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Funding isn't likely to reach half of 2021's record breaking total
The heady days of funding for the digital health space are over; if that wasn't already apparent from the drops in funding in the first two quarters of the year, it is incontrovertible now: things are going to be much, much leaner for the foreseeable future.
While Q2 of this year saw funding to digital health companies fall to a two-year low, the Q3 numbers, out from Rock Health on Monday, are a blood bath in comparison, with dollars dropping 48% quarter-to-quarter to just $2.2 billion. That makes it the smallest quarterly amount raised since $2.1 billion in Q4 of 2019, meaning digital health dollars are now officially back to where they were pre-pandemic.
The total funding to date in 2022 is $12.6 billion across 458 deals through the first three quarters of the year, making it unlikely that it will reach even half of 2021’s record breaking $29.2 billion, unless the markets bounce back quickly. Interestingly, though, the number of deals during the quarter fell to 125, only a 14% drop; this was because of an increasing number of early stage deals. In fact, according to Rock Health's data, there were only six funding raises of Series C or higher during Q3, which accounted for less than 5% of the quarter’s total deal volume; for comparison, there were 32 such deals in Q1 and 19 in Q2.
The report speculates that companies that needed late stage funding raised their rounds in late 2021, when the market was still hot, with the knowledge that a reset was coming.
"Together with high market interest (i.e., investors were eager to get on the cap tables of digital health startups) and an understanding that this “free lunch” wouldn’t last forever, a number of companies chose to accelerate rounds into 2021 that may otherwise have been offered in 2022," wrote Rock Health.
"Our data supports this hypothesis: 64 companies raised twice in 2021—36% more than 2020, and 113% more than 2018."
Deal sizes shrank in Q3 to the point that there were just two deals of $100 million or more, aka megadeals, for the whole quarter: AI-based heart health platform Cleerly, which raised $223 million; and Alma, a company that assists mental health providers with building their practices, which raised $130 million. That is in comparison to 18 megadeals in Q1, and 11 in Q2, for a total of 31 for this year so far; 2021; there were 88 deals of at least $100 million in 2021.
Rock Health also sees potential sector shifts in what is being funded: while digital health startups catalyzing R&D for biopharma and medtech fell from first place to third place, with $1.7 billion raised so far in 2022, digital health players specializing in nonclinical workflow solutions jumped to first place with $1.8 billion in funding.
"To us, strong funding flows to workflow tools mean that addressing healthcare staff shortages and employee burnout remain top priorities. This trend is also reflected in funding for healthcare marketplaces, the fifth most-funded value proposition, led by nurse staffing platform Incredible Health’s $80M raise in August," Rock Health wrote.
So, what does this all mean? Basically, that things are starting to get back to being normal, like they were before 2020 and the COVID digital health boom. This, the company wrote, can be a good thing for the sector.
"While Q1 and Q2 2022 may have read as adjustment periods coming off of 2021, Q3 represented a clear departure from the COVID-driven digital health financial market, including changed market dynamics, shifts in investor focus to prioritize workflow support and complex diseases, and growing excitement for new technologies and immersive solutions," the report says.
"Rational prices promote long-term market health and, if anything, diminish near-term worries. Nonetheless, we’ll be watching Q4 closely to see which of these trends take hold to shape the market going into 2023. Small ripples can lead to big waves—and we’re curious to see where these directional turns lead."
(Image source: dailymail.co.uk)
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