Digital health funding in Q3 slides to 2019 levels as investors make more cautious bets

With the market under pressure, digital health funding continues to cool down as investors write smaller checks and focus on early-stage startups.

Digital health companies raised $2.2 billion across 125 deals in the third quarter, marking the smallest funding quarter for all of 2022—in fact, it’s the lowest quarter by dollars raised in digital health since the fourth quarter of 2019, according to the latest quarterly report from Rock Health, a venture fund dedicated to digital health. Startups raised $2.1 billion in the fourth quarter of 2019.

Coming out of 2021’s breakthrough year when funding reached a record level $29.2 billion, industry watchers questioned whether digital health could keep up the momentum. Now the signs are pointing toward funding in 2021 standing out "as an anomaly" rather than the norm with 2022 shaping up to be a year of market adjustments.

Digital health funding slowed in the first quarter, with companies bringing in $6.1 billion, down from $6.7 billion during the same period in 2020. Funding then dropped to $4.1 billion in the second quarter, also down from $8.3 billion the same time a year ago.

With the third quarter included, 2022 year-to-date funding totals $12.6 billion across 458 deals, raising doubts that this year’s digital health pot will reach even half of last year’s haul, according to Rock Health.

"Q3’s lack of funding isn’t altogether surprising. Earlier this year, we discussed funding froth drying up in digital health and in VC more broadly in response to macroeconomic forces (inflation, interest rates, supply chain woes) as well as a shift in investor mindset from the high times of 2021," wrote Rock Health research associate Mihir Somaiya in the report.

"However, the sharp decline in funding reflects a deeper underlying change: this quarter’s near-complete absence of late-stage digital health investments," he wrote.

In the first three quarters of 2022, several key themes have emerged: smaller checks across the board, a focus on early-stage funding and reprioritization of technology investments, Rock Health researchers wrote.

This past quarter also saw the exit market beginning to thaw. Digital therapeutics maker Akili Interactive's SPAC merger with Social Capital Suvretta Holdings Corp marked the first digital health public exit all year.

While overall funding dropped 48% from $4.2 billion in the second quarter, deal count fell less sharply, by 14%. Analysis of Rock Health’s funding database suggests that the number of smaller and generally earlier-stage deals remained relatively stable. Smaller deal size—rather than fewer deals—pushed down the overall quarterly total, according to the report.

There were only six funding raises of series C or higher in the second quarter, accounting for less than 5% of the quarter’s total deal volume—a marked departure from the second quarter’s 19 series C+ raises and the first quarter’s thirty-two, according to Rock Health data.

The third quarter logged just two digital health mega raises totaling $100 million or more: one from heart attack prediction app Cleerly ($223 million) and another from mental health provider support toolkit Alma ($130 million). By comparison, the quarterly average number of megadeals across 2021 was 22 deals, totaling 88 megadeals through the year. While 2021’s trend of $100 million+ raises held somewhat steady throughout the first quarter of 2022 (18 megadeals), the pace of megadeal funding started to fall in the second quarter (11 megadeals) before nose-diving in the third quarter, the Rock Health report states.

Rock Health researchers surmise that late-stage deals were raised early to strike while the iron was hot in 2021 so many companies chose to accelerate rounds into 2021 that may otherwise have been offered in 2022. 

The pullback in late-stage digital health funding in the third quarter also reflects more quiet cash infusions as growth-stage digital health startups in need of additional cash turned to investors for inside or extension rounds, bridge rounds, or venture debt.

The third quarter also saw a shift in technology investment that could signal digital health growth areas for quarters to come. In short: Interest in telehealth is waning while immersive and decentralized health-tech enablers are on the upswing.

Digital health startups catalyzing R&D for biopharma and medtech fell from first place to third place with $1.7 billion raised so far in 2022, while digital health players specializing in nonclinical workflow solutions jumped to first place with $1.8 billion in funding, led by Alma’s megadeal, Grow Therapy’s $75 million haul, and a $72 million check for practice management suite Tebra. Strong funding flows to workflow tools mean that addressing healthcare staff shortages and employee burnout remain top priorities, the researchers wrote.

This trend is also reflected in funding for healthcare marketplaces, the fifth most-funded value proposition, led by nurse staffing platform Incredible Health’s $80 million raise in August.

Funding for digital health startups applying augmented and virtual reality (AR/VR) technologies reached a new high, logging $239 million through the third quarter of 2022 compared to $198 million in all of 2021. Average deal size in this sector has doubled from $18 million in 2021 to $34.2 million through the third quarter of 2022, bolstered by rounds like’s $100 million in January. Other hot areas of investment include digital health startups addressing complex disease states with oncology care-focused companies raising $946 million in the third quarter.

While startups incorporating telehealth retained the second-top spot in investment activity—a position held since 2015—an oversupplied market, declining yields on direct-to-consumer advertising, virtual prescribing scrutiny, and difficult trajectories of public telemedicine leaders like Teladoc have increased investor skepticism toward telemedicine’s cash crop of virtual care providers, Rock Health researchers wrote.

Telehealth startups raised only $2 billion so far this year. If this funding pace holds steady, investment in telemedicine startups will close 2022 with $2.7 billion—just over one-third of the category’s 2021 total and its lowest funding pot since 2019. 

While 2022 started off as an adjustment period from the funding fever pitch in 2021, Rock Health researchers view the third quarter as a clear departure from the COVID-driven digital health financial market, including "changed market dynamics, shifts in investor focus to prioritize workflow support and complex diseases, and growing excitement for new technologies and immersive solutions."

It remains to be seen how these trends will shape the investment market going into 2023.

Investors at Rock Health Capital have seen a gradual return to pre-pandemic asset pricing in the pre-seed through series A deal flow.

"Rational prices promote long-term market health and, if anything, diminish near-term worries," the researchers wrote.