Funding of digital health startups is on the decline.
In 2021, venture capital investors poured a record $29.1 billion into digital health companies. Last year started off nearly as hot, but the market began to drop in the second quarter. Halfway through 2023, the industry has seen only $6.1 billion invested across 244 digital health companies, according to data from Rock Health, a digital health research firm. This is the lowest amount since 2020. The average deal size in the first half of 2023 was $24.8 million, a $1.7 million decrease from 2022.
Here’s what experts say is behind digital health’s funding dip.
Reason 1: Investors fail to see successful commercialization
Digital health investors are recalibrating how they view potential portfolio companies and their long-term valuation. The nascent nature of digital health and uncertainty over of how companies will be valued long term is to blame. During the 2021 funding boom, many emerging companies were given ‘unicorn’ valuations of more than $1 billion. However, many of those same companies have struggled to achieve profitability, had to lay off employees, sell lagging businesses and even file for bankruptcy.
Many digital health companies haven’t been able to successfully commercialize their products and sell them to health systems and insurers, said Peter Micca, national health tech leader in Deloitte’s audit practice.
“Investors are pickier in terms of the solutions they see in the market,” Micca said in April. “They want to see a track record. They want to see the size of the [total market demand]."
As a result of this changing dynamic, some companies that are getting funding deals are doing so without valuations and funding round labels. According to Rock Health’s data, 41% of the deals so far in 2023 were not publicly classified with a series or round label, which is up from 22% in 2022.
Unlabeled rounds often signify valuation shortfalls or declines in investments from prior rounds. Companies unable to meet investor growth expectations have few choices but to accept less money, experts said.
“It is far more common [in the current funding environment] to see digital health companies with slower growth than expected,” said Dr. Justin Norden, a partner at venture capital firm GSR Ventures.
The rise of unlabeled rounds also means that companies could have limited cash on hand to stay solvent, experts say. Adriana Krasniansky, Rock Health’s head of research, said that even two years ago companies were moving around some of their fundraising timelines in order to make the most of the cash on the table.