Investor interest in artificial intelligence is helping digital health recapture some of its pandemic-era momentum.
Venture capital funding of U.S.-based digital health companies totaled $5.7 billion in 266 deals during the year's first half, according to a report released Monday from digital health research and venture capital firm Rock Health. That's down from $6.1 billion and 244 deals in 2023's first six months. Activity picked up during the second quarter after a sluggish start to the year.
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At the current pace, 2024 could exceed 2023's performance but would significantly miss the funding records set during the COVID-19 pandemic.
Here are five takeaways from the report.
1. Artificial intelligence continues its hot streak
Much of the interest in digital health companies has shifted toward AI.
One in three dollars invested in the first six months went to startups that use artificial intelligence, the report found. Many early AI companies also received significant Series A rounds, which Rock said can help support AI startup costs like training models or acquiring datasets.
Among individual categories, the top funded areas were disease treatment, $1.1 billion, and nonclinical workflows, $896 million.
The influx of cash from investors is occurring as the industry attempts to mature past the initial hype.
2. Unlabeled rounds show signs of slowing
The number of unlabeled rounds, those not designated by a letter or series, doubled last year. This year, the trend appears to be losing steam.
Forty percent of all funding rounds have been unlabeled this year. While that's nearly the same as last year, the proportion of unlabeled rounds increased throughout the year in 2023 and have declined for the last two quarters.
Unlabeled rounds usually occur because companies were unable to meet investor growth expectations and had few choices but to accept less money or bridge financing.
During the year's first six months, 24% of unlabeled raises, or 26 deals, were from startups that previously raised an unlabeled round. Rock Health said companies with back-to-back unlabeled rounds could face challenges reaching growth benchmarks or profitability.
3. Mental health tops clinical deals
Digital health startups focused on mental health may continue their six-year streak as the most-funded clinical category.
Companies received $682 million through the first six months of 2024.
Several digital health companies focused on mental health have raised sizable sums in recent months. Among them are Two Chairs, $72 million, Talkiatry, $130 million, and Grow Therapy, $88 million.
4. The pace of private equity deals is quickening
Private equity firms have shown interest in digital health companies. Firms acquired 10 companies in the first half, versus nine during the first halves of 2022 and 2023 combined.
Rock Health predicted the activity could surpass 2021 and 2022's annual totals.
The report viewed increased private equity interest in digital health as largely positive, in part because of the diligence and research many firms complete before making an investment. Private equity historically favors companies with established business models that are profitable, Rock Health noted.
5. IPO, other exits return
After nearly two years without an initial public offering, public markets are showing signs of interest in digital health.
In June, healthcare payments company Waystar became the first digital health and healthcare technology-focused company to go public since 2022. Precision medicine and health technology company Tempus followed.
While experts don't expect a wave of public offerings this year, there is a growing consensus that the need for capital and a slightly improved macroeconomic outlook could produce more initial public offerings next year.
