Healthtech investing still lags behind even as funding grew 42% in Q1

Investments grew to $2.7B, but they're down 20% from the $3.4B in Q1 2023

2023 was a very rough year for healthtech investing: while Q1 was relatively healthy, growing 26% from the previous quarter, the rest of the year saw big downslides each quarter. In the end, 2023 ended up with the lowest amount of capital invested in U.S.-based digital health startups since 2019. 

As Q4 2023 was the lowest funding quarter in over four years, with $1.9 billion across 122 deals, perhaps there was nowhere for funding to go but up: as such, Q1 saw big gains, growing 42% quarter-to-quarter to $2.7 billion invested in 133 deals, a 9% increase, according to a new report out from Rock Health. That comes out to an average deal size of $20.6 million.

However, despite the big uptick, investments are still lagging behind where they have been historically, down 20% from the $3.4 billion raised at the same time a year ago. In addition, Q1 2024 was the lowest first quarter by sector funding since 2019, a worrying sign given that Q1 was the top-funded quarter of the entire year for the last two years. That could be a sign of yet another down year for healthtech.

While investing is still not back to where it was even a year ago, there are encouraging signs when it comes to the number of deals, as the 133 deals in Q1 beat was larger than each of the past six quarters, just coming out ahead of Q1 2023’s 132.

"Investors and founders are finding their stride and closing deals at more measured check sizes than in previous quarters," wrote Rock Health.

One of the big drivers of the increased funding was artificial intelligence, with a whopping 40% of Q1’s funding total went to AI-enabled companies, meaning $1.1 billion across 45 deals. That was up from 33% of all digital health funding in 2023, and 29% in 2022.

Some of those AI-enabled fundings included clinician scribe software Abridge, which raised a $150 million; precision health company Zephyr AI, which raised $111 million; AI operating system Ambience Healthcare, which raised $70 million; care enablement platform Fabric Labs, which raised $60 million; and autonomous medical coding platform Codametrix, which raised $40 million.

The report also looked at exits in the first quarter, which saw three digital health companies, Science 37, Better Therapeutics, and Veradigm, all delist from the public market; along with the nine companies that also delisted since 2022, that brings the number of publicly-traded digital health comes to 43, down from its peak of 54 in 2021. This may not be the end of that: as Rock Health points out, there are six other digital health stocks ending the quarter at risk of delisting.

However, at the same time, the IPO market may also finally be thawing after a couple of ice cold years, with companies like Reddit and Instacart having recently gone public, and that may offer a pathway to more digital health companies doing the same, leading to those companies to build better habits. 

"As a result, some companies that previously had eyes set on Wall Street may embark on dual-track processes, pursuing IPO and M&A exit pathways concurrently to keep options open. But fear can be combated with preparation," wrote Rock Health.

"We expect that more late-stage digital health startups will build habits of budgeting and forecasting their finances as if they were publicly-traded, even if an IPO isn’t on the immediate horizon. Shifting from growth-minded forecasting, common in venture capital, to more conservative market guidance can help to iron out kinks and set a company up for public or private exit success."

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