The digital health sector witnessed an unprecedented surge in funding in the past two years. However, according to a recent report from Rock Health, a new era of funding has emerged, marked by reduced check sizes, a decline in the number of deals, and a smaller cohort of investors.
After the significant inflow of investment dollars boosted by low interest rates and a risk-taking environment, the digital health industry experienced a sharp decline in funding in 2022. Global funding dropped by 57% to reach $25.9 billion, providing a snapshot of the changing tide in the sector. The downward trend has carried on into the first half of 2023, indicating a new status quo for digital health startups.
During the first six months of the year, U.S.-based digital health startups managed to secure $6.1 billion across 244 deals. However, the average deal size decreased from $31.2 million in H1 2022 to $24.8 million in H1 2023. While the drop in deal sizes is evident, there were still notable megadeals totaling $100 million or more. These megadeals accounted for 37% of the total funding dollars in H1 2023, resembling the figures from previous years.
Interestingly, these megadeals were spread across different funding stages, including Series A, B, C, and D or higher. Platforms and solutions focused on value-based care enablement, at-home care, and healthcare workforce management received substantial investments. Companies such as Strive Health, Arcadia, and Vytalize Health secured significant funding in the value-based care sphere. Similarly, Monogram Health and Author Health stood out in the home health space, while Shiftkey, ShiftMed, and MedShift addressed nurse staffing concerns.
One evident trend from H1 2023 was a decline in the number of investors participating in digital health funding rounds. Compared to H1 2022 and H1 2021, there was a decrease in investor engagement, with only 555 investors taking part in the funding process. Additionally, the report mentioned that the majority of dealmakers in H1 2023 were repeat investors, suggesting a shift away from one-off investments in the digital health sector.
As startups strive to raise new capital without compromising their valuations or attracting negative attention from down rounds, they are increasingly opting for unlabeled funding rounds. In fact, 41% of H1 2023 deals fell under this category, representing the highest proportion of unlabeled raises since Rock Health began tracking digital health funding in 2011.
As digital health enters a new era of funding, startups must adapt to the changing landscape characterized by lower check sizes, fewer deals, and a smaller pool of investors. The challenges they face in raising new capital while maintaining valuations and avoiding negative publicity highlight the need for strategic fundraising approaches. By closely monitoring these trends, startups can position themselves for success in an industry where financial support is evolving.
Market Capital Research 