Digital health hit hard by VC slump in 2023, says report

CB Insights digital health investment report

There’s little doubt that financing for digital health companies remains in the doldrums. A new report has found that funding has halved for the second year in a row, falling to $13.2 billion from a peak of more than $57 billion in 2021.

The data from CB Insights’ annual State of Digital Health report also shows that the number of deals being signed is well down, with last year’s tally of just under 1,400 the lowest recorded in a decade.

So, what is behind the steep decline? A key factor is that ‘mega-rounds’ valued at $100 million or more have all but disappeared in digital health – likely amid recognition of the difficulties in developing a sustainable business in the sector – while, overall, the size of venture capital deals has been in decline since 2021.

Since that record year, for example, digital therapeutics (DTx) pioneer Pear Therapeutics went bankrupt and was sold in parts last year, despite bringing three FDA-approved prescription therapies to market, while Akili has drawn back from reimbursed prescription sales of its attention-deficit hyperactivity disorder (ADHD) in favour of a direct-to-consumer approach.

There was a steep decline in VC funding across almost all industrial sectors last year, with deal numbers and funding totals falling to six-year lows, but digital health has suffered greater drops in funding than the average.

On the positive side, the median deal size overall remained at $4 million, which CB Insights says is the highest on record.

“Although digital health investors may be more hesitant to strike a deal now than in 2021, they are putting even more skin in the game where they do see value,” according to the study.

The top categories for investment were care delivery and navigation tech, like patient portals to drive access, followed by monitoring, imaging, and diagnostics tech.

Highlights of the year included three mega-rounds – all for US companies – which included a $175 million Series E for Devoted Health, a tech-enabled Medicare Advantage health plan provider, a $125 million third round for Headway that connects patients with mental health providers covered by insurance, and a $100 million Series B for artificial intelligence in drug discovery specialist Iambic Therapeutics.

Four new digital health unicorns also emerged, led by Devoted Heath, which is currently valued at nearly $13 billion, along with Headway, and EmployerDirect Healthcare, which supports employers who self-fund healthcare coverage, as well as health operating system developer Commure. However, the report notes the herd has shrunk from 97 last year to 94, with losses outpacing unicorn births as a result of “start-up exits, down rounds, and shutdowns.”

M&A activity is also picking up, nearly doubling in the fourth quarter, and consolidation in the digital health category is likely to continue if funding remains sparse and initial public offerings (IPOs) remain out of reach, according to the report.