 2020 and 2021, investors were taking risks amid low interest rates. There was a mammoth influx of investment dollars flowing into digital health startups, and companies and investors alike quickly became accustomed to lofty valuations and high funding round totals.
Last year, the digital health industry experienced an acute slowdown in the investment space — the sector’s 2022 global funding total was $25.9 billion, which is 57% less than 2021’s record high of $59.7 billion. The funding decline has continued during the first six months of 2023 (H1 2023), marking a new status quo.
Digital health startups in the U.S. raised $6.1 billion across 244 deals during the first six months of this year, according to Rock Health’s report. The average deal size during H1 2023 was $24.8 million — down from $31.2 million in H1 2022 and $39.6 million in H1 2021.
However, H1 2023’s megadeals — those that total $100 million or more — were comparable to megadeals from prior years. Twelve megadeals went to U.S.-based digital health startups during H1, making up 37% of total funding dollars. The average megadeal size for H1 2023 was $185 million, which is close to the average megadeal size of $188 million in 2021.
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The report pointed out that H1 2023’s megadeals occurred at a variety of funding stages — there were two megadeals at Series A, one at Series B, two at Series C, and six at Series D or higher.
Most of these megadeals involved companies focused on value-based care enablement, at-home care or technology to improve healthcare’s workforce management. For example, in the value-based care arena, Strive Health raised $166 million, Arcadia snagged $125 million and Vytalize Health pulled in $100 million. In the home health space, Monogram Health received a $375 million deal, and Author Health raked in $115 million.
There were also some megadeals for startups aiming to help providers improve nurse staffing levels — Shiftkey got $300 million, ShiftMed snagged $200M and MedShift received $108 million.
Another key trend from H1 2023 was that fewer investors were involved in digital health deals. A total of 555 investors participated in digital health funding rounds in H1, down from 775 in H1 2022 and 832 in H1 2021. The report also noted that nearly three-fourths of H1 2023’s dealmakers were repeat digital health investors. This means that many generalist investors have stopped pursuing one-off deals in the digital health space, according to the report.
Digital health’s new fundraising landscape poses a challenge for startups — they are figuring out how they can raise new capital without significantly shrinking their valuation or receiving bad press associated with a down round.
This is why 41% of H1 2023’s deals were unlabeled funding rounds. This means that startups raised money but chose not to publicly label the effort with a series or round title. Rock Health said this was the highest proportion of unlabeled raises since it began tracking digital health funding in 2011.
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