In the third quarter, digital health companies raised the lowest total quarterly funding in 11 quarters, according to a recent report from CB Insights. Funding for the sector fell 36% quarter-on-quarter from the previous quarter and 72% from its all-time high set in the second quarter of 2021.
While this decline in funding is not entirely insignificant, it should be noted that the decline reflects a sharp decline in global funding across all sectors. Actually CB Insights reported a 34% quarter-on-quarter drop in global venture funding for Q3.
That means the main driver behind the decline in digital health fundraising is macro market trends, according to Sunny Kumar, partner at GSR Ventures, and a less inherent problem of the digital health sector. He said those trends include elevated interest rates, a limited market for initial public offerings, lower public market ratios, slower corporate purchases and preparation for recession risk.
These macro market trends have led investors to behave more conservatively, especially when it comes to late-stage funding, Kumar pointed out.
Michael Young, Managing Partner at OMERS Ventures, agree. With inflation on the rise, interest rates rising and the stock market falling, he said many investors are making decisions knowing a recession could be on the way.
It’s important to understand that investors are in “price discovery mode,” Yang said. Because in the third quarter no one knew how to price a deal in a bear market, most investors chose to simply wait until the market stabilized, he said.
“No one wants to catch a falling knife or answer the ‘why now?’ question, so things have been delayed,” Yang said.
Another critical reason digital health funding numbers in the third quarter were so low is that venture capitalists are dealing with more bloated digital health portfolios than they’ve ever had, according to Marissa Moore, an investor at OMERS. This is because there was a record breaking wave of investment into space in 2020 and 2021.
With much larger digital health portfolios than they were used to in the past, many investors are paying less attention to new deals. They are shifting their resources away from new deals and more toward portfolio management, Moore said.
“In this market environment, this shift is even more pronounced as the bar for portfolio companies to achieve milestones and raise follow-on funding has been raised,” she said. “As an aside, the inner circles may be a by-product of the increased focus on portfolio management, and we suspect there are many more than have been publicly reported.”
On a positive note, Kumar believes there is still huge opportunity for startups to demonstrate their impact and clinical value, given that the nation’s healthcare challenges are not going away anytime soon.
But for digital health startups to be successful in the current economic landscape, they need to place more emphasis on showing how they deliver value to organizations. He said it’s no longer enough to tout usage or engagement statistics — instead, companies need to give investors a clear picture of return on investment.
“As an example, telemedicine is still one of the most exciting areas of innovation for health technology, but part of the significant decline in funding (and decline in public market multiples) for this sector is due to the fact that while these companies can access and convenience improve, many still do not deliver significant cost savings or efficiency gains. This limits the value for insurers, employers and health systems to promote them,” Kumar said.
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