If Rock Health’s Q1 2024 Digital Health Funding Report makes one thing clear, it’s that the times of transition are behind us, and we’re now fully entrenched in a new digital health funding cycle.
The first quarter saw $2.7B in digital health venture funding across 133 rounds, marking the lowest quarterly total seen since 2019. It’s not as bad as it sounds.
- Although total funding wasn’t trending in the right direction, the pace of the funding was actually healthy, and the 133 rounds was the highest in the last six quarters.
The average transaction size of $20.3M mostly tells the tale of growth-stage companies having to justify their valuations based on clinical outcomes rather than fancy storytelling.
- Crowded markets are pushing enterprise customers to seek out outcomes data as a way to differentiate players and evaluate value-for-investment.
- As outcomes data becomes a moat and a customer draw-in, investors are seeking out companies that can demonstrate efficacy early – making outcomes data more central to fundraising conversations… and at earlier stages.
AI drove a record share of funding. While not exactly too surprising, AI-enabled companies captured 40% of Q1’s funding total ($1.1B across 45 deals), compared to 33% of 2023’s funding pot and 29% of 2022’s.
- As AI energizes the sector, it isn’t too hard to follow the funding to the areas with the most perceived promise: scribing, precision medicine, and care enablement.
- Abridge raised a colossal $150M Series C, AI precision health company Zephyr AI landed a $111M Series A, and a suite of high flying startups landed huge rounds, including Ambience Healthcare ($70M), Fabric ($60M), and Codametrix ($40M).
The last theme is familiar: creative fundraising continues to be a crowd favorite, especially as public market delistings cause investors to rethink their exit potential.
- Nearly half (48%) of Q1’s funding rounds were unlabeled, compared to 44% of all transactions in 2023.
- Founders are going above and beyond to entice investors with more upside in the event of an exit, as seen with Transcarent structuring its $125M Series D to offer funders 2.5x their investment should the company M&A or IPO.
The Takeaway
Expectations have been reset for digital health startups, causing them to evolve their strategies and reorient around different metrics of success (strong outcomes / margins vs. high projected growth). These expectations are undoubtedly higher than they were during the pandemic era of loose capital, but that’s probably not a bad thing for a sector that’s still striving for maturity.
