Report Details Trends in Digital Health Investing for First Half of 2023

The first half of 2023 saw relatively fewer deals, smaller check sizes, and a smaller group of sector investors in digital health, according to a new report from Rockhealth.com.

Funding data also suggested that if trends continue into the second half of 2023, digital health start-ups are on track to have the lowest funding year since 2019, researchers wrote.

The first 6 months of the year saw startups raise $6.1 billion with 244 deals. This equals an average $24.8 million per deal. While 131 deals valued at $3.5 billion took place in quarter 1 of 2023, only 113 deals valued at $2.5 billion were completed in quarter 2, data from the Rock Health Digital Health Venture Funding Database showed.

Total investors in the space also fell in the first half of 2023 to 555. That total was recorded at 775 in the first half of 2022 and 832 during the same time frame in 2021. Most dealmakers in 2023 were also repeat investors, researchers said.

“To us, this signals that generalist and crossover investors are moving away from one-off participation, leaving a smaller group of focused digital health investors to lead sector activity,” they wrote.

Taken together, the data signal a new funding cycle in digital health that may pose challenges to start-ups.

In addition, over 40% of the digital health funding deals so far in 2023 were not publicly labeled, marking the highest proportion of raises without a label since the company began tracking the data in 2011.

“To try and delay valuation haircuts, many digital health players have raised capital without publicly attaching labels to weaker rounds,” researches said. They caution this practice, although it can help start-ups protect their previous valuations, is not a long-term strategy.

Despite the smaller number of active investors in 2023, some that continue to make bets do so with confidence, the authors said.

Just 12 deals in the first half of the year accounted for 37% of total funding dollars, with an average check size of $185 million. This is a similar total to the average mega deal size seen in 2021, at $188 million.

In 2023, “2 mega deals [were] at Series A, 1 at Series B, 2 at Series C, and 6 at Series D or higher,” the authors wrote. Many focused on themes like value-based care enablement and at-home care. Others centered on nonclinical workflow and practice management.

Paradigm, Author Health, MedShift ,and Strive Health were among the start-ups to receive mega deals in the first 6 months of 2023.

When it comes to acquisitions and sell-offs, there were an average of just over 12 acquisitions per month in the first half of the year. The researchers hypothesize one reason this number is so low is that startups may be holding out on accepting bids “they see as lower than they might have received just a few quarters ago or even lower than the sum of their previous raises.” Acquisitions may also be taking place, but are not being publicly announced.

Overall, the reset in funding seen in 2023 “stands to bring fresh and focused perspectives to digital health product development, partnerships, and commercial approaches, as well as team-building,” the researchers wrote. “Though challenging, tough times can serve as a much-needed market correction, right-sizing innovator and investor expectations for a more steady and sustainable future,” they concluded.

Reference

Somaiya M, Knowles M, Krasniansky A, Zweig M, Evans B. H1 2023 digital health funding: a brave new (lower funding) world. Rockhealth.com. July 10, 2023. Accessed July 17, 2023. https://rockhealth.com/insights/h1-2023-digital-health-funding-a-brave-new-lower-funding-world/