Digital health investments were off to a record start. How will COVID-19 change things?

Digital health venture funding was on a tear in early 2020, with a record $3.1 billion invested during the first quarter.

In the first three months of this year, digital health companies raised more than $3 billion across 107 deals—more than 1.5 times the total funding in the first quarter of any previous year, according to a report from venture capital firm Rock Health.

The first quarter of 2020 was the second-largest quarter in terms of total funding and 57% greater than the average quarterly funding across 2018-19. This caps off the largest ever 12-month funding period for digital health, with $9.3 billion invested across the second quarter of 2019 and the first quarter of 2020.

The average deal size spiked in the first quarter of 2020 at $29 million—compared to $19.5 million in 2019 and $21.5 million in 2018. And six “mega deals”—funding rounds of $100 million or more—accounted for 33% of total digital health funding in the quarter, Rock Health said. Those deals included Alto Pharmacy, Verana Health and Tempus.

Other companies that saw large funding rounds in the first quarter include Innovaccer, a population health management platform that raised $70 million, healthcare software company Komodo Health, which scored $50 million, and IntelyCare, a "smart" nurse staffing solution, which landed $45 million.

Investors expected broad pullback in venture investing in 2020 as the growth trajectory of venture investment in digital health slowed in 2019 on the heels of a record-breaking year in 2018.

But this healthy funding momentum was cut off at the knees by a global pandemic, Rock Health said.

"Though some of the economic blow will be tempered by demand for connected healthcare, we do not anticipate investment activity to keep pace with Q1 levels in the coming months," wrote report authors Bill Evans, Rock Health CEO and managing director, as well as researchers Sean Day and research fellows Elena Gambon and Eric Shan.

The twin crises of a global pandemic and massive economic shifts will rapidly impact all market sectors, including digital health.

RELATED: After 3 years of growth, digital health funding declined in 2019 to $8.9B: report

There's a diminished outlook for digital health initial public offerings in 2020, as an impending recession will diminish public investor appetite for IPOs.

Venture investors have sounded the alarm about the impact on startups. Silicon Valley venture capital firm Sequoia Capital urged its companies to "brace for turbulence" and warned that the pandemic would likely cause supply chain disruptions, reductions in growth forecasts and changes in hiring plans. 

Many startups across industries have taken a hit to revenue and made deep cuts, Rock Health noted. 

In just a few weeks, more than 50 startups have cut or furloughed roughly 6,000 employees, according to a tally by The New York Times. Plans for initial public offerings are on hold, and funding is drying up for many young tech companies.

Funding outlook for 2020

Two important factors may buffer a contraction in digital health venture funding, according to Rock Health.

Venture capital and private equity firms are sitting on a record level of "dry powder," or funds that have been raised and not deployed, Day told FierceHealthcare. 

This may, to some extent, help dampen the near-term market shock on the availability of capital to entrepreneurs.

"We would expect that investors will continue to deploy capital in digital health but perhaps they will be a bit more reserved and cautious. At the moment we are not expecting a sharp contraction in the funding environment. We expect the moderation that’s been going on in the past 12 to18 months already to simply continue," he said.

RELATED: Digital health funding in first half of 2019 hits record $5.1B: report

Some digital health startups also are uniquely positioned to play an outsize role in both ameliorating the immediate effects of the crisis and in driving sustained, positive changes in its aftermath, according to the Rock Health report.

There has been a surge in demand for telemedicine, and health systems are ramping up the use of remote patient monitoring technologies.

"This does feel like a moment for digital health that is uniquely positioned to deliver care both remotely and at scale and those capabilities are a good match to the current evolving needs of our healthcare system during the pandemic," Day said. "As investors, we’re still actively investing. We haven’t changed our outlook on digital technologies to transform healthcare. We're still meeting with companies and still looking to deploy capital."

Meanwhile, leading healthcare investors have a mixed outlook on the ongoing COVID-19 outbreak and the potential impact for digital health funding in the coming months, according to Rock Health's survey of 12 investors.

Eight of the 12 investors felt that digital health startups will have a “much harder time” raising capital in 2020 than they did in 2019.

RELATED: Investors poured $4B into healthcare AI startups in 2019

Only three of the 12 investors surveyed were concerned that limited partners may default on capital calls or may not have the funds or liquidity needed to meet their capital commitment, according to Rock Health.

Surveyed investors are largely not reducing the amount of capital they plan to invest in 2020—only three said they might deploy less capital in 2020 than anticipated at the start of the year. This indicates digital health: Investors will deploy capital into new investments more cautiously during a recession while they simultaneously take action to support their existing portfolio companies, Rock Health said.

Investors are also cautiously optimistic that digital health can build on the current momentum to reshape healthcare. The investors surveyed expect virtual care to gain traction, with all respondents agreeing that telemedicine is positioned for greater growth in 2020 than originally anticipated because of the pandemic.

There is an expectation that consumers and providers who use telemedicine for the first time will remain long-term users. Surveyed investors anticipate growth in remote monitoring, symptom checkers and triage tools, according to Rock Health's report.