The numbers are in. After a record shattering year for digital health funding in 2021, the latest Rock Health venture recap shows that the sector’s frothiness has officially turned to a fade, which might actually be good news for opportunistic startups.
First things first, digital health funding totaled $10.3B across 329 rounds in H1 2022, placing it on a trajectory to end the year significantly lower than 2021’s $29.1B. As the broader market plummeted in response to recession worries and global conflict, digital health companies weren’t immune, resulting in a full year funding projection of $21B.
- Rock Health is quick to point out that “there are two sides to every (market) story.” While this year’s funding will likely fall far short of last year, it’s still on track to outpace 2020’s $14.7B, representing an important return to long-term growth and supporting the view that digital health is a sustainable investment sector.
The slowdown impacted nearly every corner of the digital health market. Series B round sizes declined by an average of 25% in the first half of the year, while Series C and D+ rounds fell by 22% and 12%, respectively. The one bright spot was early-stage startups unburdened by an outdated sky-high valuation, with the average Series A size of $18M staying on par with 2021.
- We’ve covered this often but it’s worth restating here: companies prioritizing growth-at-all-costs over a sustainably profitable business model are struggling in the current funding environment. As investors re-evaluate future revenue with a less favorable outlook, not a single digital health company decided the timing was right to go public in H1 2022, down from 23 in 2021.
The most-funded clinical area defended its title once again, with mental health startups bringing in $1.3B during H1 2022 on the back of a huge round from Lyra Health ($235M). This chart gives a full breakdown of the top clinical indications.
- The value propositions that attracted the most investment were research and development at $1.6B, followed-by on-demand healthcare and disease monitoring each bringing in $1.4B. Administrative / clinical workflow automation also saw large totals as health systems continue to build back up their worn down workforces.
Although the first half of the year brought a pullback in digital health funding, the return to a multi-year growth trend is a healthy sign for a sector that was overheating throughout 2021. This particular market moment gives companies a chance to tighten their belts and reorient towards a more fundamentals-driven direction, and we should start to see more differentiation and clinical rigor from the businesses that successfully navigate the transition.
Venture firm Rock Health recently published an interesting deep dive on the digital health adoption patterns of marginalized user groups that have carried a disproportionate amount of access disparities. The analysis was based on survey results from Rock Health’s latest Digital Health Consumer Adoption Survey of 7,980 US adults, which shed light on where digital health solutions are gaining traction, and where gaps still remain.
Rural households have one of the most persistent adoption gaps among all demographics, with rural respondents reporting lower rates of live video telemedicine use, wearable ownership, and digital tracking of health metrics… and not by a small margin. Rock Health found that rural residents trust health information from a doctor (88%) far more than from a website (52%), highlighting a need to invest in tools that empower rural providers.
- Startups working to solve these problems include Main Street Health, which pairs rural MA beneficiaries with local health navigators to coordinate chronic care needs, and Homeward Health, which designed its RPM platform to function on cellular networks to bypass the need for a broadband connection.
Medicaid’s 80M beneficiaries account for over $650B in annual health expenditure, and the fact that they use digital health tools at similar levels to the survey average seems to bust the myth that people with low incomes or disabilities won’t use health technologies.
- Recent raises from startups like Waymark ($45M) and Clinify Health ($3.1M) have helped support Medicaid care hubs like Federally Qualified Health Centers, and Rock Health expects more innovation to be targeted at these community-based networks.
Women of color reported significantly lower satisfaction with digital health tools than women who identified as white, despite their strong adoption across all modalities. Although the survey didn’t explore the “why” behind the satisfaction levels, Rock Health believes that they may relate to disconnects between product design and the communities using the solutions.
- Several startups have begun co-designing solutions with their communities to mitigate these satisfaction breakdowns, including Radical Health (online peer support for navigating healthcare journeys) and Grapevine Health (community-created health content that’s then distributed at scale).
LGBQA+ and transgender patients report some of the highest levels of discrimination in health settings, and their sky-high digital health utilization serves as a proxy for lack of trust in traditional care. Rock Health found that 85% of transgender respondents and 33% of LGBQA+ respondents delayed medical care in 2021, and several solutions are entering the market to ensure that care gap doesn’t persist.
- Startups supporting queer and transgender patients raised a record $311M in 2021, including Folx, which raised $25M to expand its virtual clinical services, and Plume, which raised $14M to help deliver holistic gender-affirming care to anyone who needs it.
Pandemic-fueled digital health adoption and regulatory changes have brought a wave of new entrants and climbing valuations, but a cloudy macroeconomic outlook has caused many to wonder when the music will stop playing. Digital health venture firm Rock Health recently published its thoughts on whether digital health is in an investment bubble, providing a framework for innovators to assess their individual bubble risk to help navigate a downturn.
