Digital health startups banked record-breaking $29.1B last year. Will the momentum continue in 2022?

Digital health had another standout year in 2021, with startups raising an eye-popping $29.1 billion across 729 deals, according to Rock Health, a venture fund dedicated to digital health.

Overall, investment in the market nearly doubled 2020’s $14.9 billion former record haul, the company noted in its year-end funding report.

Top-line funding growth was driven in large part by 88 megadeals (rounds of $100 million or more), which brought in $16.6 billion, or 57% of the year’s total. In terms of deal size, 2021 saw four of the five largest digital health deals since Rock Health started tracking in 2011: Noom ($540 million), Ro ($500 million), Mindbody ($500 million) and Commure ($500 million).

Digital health startups offering mental health maintained their spot as top money raisers, bringing in $5.1 billion—$3.3 billion more than any other clinical indication in 2021, and nearly double 2020’s funding total of $2.7 billion, according to the Rock Health report.

"Trends driving investment in this category include the integration of mental health services into broader virtual care platforms (think K Health acquiring Trusst) and the rise of virtual options for intensive mental and behavioral health needs, led by companies like Lyra Health ($200 million), NOCD ($33 million), and Equip Health ($13 million)," wrote Rock Health's Bill Evans, managing director, Megan Zweig, chief operating officer and researcher Adriana Krasniansky in the report.

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Investors also boosted funding for diabetes care and musculoskeletal (MSK) care, conditions that can increasingly be managed virtually. MSK funding grew sixfold between 2020 ($236 million) and 2021 ($1.4 million), as virtual MSK clinics Hinge Health and Sword Health each completed multiple raises across the year.

In 2021, digital health companies catalyzing R&D in biopharma and medtech brought in record investment with $5.8 billion in funding, stimulated by the COVID-accelerated adoption of real-world evidence and decentralized trials. Investments in digital products supporting disease treatment grew 2.6x between 2020 and 2021 as coverage pathways for prescription digital therapeutics widened, Rock Health reported.

Healthcare marketplaces also experienced a 3.2x year-over-year funding growth, driven by upticks in direct-to-consumer marketplaces (Mindbody), caregiver marketplaces (Honor) and clinical job boards (Trusted Health).

Outsized funding last year also came with a landslide of exits. 2021 saw an average of nearly 23 digital health exits via merger or acquisition each month, almost double 2020’s monthly average of 12, according to Rock Health researchers. And while some of the year’s anticipated SPAC deals didn’t materialize, 23 digital health companies went public via SPAC or IPO in 2021, almost triple the previous peak of eight in 2020.

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Will the digital health market sustain this record level of growth in 2022?

Rock Health analysts say there are a few signs pointing to a continued acceleration in the market.

Digital health adoption appears to be stabilizing at a "new normal" following the onset of the COVID-19 pandemic, they noted, with 73% of telemedicine users saying they expect to continue using telemedicine at the same rate or higher in the future.

Healthcare providers also continue to offer virtual care options. Eighty percent of Rock Health Consumer Adoption Survey respondents with a primary care provider (PCP) said their PCP offered telemedicine in 2021, nearly double the 44% who said their PCP offered telemedicine prior to the pandemic. 

"We also see macro signals that the investor community is settling into a long-term funding stride for digital health. There remains a healthy mix between new (45%) and repeat (55%) investors in the sector, balancing new cash with the consistent behavior of industry experts," Evans, Zweig and Krasniansky wrote in the report.

"Rounding out the diverse mix, big tech players are investing and acquiring in the space, joined by a growing number of middle children—smaller-but-still-sizeable retail and tech companies like Best Buy that are increasing their forays into digital health," they wrote.

According to the analysts, 2021's funding frenzy was both the cause and effect of bigger shifts within healthcare. Digital health is experiencing major changes to its infrastructure, business models and talent pool that will lead to downstream effects in 2022, they noted.