Healthcare smashed venture funding records in 2021 despite poor market performance

Despite a subpar market performance for healthcare companies last year, healthcare venture fundraising and exits in 2021 smashed previous records, reflecting a continued excitement and push for hypergrowth in the industry.

Total U.S. venture funding rose to $28.3 billion, according to a new report by Silicon Valley Bank, nearly doubling 2020’s record, boosted by explosive first and second quarters.

But as a record number of companies rushed for the doors, post-exit performance slumped. The healthcare market underperformed the S&P 500 last year for the third year in a row, dragged down by broad selloffs in digital health and biotech.

Jon Norris, managing director and head of SVB’s life science and healthcare practice, said that demands for new healthcare models and digital health solutions have propelled these companies to “put the pedal to the metal and grow as fast as possible without being as worried about profitability.”

“The pandemic has pushed the adoption of these technologies so fast. That was the story we talked about in 2020, and it hasn’t really slowed down,” he said. “People are excited, they want to get into these growth companies, and that’s resulting in these frothy valuations.”

Not all areas of healthcare saw market losses—life sciences tools and services saw a 35.5% gain, consistent with the sector’s 2020 performance, while healthcare providers and services gained a whopping 30.7%, more than double its 2020 performance.

Yet health tech, after a strong showing in 2020, saw a 30% pullback after February.

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Still, while venture funding in most areas of healthcare lagged in the second half of the year, health tech’s pace held steady.

Dominated by investments in alternative care and provider operations financing, the influx of funding created a whopping 42 new health tech unicorns, more than quadrupling 2020’s record.

SVB predicts U.S. venture fundraising will drop to around $16 billion through 2022 as healthcare firms look to slow their investment pace.

Megadeals will be less frequent this year, too, SVB projects.

In 2021, 60% of venture funding came from 105 rounds of $100 million or greater.

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The company’s market outlook for the new year is cautious, recognizing several headwinds including elevated inflation and rate increases.

Compared to previous years, the industry faces low valuations and constitutes the smallest share of the S&P 500 since 2013.

Norris said that performance may dissuade companies from pushing for an early exit.

“I think there is probably going to be a leaning towards more mature companies, where the hyper-growth stories without getting close to profitability is harder to sell in the public market,” he said.

The key factor in 2022's venture fundraising outlook, Norris said, is whether late-stage investors that bought into healthcare’s recent investing frenzy will stick around.

More likely, they’ll wait to see if the investments they made in 2020 and 2021 pay off, he said.

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With the influx of capital, Norris said investors should expect a big year for consolidation in the industry—both by private companies acquiring other private companies and by major public players, especially in health tech.

“The market’s excited,” he said. “If M&A really comes through in 2022, maybe this record investment can be stable.”

Whether companies will slow down and take inventory before seeking an IPO, Norris said, is more of a question mark.

“But I do know that alternative care, doing things outside the hospital, improving how providers operate—there’s no going back,” he said.