Digital health funding set for lowest level since 2019

The downturn in digital health funding – with fewer and smaller deals and a diminished number of backers – could make 2023 the smallest year for financing since 2019, unless there is a sharp uptick in the latter half of the year.

That’s the view of a new report from market watcher Rock Health, which has identified $6.1 billion across 244 deals, with an average value of around $25 million in the first half of this year, slowing from $3.5 billion in the first quarter to $2.5 billion in the second.

Compare that to the $29.1 billion raised from 737 deals in 2021 at the peak of the pandemic and the $15.3 billion from 579 deals in 2022, and the downward trend in the category seems pretty clearly defined.

“A new status quo has been established,” according to the report, which suggests that, while specialist digital health investors remain active, generalists and crossover investors are backing away from the sector.

Start-ups are still adapting to the change, said Rock Health. Increasingly, they are turning to “unlabelled” fundraising, raising capital without ascribing them as a Series, A, B, or C.

That allows them to avoid the valuation downgrades and negative publicity that can accompany weaker rounds - a factor that is particularly relevant for companies who managed big rounds in the boom period of 2021 to early 2022. It’s telling that 41% of all financings in the first half of the year were unlabelled, the highest since Rock Health started tracking the sector in 2011.

It’s not an entirely bleak picture, however, as big rounds of $100 million or more backed by seasoned investment groups remain comparable to prior years. That suggests they are doubling down on investments viewed as particularly promising.

All told, 12 mega deals account for well over a third (37%) of financing dollars in the first half, with an average value of $185 million that comes close to 2021’s peak of $188 million.

The big deals came across three main areas – value-based care enablement, non-clinical workflow and practice management, and at-home care.

Top of the tree in terms of value in the value-based care segment was chronic kidney disease specialists Strive Health’s $166 million Series C, while staffing technology company Shiftkey’s $300 million round was the biggest in practice management.

In at-home care, the most valuable financing was the $375 million raised by Monogram Health for its kidney disease management platform.

Rock Health predicts that a challenging venture capital environment coupled with a frozen initial public offering (IPO) market creates the conditions for takeovers of smaller companies, although the numbers of these are still low.

That could be because low valuations are prompting start-ups to wait for conditions to improve, or potentially also that deals are happening, but not being publicised due to unfavourable terms.