6 megadeals made up 40% of digital health funding in Q1 as smaller startups face rough waters: Rock Health

2023 is on pace for the lowest level of annual funding since 2019 as the first quarter saw fewer, bigger deals.

Given the volatility of the financial market and in the wake of Silicon Valley Bank's collapse, established players and investors with deep pockets deployed their dry powder reserves into teams and projects they know, according to an analysis by Rock Health, a venture fund dedicated to digital health.

In the first quarter, U.S. digital health funding closed with $3.4 billion across 132 deals, with a heavy representation of megadeals. There were six megadeals in the first quarter from Monogram Health ($375 million), ShiftKey ($300 million), Paradigm ($203 million), ShiftMed ($200 million), Gravie ($179 million) and Vytalize Health ($100 million)—making up 40% of the quarter’s total digital health funding.

The total investment in digital health this past quarter exceeded both the fourth quarter of 2022's $2.7 billion and the third quarter of 2022's $2.2 billion funding pots but pales in comparison to the $6.1 billion raised in the first quarter last year and the $6.7 billion raised in the first quarter of 2021. This past quarter is on par with the $3.4 billion raised in the first quarter of 2020. 

"The truth remains that the founder-friendly market of 2021 and early 2022 has tilted sharply toward investors," wrote Rock Health researchers Mihir Somaiya, Galen Shi and Adriana Krasniansky.

The fact that six deals nearly equaled the funding brought in from the quarter’s 126 others signals that the current market is being driven by a select group of large, high-impact transactions, the researchers noted.

2023 started off with renewed optimism in the sector, according to Rock Health, but the collapse of Silicon Valley Bank, the seizure of Signature Bank, Moody’s downgrading of bank credit ratings and another Fed rate hike was a "stark reminder that the choppy waters of 2022 aren’t over yet," the researchers wrote.

SVB was a major lender to startups, including those in digital health, over the last 40 years. "SVB’s collapse nearly precipitated a liquidity crisis in the sector, and concerns circulated that startups might need to engage in distressed debt buys or raise emergency bridges," the researchers wrote in the report.

Startups also face uncertainty about which banking institution to choose next as nascent teams or those based outside of the U.S. will need to turn to more restrictive and expensive alternatives to establish financial operations and secure loans.

"It’s hard to overstate just how supportive SVB was of the startup ecosystem, and the full ramifications of its closure and acquisition on technology innovation may not be felt until quarters later," the researchers wrote.

SVB’s collapse will impact the funding landscape as startup financing (debt and equity) will likely move more conservatively. Some companies may look for buyers. A survey of digital health founders published by HTN (Health Tech Nerds) in the first quarter of 2023 found that 44% of respondents reported having less than 12 months of cash runway left.

Rock Health researchers predict that founders will be more intentional about how they build their investor and adviser communities going forward.

Looking at exits, the first quarter of 2023 logged another quarter with zero digital health IPOs after a barren 2022. Digital health stocks started 2023 trading almost 50% lower than they did at the start of 2021, pushing some recently exited players like Pear Therapeutics to explore going private.

Digital health startups also are bracing for impending regulatory changes. In the first quarter, a slew of federal agencies, including the Food and Drug Administration, Medicare, the Drug Enforcement Administration and the Federal Trade Commission, announced preliminary steps and timelines for refining policies across digital health. These revised guidelines have far-reaching impacts, affecting telehealth reimbursement, controlled substance distribution, healthcare service pricing and rebates, and patient data management, Rock Health researchers noted.

"There’s no denying that Q1 2023’s economic conditions, bank scares, and regulatory changes have digital health startups of all sizes nervous, whether they’re trying to raise their next funding round or waiting for the right time to exit," the researchers wrote. "Either by personal choice or business requirements, we are likely to see some startups give in to turbulent waters—seeking out buyers or shutting down completely over the next several months."