Digital health startups raised $2.2 billion across 125 deals in the third quarter of this year, marking the lowest-funded quarter since the fourth quarter of 2019.
The Rock Health report found that digital health funding reached $12.6 billion across 458 deals so far this year, well below the booming investment landscape of 2021. Funding also fell 48% between the second and third quarters of this year, while the number of transactions fell by only 14%.
While this sounds like bad news for the industry, Rock Health researcher Mihir Somaiya wrote that the number of small deals and early-stage deals remained fairly stable. Additionally, there has been a lot of important digital health news this quarter.
“Given the year’s choppy risk waters and the public market correction, investors are holding back from the market, waiting to strike once things stabilize. – the lowest quarterly funding total in the last 11 quarters – reflect that sentiment,” he wrote. Adriana Krasniansky, Megan Zweig and Bill Evans of Rock Health also contributed to the report.
“Yet, even though the market is not the same as before, this quarter has been marked by remarkable activity in the field of digital health, including major acquisitions by Amazon and SVCand Closure of Akili SPACthe first public digital health release of this year.”
So why have there been so few final stage deals this quarter? The report noted just six or more Series C increases, compared to 19 in the second quarter and 32 in the first quarter. There have also only been two mega-towers, or towers worth $100 million or more.
The authors suggest three potential explanations for the slowdown in late-stage funding. Deals may have been pushed back to 2021 to take advantage of the booming funding environment, others may unfold quietly through cycle extensions or venture capital debt, and there are cycles that just don’t happen.
The quarter also saw some change in which value propositions pick up venture capital dollars. Companies touting non-clinical workflow tools have raised $1.8 billion so far this year, taking the top funded value proposition from seventh place in 2021. That could reflect a continued focus on improving clinician burnout and managing staffing shortages.
Digital mental health companies continue to dominate the most funded therapeutic area, grossing $1.7 billion so far in 2022. The report also noted a shift to more complex mental illness management.
Somaiya wrote that while the first and second quarters may have seemed like an adjustment after the blockbuster 2021 funding, this quarter demonstrated a move away from the pandemic-fueled digital health market.
“Rational pricing promotes long-term market health and, on the contrary, alleviates short-term concerns,” he said. “Nevertheless, we will be watching the fourth quarter closely to see which of these trends will take over to shape the market going into 2023. Small ripples can lead to big waves. – and we’re curious to see where those directional turns lead.”