Digital health funding experienced a major slowdown last year following a blazing hot 2021 — startups in the sector raised $25.9 billion in 2022, which is 57% less than 2021’s record high of $59.7 billion. This year, venture capital investments in the digital health world have continued to cool off — with the third quarter of 2023 having the sector’s second-lowest quarterly funding total since the fourth quarter of 2019, according to a report that Rock Health released this week.
In this year’s third quarter, U.S. digital health startups brought in $2.5 billion across 119 deals. This brings the sector’s total funding amount for 2023 to $8.6 billion raised across 365 deals. While the digital health world is clearly experiencing a significant decline in funding dollars and deal volume compared to 2021, quarterly trends seem to be stabilizing — the sector may be settling into its new normal, the report noted. For instance, the third quarter of 2023 was the fourth of the five past quarters to post a funding total in the $2 billion range, signaling normalization within digital health investment trends.
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During this year’s third quarter, digital health investors moved their focus away from pandemic-era categories like on-demand telehealth and pharmaceutical R&D catalysts, the report pointed out. Investors shifted their attention toward startups creating products for disease treatment, the improvement of nonclinical workflows and the enablement of value-based care.
Disease treatment startups have raked in $1.64 billion during the first three quarters of 2023. Some of the third quarter’s notable funding rounds in this category include the $31 million round raised by gastrointestinal health company Vivante Health and $20 million round raised by Equip, which provides virtual eating disorder treatment programs.
As for startups selling nonclinical workflow solutions, they raised $1.59 billion during the first three quarters of this year. Companies in this category are addressing a range of nonclinical tasks. For example, Collectly received $29 million to simplify providers’ revenue cycle management, Synapse Health raised $25 million to help providers manage their durable medical equipment, and Keona Health snagged $7 million to improve patient scheduling and communication.
In alignment with recent years, mental health has remained the most funded clinical indication among digital health startups in 2023 — companies in this space have raised nearly $1 billion during the first three quarters of this year. Nephrology is another clinical indication garnering investment dollars this year, with $700 million raised in the first three quarters. Investments made in both these specialties are increasingly focused on companies that enable value-based care contracts or take on risk themselves, the report pointed out
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For instance, Healthmap Solutions, which provides payers and at-risk providers with value-based care solutions for chronic kidney disease, raised $100 million in August. That same month, Better Life Partners, which delivers value-based mental health care, raised $26.5 million.
As more health systems adopt value-based care models and related policy initiatives pick up steam, value-based care enablement will become a key element of digital health startups’ commercial roadmaps, the report noted. It also said that this will be especially true for high-cost therapeutic areas such as mental health, kidney care, cardiovascular care and oncology.
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