After a wild ride in the past two years, digital health startups are adjusting to a new reality faced with difficult economic changes and investor pullback.
Digital health startups pulled in $15.3 billion in funding dollars across 572 deals last year. While still a hefty number, that $15.3 billion is just over half of 2021's blockbuster $29.3 billion. And digital health funding in 2022 barely sneaked past 2020's total of $14.7 billion, according to a 2022 funding report from Rock Health, a venture fund dedicated to digital health.
2022's downhill ride signals the tail end of a macro funding cycle centered around the COVID-19-era investment boom, the report authors said.
The COVID-19 pandemic catalyzed digital health innovation, investment and regulatory reform throughout 2020 and 2021.
Looking at funding quarter by quarter, there's a notable upward trajectory that began toward the end of 2019. Between the third quarter of 2019 and the second quarter of 2021, investors steadily increased investments in digital health startups quarter over quarter for seven straight quarters, with one dip in the second quarter of 2020. On the way down from the second-quarter 2021 peak to the end of 2022, investors continuously decreased the flow of capital every quarter, excluding two quarterly upticks: one in the fourth quarter of 2021 and a smaller notch in the fourth quarter of 2022, the report noted.
Despite the pullback, there are digital health segments that attracted investment dollars in 2022.
"In late 2021 and early 2022, what went up started to come down. Supply chain challenges, inflation, interest rate hikes, and investor pullback reversed investment momentum," wrote report authors Kyle Bryant, Madelyn Knowles and Adriana Krasniansky.
"It’s too early to say whether we’ve reached the end of this macro funding cycle, or if more low funding quarters are on the horizon. With recession concerns looming, the first half of 2022’s quarterly average of $2.4 billion may be a bellwether for the next several quarters—which means that 2023 could be digital health’s first $10 billion or lower year in venture funding since 2019," Rock Health researchers wrote.
Higher operating costs squeezed health system margins in 2022 while provider organizations also faced record-high burnout levels among doctors and medical staff. Health systems looked for ways to increase efficiency and reduce provider pain points, which boosted investments in nonclinical workflow solutions. Companies in that sector raised $2.2 billion last year.
On-demand healthcare was the top-funded segment last year, raising $2.4 billion, led by urgent-care-at-home service DispatchHealth with a $330 million funding round. New startup Homeward Health launched in 2022 with a focus on providing in-person and virtual medical care in rural markets and it raised funds twice last year.
Looking ahead, Rock Health researchers surmise that digital health’s next growth trajectory will look more like 2011-2019 than 2019-2021—a slower and more sustained path with a focus on startups with strong financials and balanced valuations.
Here are a few other key trends identified in Rock Health's report:
- Direct-to-consumer healthcare startups continued to feel the pinch in the current macroeconomic environment. Only 37% of the digital health companies that raised in 2022 sell directly to consumers, compared to 43% in 2021.
- As the market tightened, investors shifted away from investing heavily in late-stage deals in 2022. Last year, 35 digital health startups raised rounds of $100 million or more, compared to 88 so-called "mega-rounds" in 2021 and 43 of these deals in 2020.
- Health systems stepped up investments in both short-term and long-term initiatives. Provider organizations ramped up their focus on hospital-at-home initiatives, including Allina Health's spinout of Inbound Health. Health systems also explored new businesses to diversify revenue streams. Provider venture capital funds remained the top corporate investors by deal volume.
- Big Tech players recentered digital health strategies within their tried-and-true operational fields. Amazon shuttered Amazon Care but rolled out Amazon Clinic, a virtual health storefront offering access to third-party telehealth providers. Microsoft closed its Nuance acquisition, and Apple focused on validating the efficacy of its Apple Watch health monitoring capabilities.