The third quarter of 2023 saw digital health funding and deals decline to some of the lowest levels seen in years, according to CB Insights’ third-quarter 2023 State of Digital Health report. But some bright spots exist, including early-stage and megaround deals, said speakers from the company during a Nov. 9 webinar titled Digital Health in Q3’23: Global Activity & Emerging Trends.
The main takeaway from the quarter, said Chris Sekerak, intelligence analyst II for CB Insights, is that “digital health funding is the lowest since 2016,” with “$3 billion in equity funding across 247 deals,” representing a 14% quarter-over-quarter (QoQ) funding decline. For a third straight quarter, digital health deals decreased, with a 33% QoQ drop most recently in deals, the lowest amount in almost 10 years.
These numbers compare with an 11% QoQ increase in the broader global venture funding for third-quarter 2023 to $64.6 billion, which was mainly due to investments in artificial intelligence and electric vehicles, he noted. The broader venture market experienced an 11% QoQ decline in deals.
When defining digital health, CB Insights categorizes more than 10,000 companies across seven groups:
- Monitoring, imaging and diagnostics technology;
- Care delivery and navigation tech;
- Digital therapeutics and wellness;
- Health data and analytics;
- Drug research and development (R&D) tech;
- Health insurance and revenue cycle management (RCM) tech; and
- Digital pharmacy tech.
When looking at the specific digital health categories, care delivery and navigation tech led in both funding and deals for the third quarter: $1.3 billion and 105 deals. This, observed Sekerak, “is a pretty common trend” over recent quarters. The category also had five of the top deals for the quarter: CMR Surgical Ltd., Halodoc, HealthMap, Corti and Thyme Care, Inc.
Drug R&D tech had the biggest funding jump of the quarter, he pointed out, mostly because the sector had the largest digital health deal overall: Generate Biomedicines, “a generative AI platform for drug discovery and antibody discovery,…raised 9% of all digital health funding last quarter, which is a very big amount.”
In addition, seven of the top digital health deals involved companies using AI, said Sekerak, noting that many of the 247 overall deals for the quarter also included AI. “So the key takeaway right here is that AI companies within digital health are receiving a lot of funding, but there’s also a lot of companies that are focused on AI in many different use cases, which is very encouraging to see.”
‘Megaround’ Deals Were Almost One-Third of Digital Health Funding
Third-quarter 2023 had six so-called megaround deals — those worth at least $100 million. He noted that they focused on mid- and late-stage deal activity: one for Series B, two for Series C, one for Series D and Series E and one private-equity deal. “So we’re seeing really large check sizes go out across all funding stages.” Those six deals, explained Sekerak, were 29% of overall digital health funding for the most recent quarter, which represents “a five-quarter high.”
While Sekerak acknowledged that there has been a “huge pullback in digital health funding and deals over the past few years,” certain companies are still able to raise large amounts of funding. “Investors are more selective now with their dealmaking — dealmaking has slowed — but there’s still a lot of money out there for companies to gain as we saw this past quarter with the six megarounds.”
The quarter’s two most active investors — General Catalyst and Samsung Next — invested in four digital health startups each, with the former investing in Medeloop and the latter in Atropos Health, both of which are AI-enabled companies. “AI is something that we’re really seeing not just across the broader funding environment, too, but also within specific investment themes and investment targets,” said Sekerak.
In addition to the slow funding environment for digital health in the third quarter, “a relatively slow exit environment” also existed. Exiting — via either going public or achieving a merger and acquisition (M&A) deal — is “the ultimate goal for many startups,” he maintained, but exits “slow[ed] significantly” during the most recent quarter.
Early-Stage Activity Was Up
Some “pretty interesting activity,” however, was seen in early-stage investments, asserted Sekerak. More specifically, said Alex Lennox-Miller, lead analyst at CB Insights, “there is a ton of money going into early-stage health care at the moment”: $684 million in funding for the third quarter.
Since 2019, the majority of digital health funding has been via early-stage deals, with 64% during 2023 so far. “This is something that continues to be true even as we dig into individual subcategories,” said Lennox-Miller. “As we look at digital therapeutics, for example, where despite some very well-developed products and despite having been around for a long time, it’s still a very nascent market and one basically operating as an early-stage space.”
So while large mid- and late-stage deals have declined, “smaller deals of seed rounds and Series A” have “stayed pretty stable.…The median round size is higher this year than it was in 2021 when median sizes across the board in other stages were enormous, and it’s seen a fairly stable growth since 2019,” he explained.
Lennox-Miller highlighted three categories of early-stage activity. The first is health care-specific large language models (LLMs), which “are a really interesting opportunity that’s starting to develop within this space. We’re starting to see some real data and some real evidence that industry-specific training makes a huge difference in the accuracy and the capacity of an LLM to answer questions, to interpret specialized jargon, [and] to properly interpret complicated and difficult terminology.”
“We’re starting to see the emergence of these specialized AIs trained on clinical data,” he explained, which “is really leading to some interesting crossover effects within the data market, as we’re starting to see more and more interest, first of all, within the generative AI space to have access to and acquire access to data, but also real-world data companies starting to develop their own generative AI tools.”
Within the early-stage space, a lot of investment also is going to clinical trials tech and value-based care. Clinical trials tech saw three of the top 10 seed/Series A digital health deals during the quarter, Lennox-Miller explained, while value-based care tech saw six early-stage deals.
“Value-based care has been a major topic in health care for as many years as I can remember,” he said. “It has always evolved and proceeded slower than I think anybody ever predicted it will. It’s interesting that even within the early-stage space, we’re seeing pretty significant amounts of investment in tools to assist with value-based care.”
Investment in Digital Therapeutics Overall Is Down
When asked if CB Insights envisioned “major investment beyond health care LLMs,” such as “large visual models for clinical diagnosis,” Lennox-Miller said the company “absolutely” does. “We’re seeing the evolution and the use of generative AI really expand in health care in a number of different ways. You have kind of the traditional AI pathology uses that I think a lot of people within health care are familiar with. That’s expanding through the use of generative AI into what’s called synthetic imaging, where imaging can be refined, performed faster, and you can really apply algorithms to identify and detect — sometimes even in real time — concerning parts of a scan or an image. Those are getting really significant interest and investment, especially from larger institutional groups.”
Investment in digital therapeutics, however, “has really gone down,” stated Lennox-Miller. “I think there is a real major crisis of confidence in digital therapeutics. Not so much in the ability of digital therapeutics to provide care or the ability of individual digital therapeutics to succeed on a clinical level, but in the ability of digital therapeutics companies to really have a viable business model and be able to show value to their customers or create revenue for themselves.
“We’re starting to see a lot of consolidation within that space, a lot of acquisition coming from a number of different directions,” he continued. “Larger digital therapeutics companies acquiring smaller products to fill out gaps within their own product suite. Virtual care companies acquiring digital therapeutics to add additional tools and even in some cases brick-and-mortar organizations or systems acquiring digital therapeutics to expand into more of a hybrid offering. Overall right now, investment is down, and I would expect probably as long as there is this level of disruption and difficulty within the space, [it will] be slow going for a while.”