After record-setting 2018, digital health venture funding levels off

Venture capital firms continue to show strong interest in data analytics and mobile health app startups as well as consumer-facing companies. (Jirapong Manustrong/Getty Images)

After hitting record levels in 2018, venture funding for digital health companies leveled off in the first quarter of 2019, dropping 19% compared to the first quarter of 2018, according to a new report.

In the first quarter of 2019, $2 billion was raised in 149 deals compared to nearly $2.5 billion in 187 deals raised in the same quarter of 2018, according to the report from Austin, Texas-based Mercom Capital Group, a communications and research firm. Venture funding was up compared to in the fourth quarter of 2018, which brought in $1.4 billion in 142 deals.

“Funding levels were down compared to last year in digital health in the absence of larger deals. M&A activity was also flat,” Raj Prabhu, CEO of Mercom Capital Group, said in a statement. “However, digital health public equities experienced a turnaround in the first quarter of 2019 with 66% of them beating the S&P 500 compared to the last quarter of 2018 when 63% of the equities we tracked performed below the S&P 500. Favorable market conditions have prompted several companies to announce IPO plans."

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Digital health funding has soared over the past few years. Venture funding for digital health companies reached $9.5 billion in 2018, up more than 30% over the previous year, Mercom Capital Group reported. Overall, digital health companies have brought in over $37 billion in disclosed venture capital funding since 2010.

RELATED: Venture deals, funding for digital health companies reached $9.5B last year

There has been some debate about whether digital health is nearing a bubble as an over-capitalized market.

A recent Venrock report based on a survey of healthcare professionals found strong enthusiasm for health IT companies, with 78% of survey respondents predicting the number of health IT companies would “somewhat” or “significantly” increase this year. Those respondents see strong growth for telemedicine companies as well as wearables, digital preventative care programs and analytics.

Looking at investment dollars available, 36% think the capital market will become more difficult for early-stage companies and 16% believe fundraising will be tougher for all stages, according to Venrock. Almost half of the respondents are concerned about funding, and 72% are worried about hiring the right talent to help move startups forward, according to the survey.

CNBC also reported earlier this month that several digital health companies—Livongo, Health Catalyst and Change Healthcare—are preparing for initial public offerings in 2019. The last IPO of a U.S. digital health company was in 2016, according to Rock Health.

Who is the making the deals?

According to the Mercom Capital Group report, the top venture capital deals this past quarter were France-based online and mobile booking platform Doctolib, raising $170 million, followed by healthcare analytics company Health Catalyst, raising $100 million. Calm, which makes a meditation app, raised $88 million, and Taimei Medical Technology, a Chinese cloud-based software provider that serves pharmaceutical companies, raised $80 million.

This past quarter saw a drop in the number of investors participating in funding deals; 371 investors participated this year compared with 412 investors who did so during the first quarter of 2018. There were also slightly fewer M&A deals involving digital health companies this past quarter, 45, compared with 48 M&A transactions in the first quarter of 2018.

The top disclosed M&A transactions in 2019 so far include the $195 million acquisition of clinical communications software company Voalte by Hill-Rom Holdings, followed by BioTelemetry’s acquisition of remote monitoring startup Geneva Healthcare for $65 million.

Alphabet's Google acquired Fossil Group’s intellectual property related to a smartwatch technology currently under development for $40 million. Netmeds acquired KiViHealth, a clinical management software platform, for $10 million, and chronic condition management startup Livongo Health moved into the digital behavioral health space with its acquisition of myStrength for $10 million.

Other key findings from the Mercom report:

  • The top-funded categories so far in 2019 were data analytics with $557 million followed by mHealth apps with $392 million and telemedicine with $220 million. 
  • Digital Health practice-focused companies raised $926 million in 66 deals in the first quarter of 2019 and accounted for about 46% of the total $2 billion funding raised.
  • Consumer-focused companies raised $1.1 billion in 83 deals and accounted for 54% of the total $2 billion funding raised in the first quarter of 2019.
  • Companies in the U.S. recorded the highest number of venture capital funding deals with $1.14 billion. 
  • There were 43 international venture funding deals recorded in the first quarter of 2019 compared to 82 in the first quarter of 2018.

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