Digital health funding hit $5.7B through June, on track to surpass 2019 and 2023, Rock Health reports

U.S. digital health startups pulled in $5.7 billion across 266 deals in the first six months of 2024, marking continued momentum in the sector after a rocky few quarters last year.

If investment patterns continue, this year could exceed 2019 and 2023 year-end totals with early-stage deals and artificial intelligence startups driving most of the energy, according to Rock Health's first-half digital health funding report released Monday.

Total funding levels in 2019 and 2023 reached $8.2 billion and $10.7 billion, respectively, and can serve as barometers of the digital health market outside of the pandemic-fueled funding cycle from 2020 to 2022, according to Rock Health analysts.

Rock Health, a venture fund dedicated to digital health, outlined a number of key trends in 2024 so far: Early-stage checks are growing, the proportion of unlabeled deals is tapering and the digital health IPO market is showing early signs of life.

Early-stage deals—seed, series A and series B checks—accounted for 84% of labeled raises in the half. Series A activity was especially strong in the first half, with a median deal size of $15 million in the cohort, $3 million larger than the median series A in 2023.

The first half’s series A stats were pulled up by double- and triple-digit A raises from startups like precision medicine player Zephyr AI ($111 million round in March), continuous glucose monitoring platform Allez Health ($60 million series A in May), and AI-powered care enablement company Fabric ($60 million round in February).

One in 3 dollars invested in the first half (34% of total sector funding) went to digital health startups leveraging AI. More than a third (38%) of digital health companies that raised A rounds in the first half of 2024 were AI-enabled.

"Big Series A rounds can help support AI upstart costs like training models or acquiring datasets. For others, large As open doors for unique early-stage opportunities like making acquisitions—take Fabric’s purchase of virtual care solution MeMD from Walmart’s shuttered healthcare business in June," Rock Health research analysts Adriana Krasniansky, Mihir Somaiya and Sari Kaganoff wrote in the report.

2023 saw a big trend of creative deal structuring, like unlabeled rounds, as digital health startups navigate a tighter funding market. Unlabeled rounds tend to spike during periods of transition between market conditions, when startups need access to capital but don’t meet benchmarks for their next labeled raise or are trying to delay tough conversations on topics like valuation, Rock Health research analysts wrote.

Overall, 44% of 2023’s digital health deals were unlabeled. In the first half of 2024, 40% of the sector's fundraises (107 deals) were not assigned a series label. Comparatively, 22% of deals were unlabeled in 2022, 19% in 2021, 7% in 2020 and 4% in 2019, according to Rock Health data.

But, looking quarter over quarter from the first quarter of 2023 to the second quarter of 2024, the prevalence of unlabeled deals has started to taper—47% of deals in the first quarter of 2024 and 33% of deals in the second quarter, declining from a peak of 55% in the fourth quarter of 2023.

"This waning could mark the beginning of our return to a 'more normal' cadence of labeled raises," Rock Health researchers wrote.

Mental health again topped the list of top-funded clinical indications in digital health with $682 million raised in the first half of 2024, while headlines in weight management and obesity care bolstered funding to startups in the category, raising a total of $261 million so far. Investments in companies developing menopausal and pelvic health solutions bumped first-half funding for reproductive and maternal health to $214 million.

There are also signs of life in the exit market.

The digital health sector went almost two years (21 months) without an IPO. Three digital health companies exited onto the Nasdaq or New York Stock Exchange the second quarter of 2024: remote fetal monitoring platform Nuvo (public exit via SPAC in May), revenue cycle management company Waystar (IPO in June) and precision diagnostics player Tempus AI (IPO in June). 

Rock Health researchers note that for late-stage digital health players looking to make a public exit, debt management is a key consideration.

"Both Waystar and Tempus disclosed that funds raised during their IPOs would be used to pay down debt in a high interest rate environment. Aligning exit price to 2024’s economic climate is also top of mind. Tempus, for example, priced its IPO at a nearly 40% discount from its $10.25B valuation set in 2022," Krasniansky, Somaiya and Kaganoff wrote in the report.

In the M&A space, digital health buyers are being more selective. Acquisitions of digital health companies by other digital health companies dropped, clocking in at 34 deals in the first half of 2024, less than half of 2023’s total (83 deals).

“There are many good companies trying to get bought, but it’s hard to make those deals work. Even if they are interesting companies, potential buyers are focused on their immediate priorities. Anything that is not directly related to what we are trying to get done is de-focusing and incredibly risky," said Joanna Strober, founder and CEO of Midi Health, as quoted in the report.

Private equity firms have been active in the digital health sector. PE firms acquired 10 digital health startups in the first half of 2024, more than the total number of digital health acquisitions they made in 2023 and on track to surpass respective totals from 2021 and 2022, according to Rock Health data.

Overall, Rock Health research analysts see the funding momentum in the first half of 2024 as a sign that the sector may be returning to more "normal, sustainable venture patterns."

"Big questions still loom on the horizon—like how the U.S. presidential election will shake out, what will happen to virtual care flexibilities, and which digital health roles retailers will ultimately choose to play. Yet, the first half of 2024 proved that digital health founders and investors have their eyes on the prize, which gives us confidence in what’s to come," the researchers wrote.