Digital Health Funding Continues to Decline as Industry May Be Undergoing Reset

Digital health funding hit a six-year low in the second quarter of 2023, dropping for the sixth quarter in a row. That’s one of the findings of CB Insights’ State of Digital Health Q2’23 report. And while funding is unlikely to return to the peaks it saw in 2021, the industry may be undergoing more of a reset to funding seen in 2018-2019.

“The headline here really is that digital health funding has hit a six-year low,” remarked Chris Sekerak, intelligence analyst II at CB Insights, speaking during an Aug. 10 webinar titled Digital Health’s Midyear Review & What to Expect Next. For the second quarter of 2023, funding on a global basis dropped to $3.4 billion, a 3% decline from $3.5 billion in the first quarter. The last time that funding was this low was third-quarter 2017.

Global digital health deals, he said, were a “very similar situation, very similar story. Deals have continued to drop across most quarters over the past year or so.” The most recent quarter had 348 deals, a 25% quarter-over-quarter drop from 463 deals in the first quarter of the year. Digital health deals have not been this low since 2015, marking an eight-year low, Sekerak noted.

A similar trajectory is seen in the global venture environment, he said, with second-quarter funding of Q2 $60.5 billion, a 13% quarter-over-quarter drop from $69.7 billion. That 13% drop marks the lowest point since the second quarter of 2020. Deals within the segment also declined from 7,597 deals in the first quarter to 6,385 in the second.

However, fintech and retail tech had greater quarter-over-quarter funding declines than digital health did. Fintech funding dropped 48% from $15.1 billion in first-quarter 2023 to $7.8 billion in the second quarter, while retail tech funding decreased 24% from $5.4 billion to $4.1 billion. The $3.5 billion decline to $3.4 billion in digital health funding represented only a 3% decrease, “although digital health has been hovering just above its recent low,” stated Sekerak.

CB Insights defines digital health as “software within the health care industry focused on tech and tech-enabled services, health data infrastructure platforms” and similar types of companies, he explained. “What we exclude are pure play biopharma, pharma,…gene editing, assistive tech, that type of thing.” The firm tracks and categorizes more than 10,000 such companies.

Care Delivery & Navigation Tech Was Top Segment

Among those categories, care delivery and navigation tech had the most funding and deals: $1.5 billion — or 44% of funding — and 152. This segment, Sekerak said, “includes everything from telehealth to virtual scribes to scheduling software and hybrid care providers. So it’s a very big category within our digital health collection, and quarter over quarter, [there has been] no change in funding” from the first to second quarter. Among the top 10 digital health deals of the second quarter, six of them involved care delivery and navigation tech.

There also was no change in funding for the monitoring, imaging and diagnostics tech segment in the first two quarters, which had $700 million in funding and 77 deals.

“Where we really saw a big change in funding was in the health insurance and revenue cycle management category, which despite having only 13 deals, actually saw funding double quarter over quarter,” he said, reaching $400 million in the most recent quarter. Sekerak attributed that growth to “the largest deal” of that time frame, which was for Aledade. The biggest network of independent primary care practices in the U.S., Aledade closed a $260 million Series F funding round in June and “saw their valuation increase to $3.5 billion,” he said. “So even though there’s been a very strong pullback in venture funding, and a lot of companies haven’t raised as much as what they would have over the past few years, this company still saw its valuation increase up to $3.5 billion.”

The lowest average disclosed deal size was seen in digital therapeutics and wellness tech, at $6.1 million. That segment also was the one with the most early-stage deals: 71%.

The United States saw 65% of digital health funding in the second quarter, with $2.2 billion total and 174 deals. That funding was “by far the largest out of all across the entire world.” However, it also represented an 8% drop from $2.4 billion in the first quarter, which was the lowest since the third quarter of 2017.

Early-Stage Deals Were Up; Mid-, Late-Stage Deals Were Down

As far as individual digital health deal sizes, “it’s a bit of a split story…because what we’ve seen so far in 2023 is that early-stage deal sizes actually ticked up 4%” from $2.6 million in 2022 to $2.7 million, stated Sekerak. “So early-stage deal size increased just ever so slightly, but still an increase nonetheless, which is significant because when we think about it, if you’re a company that is raising an early-stage round — which we define primarily as seed stage and Series A stage — whether you raised last year or this year,…it’s pretty much the same amount of money that these companies are receiving.”

Mid-stage and late-stage deals, though, are “a little bit of a different story.” Mid-stage deals are down 39% from $25.0 million in 2022 to $15.3 million so far in 2023, and late-stage deals are down 16% from $29.6 million last year to $25.0 million.

However, noted Sekerak, “we’ve actually seen $100 million dollar-plus digital health mega-round deals increase this past quarter, and mega rounds can be across any stage. However, primarily they are frequently on late-stage deals given where they fall on the funding cycle.

