The digital health startup market is recovering after a tough 2023.
The first half of this year has been characterized by smaller but more frequent venture capital (VC) deals, more early-stage deals, and a thawing IPO market, according to a report from digital health strategy group and venture fund Rock Health.
Overall, US digital health startups raised $5.7 billion in the first half of the year, Rock Health researchers found. While that’s slightly less than the first half of 2023 ($6.1 billion), the number of deals closed is on the uptick, with 266 closing in H1 2024 compared to 244 in 2023.
If dealmaking continues at the same pace, Rock Health analysts expect digital health startups could raise more money and close more deals this year than they did in both 2023 and 2019, which is the year before VC investing skyrocketed during the pandemic.
“Funding momentum (especially at the early stage) and the tapering of transition measures like unlabeled rounds hint that we might be returning to more ‘normal,’ sustainable venture patterns,” Rock Health researchers wrote in the report.
The earlier the better: The report shows that most of the deals closed in the first half of this year (84%) have been early-stage deals.
Some large Series A raises include Zephyr AI, an artificial intelligence (AI) precision medicine startup, which closed a $111 million deal in March with funding from investors including Eli Lilly and Epiq Capital Group, and biosensor startup Allez Health, closing a $60 million Series A+ deal in May led by Korean in vitro diagnostics company Osang Healthcare.
AI-focused digital health startups continued to get a lot of VC attention in the first six months of 2024—38% of those that raised Series A rounds deal with the tech—according to Rock Health researchers. Plus, 34% of the overall dollars invested in digital health in H1 2024 went to AI-based startups.
Overall, the most popular firms capturing VC dollars in the first half of the year, per the report, were those focused on treating a specific disease or related to mental health.
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Another popular feature of digital health startup deals for the last several quarters has been unlabeled deals (meaning companies aren’t attaching a name like Series A or B to the funding round).
“Unlabeled rounds tend to spike during periods of transition between market conditions, when startups need access to capital but don’t meet benchmarks for their next labeled raise and/or are trying to delay tough conversations on topics like valuation,” researchers wrote in the report.
But the prevalence of these special rounds is starting to fade as the deal market stabilizes and startups aren’t as strapped for cash. In the first half of 2024, 40% of deals were unlabeled, compared to 48% in Q1 2024 and 44% during 2023, as Healthcare Brew previously reported.
The number of unlabeled rounds is still much higher than in previous years (7% in 2020 and 4% in 2019), but the researchers said the slowdown “could mark the beginning of our return to a ‘more normal’ cadence of labeled raises.”
Comeback kid? Digital health startups are also (slowly) returning to the IPO market. After a quiet year of no digital health IPOs in 2023, three startups went public in Q2 2024: Nuvo, a remote fetal monitoring platform; Waystar, a healthcare revenue cycle management company; and Tempus AI, an AI-based precision medicine company.
Private equity firms have also taken an increased liking to digital health startup acquisitions, Rock Health researchers noted; PE firms scooped up 10 digital health startups in the first half of the year—more than in all of 2023.
The researchers noted, however, that there’s still much uncertainty over how the digital health market will perform in light of the presidential election and as retailers like Walmart sell off their digital health capabilities.