A new era for digital health funding

The first half of 2023 marked the start of a new era for digital health funding, according to a report from digital health strategy group and venture fund Rock Health.

The “new normal” is characterized by fewer deals, smaller deal sizes, and fewer investors, Rock Health found. And if funding in the second half of the year continues at its current pace, 2023 will be the lowest digital health funding year since 2019, according to the report, authored primarily by research associates Mihir Somaiya and Madelyn Knowles.

By the numbers

In the first half of 2023:

• Digital health startups raised $6.1 billion in 244 deals. The average deal size was $24.8 million.
• In Q1, startups raised $3.5 billion in 131 deals, and $2.5 billion over 113 deals in Q2.
• 555 investors were involved in fundraises, compared to 775 in the first half of 2022 and 832 in the first half of 2021. Of those investors, 71% had previously invested in digital health.
• There were roughly 12 digital health startup acquisitions per month, compared to 15 monthly in 2022 and 14 each month for the past five years.

The lack of dollars flowing to companies is already reverberating: Some startups are closing down. Pear Therapeutics filed for bankruptcy in April and sold its assets to four buyers in May. Other digital health startups—SimpleHealth, The Pill Club, Hurdle, and Quil Health—also closed in the first half of 2023.

Mega money

There may be fewer investors overall, but those still investing in digital health are putting a lot of money down, according to Rock Health.

There were 12 so-called mega deals in the first half of 2023, which made up 37% of the total funding for the six months. The average size of each mega deal was $185 million, and mega deals were seen in all stages of fundraising, from Series A to Series D and higher, Rock Health found.

Most of the mega deals were for startups focused on value-based care, non-clinical workflow management, and at-home care.

“H1 2023’s cluster of mega deals around promising innovation areas suggests to us that funders are going ‘all in’ on companies that they feel have the right talent, technology, and market positioning to become the next digital health varsity team,” Somaiya and Knowles wrote.

But big checks come with some potential downsides. Having a few mega deals in an otherwise low-deal environment can make it hard to predict how much capital will be available in the future, creating more uncertainty for investors and startups, according to the report.

And having a lot of investor interest compounded in a small group of startups can make it harder for underrepresented founders to garner investor interest, the authors wrote.

Let’s not label it

The main challenge for startups today, according to Rock Health, is bringing in money without having to lower valuations, or getting bad press from a smaller-than-expected fundraise or down round (a down round is when a startup sells shares at a lower price than it sold shares for during a previous financing round).

To address that challenge, startups have increasingly held unlabeled fundraising rounds, Rock Health found. That means startups are holding fundraising rounds without publicly attaching a label to it (like Series A, B, C, etc.). Two-fifths (41%) of digital health deals in the first half of 2023 were unlabeled, the highest proportion since Rock Health began tracking digital health funding in 2011.

“Unlabeled raises are one way for startups to protect their prior valuations while they continue to make progress, but they’re a battlefield tactic, not a long-term strategy,” Somaiya and Knowles wrote.

When VC dollars boomed in 2021, many digital health companies inflated their valuations, according to Rock Health. But “the new funding climate has a low tolerance” for those inflated valuations, Somaiya and Knowles wrote.

“Startup operators that reset valuations to match sustainable profitability and growth targets now may ultimately be better positioned for success with investors—and possible acquirers—in the long run.”