Digital health funding suffered its worst year since 2019, according to a report released Monday from research and digital health venture firm Rock Health.
Total venture capital funding for U.S.-based digital health companies dipped from $15.3 billion in 2022 to $10.7 billion in 2023. Rock Health blamed the drop on broader economic challenges including higher interest rates and conservative investors.
Read more: What’s behind digital health’s funding freefall
Here are four takeaways from the report:
Deals and total funding continued to decline.
Unsurprisingly, the average deal size was also notably lower in 2023 than it was in 2022. The average size of digital health deals has decreased significantly over the last two years from a peak of $39.6 million in 2021 to $26.5 million in 2022 to $21.7 million in 2023.
While the number of deals in 2023 were lower than each of the past two years, the 492 deals last year were higher than 2019 and 2020 totals. In 2022, there were 577 deals.
A surge in unlabeled rounds.
The number of unlabeled funding rounds, those not designated by a letter or series, doubled from 22% in 2022 to 44% in 2023.
The trend, which became apparent earlier in the year, happened because companies were unable to meet investor growth expectations and had few choices but to accept less money or bridge financing, experts said.
Still the unlabeled rounds might have bought some companies enough time to hit commercial and outcome benchmarks set by their investors.
“We expect that label raises will return [next year],” said Adriana Krasniansky, Rock Health’s head of research. “Or to be more precise, that the proportion of unlabeled raises will decrease.”
Krasniansky said some companies raising next year with labeled rounds would likely have to adjust valuations or take down rounds, an acknowledgment of the vastly different funding environment.
M&A activity slow but an uptick could be coming.
While Rock Health predicted an increase in merger and acquisition activity last year, it did not occur. In 2023, M&A activity dropped 23%, with 146 publicly announced deals compared with the190 publicly announced deals in 2022.
Even though companies were more likely to face financial challenges, the lack of M&A activity occurred because of higher interest rates and volatile capital markets early in the year, according to the report.
The report's authors said it could see more companies selling non-core assets like embattled digital health company Cano Health did earlier this year.
Public exit lull persists
Since early 2022, the digital health initial public offering market has come to a near standstill. The last digital health company to go public in August 2022 was Akili, which has faced its share of challenges. No digital health company went public in 2023.
Experts say a better understanding of the long-term growth metrics for digital health companies should mark the next IPO market.
Healthcare payment technology company Waystar said in October its parent company, Waystar Holding Corp., had filed a registration statement with the Securities and Exchange Commission related to a proposed initial public offering. However, later that month the Wall Street Journal reported the company was delaying the move.
“Some companies that have delayed an exit because they've been trying to time the public markets will make a move,” Krasniansky said. “So, we do expect to see some digital health companies exit onto public market next year. Broadly, we think both of these measures together will lead to a more consolidated but stronger digital health cohort on the public markets.”
