After reaching an unparalleled peak in 2021, venture capital investment in digital health companies saw a substantial drop-off in 2022, according to a report from Rock Health.
Last year saw $15.3 billion raised for digital health companies in 572 deals — about half of the $29.3 billion raised among 738 deals in 2021, the report stated.
The 2022 numbers were just a tick above 2020’s $14.7 billion tallied over 480 deals.
The stunning 2021 crest was the result of a confluence of factors. COVID-related regulatory reforms and investment in digital health innovation came together, spurred on by government stimulus that “contributed to an artificially depressed cost of capital in 2020-2021, encouraging investors to make bigger and riskier bets in emerging areas like digital health,” the report noted.
But those good times started slowing down in late 2021 and early 2022 as supply chain challenges, inflation, interest rate hikes, and investor pullback reversed the earlier momentum among investors.
The report continued that “2022 was a necessary reminder that investment is cyclical, and that strong players build resilience in weathering funding climate changes.”
“What’s unclear is whether we’ve reached the end of this cycle, or if more low funding quarters are on the horizon,” the report added. “With recession concerns looming, there’s a chance that 2023 could be digital health’s lowest venture funding year since 2019.”
Indeed, 2023 “could be digital health’s first $10 billion or lower year in venture funding since 2019,” according to Rock Health.
As for where venture dollars were invested in 2022, health systems were looking for solutions to depressed patient encounters, rising wage inflation, and ongoing staff crises. Thus, they focused on efficiency gains by boosting investment in non-clinical workflow solutions — which was the third most-funded “value proposition” category in 2022, at $2.2 billion. It came right behind on-demand healthcare ($2.4 billion) and research and development ($2.2 billion).
As for top-funded clinical indications, mental health took the top spot in 2022, at $2.1 billion, followed by cardiovascular medicine ($1.3 billion) and oncology ($1.2 billion).
Direct-to-consumer companies bore the brunt of the downturn, according to Rock Health, accounting for 37% of deals in 2022, down from 43% in 2021. Inflation burned consumers’ discretionary dollars, so some companies, such as Noom and Oura, targeted employers “interested in modernizing health and wellness benefits,” the report stated. It acknowledged its possible consumers will be even more conservative in the months ahead.
Recent results will put pressure on “fallen” unicorns to accept acquisition bids if their cash reserves are low, the report noted, and the companies most likely to raise cash are those that appear grounded.
“Investors are wary of unicorns’ spells, but they’re on the lookout for strong horses: startups that don’t rely on the promise of magical growth but are instead grounded in demonstrated cost savings, clinical workflow improvements, and interest from market buyers,” the report added.
Ultimately, Rock Health’s prediction for venture capital investments in digital health in 2023 was that they will be “built up on slow, steady, and maybe even boring strategies.”
When investment in digital health does pick up again, its trajectory will likely look like “a slower and more sustained path that better reflects startup risk and prioritizes companies taking measured paths to success.”
Source: MedicalNewsToday.com