“But after multiple quarters of successive drops in mega-round funding, we actually saw mega-round funding increase in uptake this past quarter, which is interesting, because again, you think about the big pullback that we’ve seen in funding and deals,” he continued. “But yet, for companies that are able to demonstrate promise or value to their investors, they’re still able to receive a very large amount of funding. And of course, when you compare back to where we were in the funding boom in 2021, early 2022, it’s a pretty noticeable difference. But again, that just shows how much mega-rounds did comprise that funding during that boom versus where they are right now.”

Interest in AI Is Growing

As far as the role of artificial intelligence in digital health, “there’s a lot going on in the world of AI across digital health and health care more broadly,” observed Sekerak.

“In case you haven’t heard, AI is a big deal right about now,” agreed Alex Lennox-Miller, lead analyst at CB Insights. “It won’t surprise anybody to see that interest in AI is really taking off.” Based on earnings call mentions of “artificial intelligence” or simply “AI” through Aug. 7, executive interest has soared since the public launch of ChatGPT by OpenAI in the fourth quarter of 2022. At that time, there were 180 mentions of those terms, but that rose to 372 in the first quarter of 2023 and then 444 in the most recent quarter.

“Executives are talking about it. Everybody’s trying to learn about it and figure it out,” said Lennox-Miller. “The big question we had was to what extent is this just hype and curiosity versus something that’s really being reflected in dollars in the market?”

Of the top 10 digital health deals in second-quarter 2022, “half of them went to AI companies or AI-enabled companies.” Most interesting about this is “this spans multiple categories, multiple different kinds of solutions. And it really is focused…in that mid- to late-stage area. Because AI, especially generative AI, is…being treated as something fairly novel, it’s worth remembering that, really, AI has been around for a while, and the companies that are really reaping the benefits of this enthusiasm and this interest seem to be the ones that have been developing the technology over time.”

He explained that AI digital health deals were twice the size of non-AI deals in second-quarter 2023 in both median deal size — $4.0 million for non-AI deals compared with $8.0 million for AI-enabled digital health companies — and average deal size — $10.3 million compared with $20.5 million. It’s “very interesting to see that suddenly take off,” he observed.

And while late-stage companies are garnering interest, early-stage ones are as well. The two biggest early-stage digital health deals in the second quarter involved AI-enabled companies. Hippocratic AI, which specializes “in selling their own health care-specific, large language model to developers for a variety of uses,” raised $50 million in seed funding, and Memora Health, “which is AI-enabled care navigation,” closed a $30 million Series A funding round.

“What does this mean for investors?” he asked. “Well, the interesting thing is that it seems like for the near future, exits are mostly driven by” mergers and acquisitions (M&A). “We’re seeing a lot of consolidation in the space, a lot of acquisition by larger companies or companies looking to add functionality to an existing platform.

“This is almost reaching the point where our projections are hitting nearly the level of M&A that we saw in 2021 at the peak of enthusiasm, while there’s really only been one significant health care AI IPO, from Bullfrog AI, in drug development,” continued Lennox-Miller. “So while the space is getting a lot of investment, we’re also seeing a lot of consolidation and a lot of acquisition.”

When asked if larger digital health funding will recover, and, if so, when, Sekerak replied that “when you talk about recovery, there are almost two ways you can look at this. You can say, hey, if it’s going to recover back to where it was at the peak in 2020, where it was five times as much as it is now pretty much, that’s unlikely because, again, that’s indicative of the broader venture environment where we are in a downswing right here, and we are seeing deal sizes that have less high valuations attached to them.”

“So in terms of recovered back to 2021, that’s unlikely at this point anytime soon. However, if you look back earlier to that, where we look at 2019, that’s where it gets a bit interesting, because” the first quarter of 2019 had $3.9 billion in digital health funding compared with $3.4 billion for the most recent quarter.

“So when we think about recovery in that type of a sense, 2021 is very different from where we’re at now,” he maintained. “But then when we look at 2019, [current funding is] pretty much back at 2019 levels and 2018 and…before that, and of course, it is a little bit lower than where it was in 2018 and 2019. But by and large, what we’ve really seen is not necessarily more of a recovery [but rather] more of almost a reset to where we once were.”

© 2024 MMIT
Angela Maas

Angela Maas

Angela has an extensive background of editing, reporting and writing for trade and consumer publications. She has written Radar on Specialty Pharmacy since she joined AIS Health in 2005 and has broad knowledge of the various issues at play within the space. She also has written for Spotlight on Market Access since its 2017 launch. Before joining AIS Health, she was managing editor at Employee Benefit News and Employee Benefit News Canada and managing editor at Hem Aware (a hemophilia publication), Lupus Living and Momentum (a multiple sclerosis publication). She has a B.A. in English and an M.A. in British literature from Arizona State University.

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