Huge Digital Health Fundraising Growth May Not Continue in 2022

US-based digital health startups continue to raise capital at unprecedented rates. In 2020, total fundraising in digital health topped the $10 billion barrier for the first time at $14.6 billion. In 2021, the sector more than doubled that record total with $29.1 billion raised. Those are the findings of venture capital analyst firm Rock Health in its new report. But while the numbers are jaw-dropping, they’re probably not sustainable in the long run.

The Digital Health Sector

In analyzing digital health funding flows, Rock Health counts companies that build and sell technologies, including those paired with a service where the technology itself is the service. That includes companies like data warehouse platform builder Health Catalyst, online preventive health programs designer Omada Health, and Sotera Wireless, developer of the ViSi Mobile System. Rock Health doesn’t count companies like Access MediQuip, Oscar, One Medical, and other firms that are innovative but focus on selling labor-intensive services, rather than technology. The analysis also counts only deals of $2 million or more.

The 2021 Analysis

The $29.1 billion was raised across 729 deals, an average deal size of $39.9M. But growth was driven by what Rock Health describes as the 88 “mega deals” (rounds of $100 million or more), which accounted for $16.6 billion, or 57 percent, of the year’s total. That includes four of the five biggest digital health deals that Rock Health has ever tracked since it began tracking the market in 2011, including Noom at $540 million, and Ro, Mindbody, and Commure at $500 million each. Digital health firms catalyzing R&D in biopharma and medtech were especially successful in attracting investment in 2021, which Rock Health attributes to COVID-19’s impact in accelerating adoption of real-world evidence and decentralized trials. Upticks in direct-to-consumer and caregiver marketplaces drove 320 percent year-over-year funding growth in health care marketplaces. Meanwhile, expansion of coverage pathways for prescription digital therapeutics fueled 260 percent growth in digital products for disease treatment fundraising. By clinical indication, digital health startups offering mental health care remained at the top with $5.1 billion, more than $3.3 billion over the next-highest clinical indication, and nearly double the $2.7 billion raised in 2020. Rock Health lists integration of mental health services into broader virtual care platforms and the rise of virtual options for intensive mental and behavioral health needs as trends driving growth in this area. Diabetes and musculoskeletal health also significantly increased their year-over-year fundraising success.

2021 Digital Health Company Fundraising by Clinical Indication, 2017 to 2021 (in billions)

Clinical Indication	2017	2018	2019	2020	2021
Mental Health	$0.5	$1.4	$1.0	$2.7	$5.1
Diabetes	$0.3	$0.4	$0.5	$0.8	$1.8
Cardiovascular	$0.5	$0.6	$0.6	$1.1	$1.8
Primary Care	$0.1	$1.0	$0.5	$1.7	$1.6
Musculoskeletal	$0.5	$0.2	$0.2	$0.1	$1.4
Oncology	$0.3	$0.4	$0.6	$1.3	$1.4

Is It Sustainable?

Some suggest that digital health care is in a bubble and that bubble is about to burst. Most agree that the record growth of the past two years is unsustainable and that fundraising is bound to slow down. Rock Health found that the year’s “outsized funding” levels were accompanied by “a landslide of exits.” On average, there were nearly 23 digital health exits via merger or acquisition per month in 2020, nearly double the 2020 monthly average of 12. Based on long-term trends and comments of financial analysts from Rock Health and other firms during an interview with the online health care news company MedCity News, there are good reasons to suspect that digital health investment flows have peaked.

Higher Valuations

The surge in investments has led to increases in the valuation of digital health companies. Thus, what would have once been a series B round is now a $25 million series A, noted Steve Tolle, a partner at HLM Venture Partners. Factors driving this include the dramatic spike in utilization of telehealth due to the COVID-19 pandemic. And while utilization rates have fallen back from their 2020 highs, the seal has been broken. Having gotten to try telehealth, the vast majority found it to be a positive experience that they want to continue even after the pandemic ends. The sector has also been more successful in attracting private equity firms, especially late-stage companies. For example, Tiger Global recently co-led a $300 million Series D round into Hinge Health, making the musculoskeletal care startup one of the highest-valued privately held digital health companies in the US at $3 billion. Hinge Health’s customer base tripled, revenue quadrupled, and customer retention continued at 100 percent.

More Digital Health Companies Going Public

Digital health companies are also carrying out fundraising initiatives more frequently than they have in the past. Twenty-three digital health companies went public in 2021, either traditional initial public offering (IPO) or via merger with special-purpose acquisition companies (SPACs), as compared to 12 companies that went public in 2020. The stocks of newly public companies in the sector haven’t performed well. Thus, of the 19 companies tracked by MedCity News that went public in the last two years, all were down from their first day of trading. Every company that went public via a SPAC was valued below $10, the standard share price for these deals, according to MedCity News. Among the few companies to break the trend are Oak Street Health, which is trading at 51 percent above its IPO price of $21, and Doximity, which is valued at more than double its $26 IPO price.

How Far Will Digital Health Fundraising Growth Levels Fall?

In the three years from 2019 to 2021, annual fundraising totals for digital health companies has gone from $7.9 billion to $29.1 billion. While the rise of telehealth makes a return to the sub-$10 billion level unlikely, the experts that MedCity News interviewed don’t expect a repeat of 2021 growth levels in 2022. They suggest that funding will fall back into the 2020 range of $14 to $16 or $17 billion, not because the companies aren’t good but because of current valuations. “Really high valuations are great when you’re private,” noted Chris Moniz, a director at Silicon Valley Bank’s Healthcare Practice and one of the interviewees cited in the MedCity News piece, “but will the public markets keep that premium?” Editor’s Note: This article was updated with new information on Jan. 31.