Investing is cyclical. It’s a lesson that has repeated itself over the past two years for entrepreneurs and investors in emerging digital health technologies.
The pandemic brought more urgency to digital health innovation in 2020 and 2021, years that also saw record-breaking investments in the sector, government stimulus, regulatory clarity and other developments that served as strong tailwinds. Tech giants expanded their forays into digital health while hospitals and clinics adopted new technologies to keep pace with rapid changes.
But 2022 did not bring a continuation of many of the trends that buoyed digital health. Instead, the year brought mounting inflation, tightening monetary policy, the continuing conflict in Ukraine, supply complications and other challenges that battered nearly every sector of the economy. And digital health was not immune.
U.S.-based digital health startups raised $15 billion over 572 deals in 2022, according to our friends at Rock Health, which is just over half of the record-breaking $29.3 billion startups raised in 2021. The total, in fact, was just a bit above the 2020 fundraising total of $14.7 billion.
In other words, the pandemic sent the digital health sector to new heights in 2021, and the many macroeconomic challenges of 2022 brought it back to Earth. Analysts at Rock Health are calling it the end of a “macro funding cycle,” but they also note that a new chapter is just beginning for this exciting sector.
A Closer Look at 2022
Investment in digital health startups increased every fiscal quarter from Q3 2019 until Q2 2021, analysts at Rock Health found. But with the exception of a few small upticks along the way, a new downward trend began in the second half of 2021 and continued through all of last year. And the trend accelerated in the second half of the year.
The first half of 2022 saw an average of $5.2 billion invested in digital health startups per quarter, while the second half of the year saw an average of just $2.4 billion invested. The difference between the macro funding cycle peak ($8.4 billion Q2 2021) and its trough ($2.7 billion invested in Q4 2022) was 68%.
There was also a seismic change in capital concentration last year. Later-stage companies, who commanded the lion’s share of digital health funding from 2019 until 2021, raised a far smaller percentage of the total last year. Investors were hesitant to fund “megadeals” (there were 35 funding rounds of more than $100 million in 2022, compared to 88 in 2021) and mature startups were reluctant to raise at discounted valuations.
Other economic factors also affected digital health in 2022. Tech giants are busy adapting to the current climate, and have pared back their healthcare ambitions until market conditions improve. Health systems faced a new mandate to cut costs and diversify revenue streams, which has changed their priorities for interacting with emerging technologies.
Looking Ahead
We’ve hopefully turned a corner on the pandemic, and are well into the other side of the economic macro cycle that came with it. This year could be a new beginning, and that optimism was in the air this year at the 41st Annual J.P. Morgan Healthcare Conference in San Francisco last month. It was energizing to see friends and colleagues in person again, and to hear the exciting news from life sciences companies.
This optimism is also infusing the digital health sector. Our friends at Rock Health said it well: 2023 may not shape up to be a banner year for unicorns, but it can be a great one for “strong horses,” or companies with strong balance sheets, great leadership teams and recurring revenue.
Rock Health also offers a great playbook for startups navigating uncertain times, and recommends that many digital health startups spend 2023 focusing on the fundamentals.
As always, it will be exciting to see what the months ahead have in store!
