Dive Overview:
Venture capital funding for digital health companies has stabilized after a big drop in investments following the COVID-19 pandemic, according to a PitchBook report. Startups raised $1.1 billion across 77 deals in the first quarter, consistent with the previous three quarters, according to the market research and data firm. But deal value was down about 27% in the quarter compared to the same period a year ago, and deal count was down more than 9%. Some areas are still in flux: Developers of digital therapeutics have struggled to get reimbursement for their products, and Optum and Walmart recently shut down their telehealth businesses, PitchBook said.
Dive Insights:
Digital health funding has surged during the COVID-19 pandemic, with investors pouring a record $21 billion into startups in 2021, according to venture capital firm and consulting firm Rock Health.
But the sector began to cool the following year, and investment fell to pre-pandemic levels by 2023. Some digital health companies, even those that had raised significant amounts of capital through initial public offerings, were forced to close.
Funding in the sector remains well below its pandemic peak, according to a new report from PitchBook.
Digital health funding collapses amid COVID-19 pandemic
Venture Capital Deal Activity, 2020-2024 Q1
Down rounds, in which a startup raises money at a lower valuation than its previous round, have received less coverage, according to the research firm, but the space has seen an increase in silent raises, which are unnamed rounds with existing investors.
According to PitchBook, digital health valuations “should be considered somewhat outdated,” with fewer than 20% of startups reporting rounds priced within the past 18 months.
The sector has also seen few digital health exits, with initial public offerings remaining weak in the first quarter, but there has been some movement this summer, with healthcare payments company Waystar and precision medicine company Tempus AI going public.
But these IPOs may not mean that digital health companies will be entering the stock market en masse anytime soon.
“While we had expected to see several digital health IPOs heading into 2024, we now expect the best quality startups to wait until 2025 as these companies often have strong enough balance sheets to weather the crisis and believe it is OK for others to try their luck on the stock market first,” the report said.
Another exception to the first-quarter rush to exit was mental health app maker Twill, which was acquired by publicly-traded chronic disease management company DarioHealth.
According to PitchBook, the type of deal in which digital platforms buy complementary assets to create integrated offerings is likely to continue.
PitchBook noted that consolidation among digital therapeutics companies, which have historically had challenges creating stable reimbursement structures for their products, could be another driver of M&A.
Some digital therapeutics developers have gone bankrupt, and Akili, a company that develops video game treatments for ADHD, recently announced it was going private, leaving the US with no publicly traded digital therapeutics companies.
Virtual care has also been hit by turmoil in recent months, with Walmart Inc. and Optum Inc. shutting down their telehealth operations. Major publicly traded telehealth companies, including Teladoc Health Inc. and Amwell Inc., have struggled to grow profits and are underperforming on the stock market.
“Nevertheless, there is meaningful evidence that telehealth has an overall positive impact on healthcare costs, and we believe there is still a positive investment case for the next evolution of telehealth services with an emphasis on specialty telehealth. [business-to-business] “Medicine, healthcare, healthcare platforms, hybrid care models,” the report authors wrote.
