Digital health startups have had a hard 2023. Venture capital deals have been fewer and smaller, and in Q2, deal activity hit a multiyear low, according to PitchBook.
Startups are struggling to raise dollars as investors remain wary of a slower economy and stubborn high interest rates as we head into Q4. At this pace, 2023 is on track to see at least 25% fewer deals than 2022, PitchBook projected.
Q3 in a nutshell: US digital health startups “raised $2.5 billion across 119 deals, the second-lowest funding quarter” since 2019, according to digital health strategy group and venture fund Rock Health.
The average size of early-stage investments actually grew to a multiyear high, but later-stage deal sizes fell in the first six months of 2023, according to PitchBook.
“We attribute this to a reduced appetite for late-stage deals, given the tough outlook for exits and reduced interest in funding unprofitable startups, particularly in the late stages,” Aaron DeGagne, a PitchBook digital health and medtech analyst, wrote in a report.
Three factors have contributed to the lower funding environment in the last quarter, according to Rock Health:
- Venture funds have had a harder time raising money amid higher interest rates and investors’ “anticipation of a slower economy.”
- Startups are seeing lower valuations, and there’s been little IPO activity this year.
- Investors are going in with a more “conservative mindset” and “negotiating harder on deal terms.”
“These funding dynamics make the startup fundraising environment anything but easy,” Adriana Krasniansky, head of research at Rock Health’s advisory arm, and Uday Suresh, a data fellow at Rock Health, wrote in a blog post.
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To deal with the tough funding environment, some startups (mainly those in early- to mid-stages) have held unlabeled funding rounds (i.e., not publicly attaching a label to the round like Series, A, B, C, etc.), according to Krasniansky and Suresh. So far this year, there have only been 34 Series B raises compared to 82 last year, they wrote in the blog post.
“Healthcare is radically changing, but the overall capital markets have changed profoundly, too,” Emily Melton, co-founder and managing partner at Threshold Ventures, told Rock Health. “Transitioning from a low-interest environment is hard for early-stage startups, but it’s even harder for mid-stage companies that have to pivot to a new game in real time.”
So, where are investors putting their money? Into startups focused on disease treatment, tackling complex conditions, and those working in the nonclinical workflow solutions space, such as Collectly, a startup working on simplifying revenue cycle management, according to Rock Health.
Additionally, startups operating on a value-based care (VBC) model came out on top, according to Rock Health.
“If a startup can drive down the total cost of care in a risk-based arrangement, that’s a huge value for payers and other customer organizations,” Marissa Moore, an early-stage tech investor at Omers Ventures, told Rock Health. “Until recently, most digital health investors have focused on VBC enablement for primary care. Now investors are pursuing the white space of VBC enablement for specialty care needs.”