Report: Digital health funding hits $3.4 billion in Q1 filled with mega deals

According to this, startups in the digital health sector raised 3.4 billion US dollars from 132 deals in the first quarter Rock Health’s latest funding report.

Although first-quarter capex outperformed the previous two quarters — which saw companies earn $2.7 billion in the fourth quarter and $2.2 billion in the third quarter — the authors noted that this is unlikely to be a return booming financing environment of 2021 and early 2022.

“Overall, the mega-deal upside in the first quarter doesn’t necessarily suggest a recovery in the sector. Rather, they suggest that the more established players and investors in the sector are trying to find their sea legs in this market, selectively using those dry powder reserves they have been hoarding since 2021 in teams and projects they know,” Mihir Somaiya, Galen von Rock Health Shi and Adriana Krasniansky wrote.

For one, Digital Health saw a relatively large number of mega deals, or rounds, worth $100 million or more over the past two quarters following a drought. The report noted six mega deals in the first quarter, accounting for 40% of the quarter’s total funding for digital health.

Some of those deals included a kidney care company The $375 million raise of Monogram Health, the filling of startup ShiftKey’s $300 million round, and the $203 million Series A of clinical trials platform Paradigm. Notably, Paradigm was co-founded by ARCH Venture Partners and General Catalyst.

But digital health companies are still not aiming for a public exit. The report found zero IPOs in the first quarter, and digital healthcare stocks were trading nearly 50% lower in early 2023 than in early 2021.

The unattractive public markets could be a reason for the growth of mega deals as late-stage startups look for more cash. The report also noted that the proportion of Series D+ rounds compared to other deal stages has increased year-on-year. However, the median deal size of Series D+ has fallen to $58 million from $72 million in 2022.

The aftermath of The collapse of the Silicon Valley bank could also last for digital health funding. The report argued that not all startups were equally affected by the loss of SVB and that later-stage companies would have more options to choose a new bank.

“It’s hard to overstate how supportive SVB has been to the startup ecosystem, and the full impact of its closure and acquisition on technological innovation may not be felt for quarters to come,” the report’s authors wrote. “On the funding front, we expect that the collapse of SVB will help startup funding (debt and equity) move more conservatively over the next few quarters.”

Meanwhile, the regulatory environment for digital health is also changing the COVID-19 public health emergency is coming to an end. Congress also passed legislation to protect health and location data, while the Federal Trade Commission cracked down on digital health companies that share health data for advertising purposes.

“While some may mourn the digital health Wild West of 2021—unbridled demand, lax rules, cheap money—the next era will foster entrepreneurship and intrapreneurship in digital health with guardrails that guide innovation, rather than stifling it,” they wrote the authors.

David Higginson will provide more details in the HIMSS23 session, Leveraging In-House Machine Learning Innovations for a More Human Touch. It is scheduled for Tuesday, April 18 at 1:15 p.m. – 1:45 p.m. CT in the South Building, Level 1, Room S104.