Rock Health’s 2023 digital health funding numbers are in, and although they’re every bit as bleak as expected, there were some silver linings that could bode well for the year ahead.
Here’s 2023 by the numbers:
- US digital health funding totaled $10.7B across 492 rounds ($21M average)
- Q4 funding totaled $1.9B across 122 rounds (lowest quarterly total since Q3 2019)
- Unlabeled rounds accounted for a record 44% of annual total
- Surprisingly no pronounced spike in startup shutdowns
Last year’s $10.7B funding total was the lowest seen since 2019, but Rock Health points out that the real story often gets missed by the headline number. (Chart: Funding Trend)
- Most startups tend to raise every 12-18 months, however Rock Health’s database shows that 81% of US digital health startups that raised in 2021 or earlier haven’t closed a subsequent labeled round.
- Silent rounds (quiet raises from existing investors), Series extensions, and unlabeled rounds appear to have been the tools of choice to stay afloat.
Rock Health’s predictions for 2024
- Labeled raises will return – The startups that extended their runway with creative financing will need to produce proven outcomes data or showcase new products to keep investors interested. This year will separate the best from the rest, and the latter group will be looking at adjusted valuations (down rounds) or restructured cap tables.
- M&A pace will accelerate – 2023 failed to produce the uptick in M&A that was expected to be brought on by attractive valuations, due in part to “higher for longer” interest rates and market volatility. In 2024, getting acquired will start to look like the best path for startups struggling on the fundraising front. (Chart: M&A Trend)
- The public market cohort will recalibrate – After a year without a single digital health public exit, we should see a few of the late-stage players that delayed their listing to wait out market choppiness finally take the plunge, especially those with strong financials. (Chart: Digital Health Exits)
The Takeaway
While last year definitely delivered on “financial creativity” from nimble founders, the transition period can’t last forever, and Rock Health expects some startups will have to face the music in 2024 (i.e. raise at a reduced valuation, seek an acquisition, call it quits). Those are tough decisions to make, but the silver lining is that they’re also the decisions that will strengthen the sector in the long run (i.e. smaller cohort of stronger companies, platform synergies unlocked through M&A, and a more successful IPO class).
