After a tough funding year for digital health startups, the first quarter of 2024 saw a flurry of deals announced—a “positive signal” that the funding landscape is looking up, according to Adriana Krasniansky, head of research at digital health strategy group and venture fund Rock Health’s advisory arm.
Overall, the number of digital health funding deals (133) that closed in Q1 was the highest in six quarters, though the average deal size ($20.6 million) was smaller, according to a Rock Health report. Total funding for digital health startups was $2.7 billion, the lowest level since 2019.
An increase in the frequency of deals—even if they’re smaller—is a good sign, according to Krasniansky.
“That means that investors and founders are coming to conclusions and decisions and are making funding moves,” she said.
Investors are starting to look at different metrics—proven outcomes and healthy margins—when deciding which startups to put money into, rather than factors like projected growth rates, Rock Health researchers found.
“I think what [that] really tells us is [investors are] looking for companies that work now, not companies that work in the future,” Krasniansky said. “There’s less leeway for companies to point to a future path to profitability or point to a future outcome…There needs to be those signals of both healthy business model and efficacious product now.”
A significant percentage (40%) of the digital health startups that closed deals in Q1 were artificial intelligence (AI)-focused, Rock Health researchers noted. For example, Abridge, which uses generative AI to create notes for both clinicians and patients, closed a $150 million Series C round in February. Zephyr AI, an AI-focused precision medicine company, raised $111 million in a Series A round in March, and Ambience Healthcare, an AI-powered startup that created what it calls an “operating system for healthcare,” raised $70 million in February.
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Many startups that closed deals in Q1 also opted for unlabeled funding rounds, which are those that aren’t attached to a label like Series A, B, C, etc. Of all the deals closed in Q1, 48% were unlabeled, compared to 44% for all of 2023, Rock Health researchers found.
Krasniansky said it’s not always clear why startups choose to do an unlabeled round, but that the rounds can indicate “really positive things, like an investor wants to add on to a prior round.”
An uptick in unlabeled rounds also shows that there’s more flexibility in dealmaking, she added.
The digital health landscape has also changed since several companies have gotten delisted from the Nasdaq or the New York Stock Exchange, the Rock Health report noted. Three companies—Science 37, Better Therapeutics, and Veradigm—were delisted in Q1 2024. Another nine companies have been delisted since 2022, and six more are at risk of delisting, according to Rock Health.
“We’re watching a big change moment for not only digital health’s publicly traded cohort but for the entire cohort of companies that have been considering going public,” Krasniansky said. “I’m really interested in what the changes in the public market ultimately mean for private market activity. I’m also really interested [in] how it reflects to us how Americans are thinking about digital health in relation to healthcare.”