Economic challenges continue to have an effect on digital health.
In the third quarter, U.S. digital health startups raised $2.5 billion across 119 deals, according to a report released Monday from research and digital health venture firm Rock Health. This represented the second lowest quarterly funding total since the fourth quarter of 2019. Only the third quarter of 2022, which saw companies raise $2.2 billion across 125 deals, was worse.
Read more: What’s behind digital health’s funding freefall
Through the first nine months, companies have raised $8.6 billion across 365 funding deals. The sector is on pace to have its worst year since 2019. Rock Health said there “significant reductions in funding and deal volume" despite some data that suggested quarterly trends were stabilizing.
Here are four takeaways from the report:
The new reality.
The third quarter continued a trend that's been in place since midway through 2022: fewer companies are receiving smaller amounts of funding dollars. The last five quarters have seen companies raise an average of $2 billion in total funding across 120 deals per quarter. This is far cry from the peak of 2021 when quarterly totals saw an average of $7 billion invested across 180 deals.
The average deal size continues to drop as well. Rock Health's report found the average deal thus far in 2023 is $23.5 million, which would be the lowest amount since 2019 if these trends continue through the end of the year.
Mental health remains on top.
Since 2019, mental health companies have been the top funded digital health clinical category and this year has been no exception. Mental health companies have received just shy of $1 billion in funding this year putting it ahead of kidney care, cardiovascular care and oncology. Mental health funding for the third quarter was $305.2 million across 14 deals.
In September, Cartwheel Health closed a $20 million Series A funding round. Cartwheel is part of a growing number of mental telehealth companies offering therapy to school-aged children by working with local schools.
But there also could be some consolidation among mental health startups. Because of high interest rates, an oversaturated market and potential regulatory changes to remote prescribing, many mental health startups may be looking for an exit ramp, industry insiders said.
Changing value propositions.
Funding this year has shifted away from on-demand healthcare and life science research and development to products and services that support disease treatment, nonclinical workflow, and management of complex conditions, Rock Health said in its report. For example, some of the year’s largest rounds have been netted by companies focusing on kidney disease. Strive Health closed a $166 million Series C round in May, while Monogram Health closed a $375 million round in January.
Still, other clinical areas remain lucrative. Treatment of disease and nonclinical workflow solutions have been among the most funded areas of digital health through the first three quarters of this year. In September, Salt Lake City-based health system Intermountain Health’s venture arm was one of the investors in digestive health startup Vivante Health’s $31 million round.
Highs and lows on the public market.
It's been a mixed bag when it comes to digital health companies on the public markets. On the negative side, Babylon Health, an artificial intelligence-enabled virtual diagnosis and medical appointments company, went bankrupt in August and sold for parts while Cano Health, membership-based primary care company, is fighting to stay alive.
But other publicly traded digital health companies appear have found their footing. Physician enablement company Privia Health has routinely exceeded investor expectations since going public in May 2021. Direct-to-consumer telehealth company Hims & Hers was another winner. The company saw a year-over-year increase of 83% in revenue last quarter.
Rock Health’s digital health index has fallen in line with Nasdaq's Biotech Index and the S&P 500's index for healthcare.
