The new reality for digital health funding was evident in the first quarter of 2023 despite a slight uptick in mega deals.
A report from Rock Health, a research and digital health venture firm, showed funding for the first three months of 2023 totaled $3.4 billion across 132 total deals. Six mega deals with more than $100 million in funding accounted for 40% of this total. The six deals were from Monogram Health ($375M), ShiftKey ($300M), Paradigm ($203M), ShiftMed ($200M), Gravie ($179M) and Vytalize Health ($100M).
Related: Digital health funding takes a dive in 2022
There were the same number of mega deals during the past three months as there were the entire second half of 2022. But even with this early momentum for large deals, funding throughout the sector slowed. Throughout the first three months of 2023, digital health companies received $3.4 billion in funding. In each of the past two years, those first-quarter totals topped $6 billion.
Experts say founders seeking venture capital backing just don’t have as much leverage as in previous years.
“Investors are pickier in terms of the solutions they see in the market,” said Peter Micca, national health tech leader in Deloitte’s audit practice. “They want to see a track record. They want to see the size of the [total market demand]."
Investors echoed similar sentiments. Their expectations for digital health companies have fundamentally changed in the past 18 months.
“If anyone didn't believe we were in a different market condition, [Silicon Valley Bank’s failure] put a stamp on it,” said Dr. Justin Norden, a partner at venture capital firm GSR Ventures. “The world is different.”
The Rock Health report shows that the six larger deals lifted the entire sector. Adriana Krasniansky, research manager at Rock Health, said these deals came from venture firms that had leftover financial reserves and that are selectively choosing which companies to fund.
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Other venture firms without these reserves are holding off. Even with six deals greater than $100 million, the number of later-stage deals dropped precipitously. In 2021, there were 149 Series C and later-stage deals. In 2022, there were a total of 70. Through the first quarter in 2023, there were only 10 later-stage deals. There were 183 deals in the first quarter of 2022 compared with 132 in 2023.
“There used to be a discount for health tech versus other parts of tech because people knew healthcare was harder,” Norden said. “Those models have all soured somewhat from an investor standpoint when capital is more expensive.”
Uncertainty at root of shifting expectations
While investors and experts are still encouraged by healthcare’s need for new digital solutions, they say the overall environment won’t be as friendly for founders.
“I think it’s going to be a tough year for founders,” Krasniansky said. “The funding approach right now is really difficult.”
The shift is leading some founders to consider exit opportunities. Pear Therapeutics, a digital therapeutics company, said last month that without financial help it may need to liquidate or restructure. Mindstrong, a digital mental health company, sold its technology assets to a former competitor last month after shuttering its patient service offerings.
While macroeconomic factors are at play, the nascent nature of digital health and uncertainty over of how companies will be valued long term could be partially to blame, experts say.
“What kind of multiples do you assign on early growth stories that have yet to achieve profitability?” asked Scott Schoenhaus, managing director of healthcare IT equity research at KeyBanc Capital Markets. “I think that's probably part of the reason you've seen pullback from venture capitalists and private equity funding.”
This story first appeared in Digital Health Business & Technology.