Is digital health in an investment bubble? Rock Health assesses “bubbliness” with a six point rubric based on analysis of past bubbles. The rubric currently indicates that digital health is not in an investment bubble, but has more valuation risk than in the past.
To assess the bubble risk of an individual segment, Rock Health maps the segment’s market infrastructure (tech stack, regulatory framework, business models) to its market traction (adoption, outcomes, integration). The resulting framework (pictured here) lets companies plan different bubble strategies depending on their quadrant.
- “Early days” startups have emerging market infrastructures and limited market adoption, giving them long growth runways but only if they can put in place mission-critical infrastructure pieces (scalable tech, sustainable business models). Example: VR therapeutics
- “Disequilibrium” companies have high market traction that outpaces the maturity of the market infrastructure, creating the need to partner with companies that fortify this infrastructure with complementary assets (regulatory expertise, foothold in adjacent markets). Example: Consumer genetic testing
- “Niche” companies have limited traction despite a mature market infrastructure, and Rock Health suggests that they should expand the types of customers they target in order to secure more stable (bubble-proof) revenue. Example: Personal health records
- “Established” companies have a high degree of market traction and a mature market infrastructure, so continued growth hinges on expanding into novel use cases and investing in technology that reduces the chance of commoditization (cloud/AI, reimbursement mechanisms). Example: Telemedicine
Rock Health’s current stance is that “digital health is not in an investment bubble, but it is frothy.” That said, the report’s true call-to-action applies regardless of whether or not we’re in a bubble: now is the time for companies to evaluate their bubble risk and put a plan into place to prepare for whatever the market brings in the future.
Regular Digital Health Wire readers could probably guess that 2021 was a spectacular year for digital health funding, and Rock Health’s latest full-year report confirms that investment in the space topped even the most bullish expectations.
- Total funding for US digital health startups climbed to $29.1B across 729 investments, nearly doubling 2020’s former record of $14.9B. The growth was shaped by 88 different $100M+ rounds combining for $16.6B, including four of the largest digital health raises of the decade: Noom ($540M), Ro ($500M), Mindbody ($500M), and Commure ($500M). [Chart 1]
- M&A activity grew at a similarly breakneck pace, with 272 M&A moves easily eclipsing 2020’s total of 146. Last year also saw a record 23 companies go public through either SPAC mergers (15) or IPOs (8), shattering the previous record of 8 exits set in 2020. [Chart 2]
- The most funded value propositions of the year included R&D catalysts such as decentralized trials ($5.8B) and on-demand healthcare ($4.5B). Healthcare marketplaces were among the fastest growing segments, with 3.2x funding growth driven by D2C marketplaces like Mindbody and caregiver marketplaces like Honor. [Chart 3]
- Mental healthcare was the most popular clinical indication among investors ($5.1B), raising $3.3B more than any other clinical focus. Outside of the pandemic’s less-than-stellar impact on many people’s mental health, this area has seen a funding frenzy due to the rise of virtual behavioral health platforms such as Lyra Health and NOCD. [Chart 4]
Despite last year’s record breaking digital health funding, Rock Health’s view on the market was that it “wasn’t an across-the-board bubble, but it wasn’t placid water either.” Many companies are exceeding pre-pandemic projections by wide margins, and it’s possible that historical digital health benchmarks are too low, as opposed to today’s valuations being too high. If these companies can find a way to sustain their momentum beyond the pandemic, there’s a chance we could see a repeat performance in 2022.
While we publish new telehealth trends virtually every week, Rock Health consistently adds more color to these stories with its deep dives into funding and consumer preferences. Its latest research in collaboration with the Stanford Center of Digital Health is no exception.
Rock Health’s annual Digital Health Consumer Adoption Survey of 8,000+ US adults sheds more light on self-reported digital health behaviors, exploring three core insights with plenty of charts included for the visual learners:
INSIGHT #1: Future care models will increasingly integrate asynchronous modalities. (Chart 1)
- 51% of this year’s respondents have used live video telemedicine, making it the most used modality over audio-only or text-based care.
- Rock Health predicts that asynchronous non-video modalities will gain popularity because they enhance clinician efficiency and enable proactive continuous care
INSIGHT #2: Telehealth satisfaction remains high but is trending downward. (Chart 2)
- 43% reported greater satisfaction with live video calls compared to in-person care, down from 53% in last year’s survey.
- The authors attribute the decline to the changing expectations around telemedicine as an alternative to care, rather than as a needed replacement.
INSIGHT #3: High telemedicine adoption skews towards the young and wealthy. (Chart 3)
- Telemedicine adoption is highest among high income patients aged 18-44, underscoring gaps related to broadband access, device ownership, and digital literacy.
- To address these gaps, Rock Health suggests that innovators understand the population they’re building for, and what factors drive that group’s adoption.
Telemedicine’s Path Forward
The survey suggests that telemedicine is beginning to focus on personalized treatments that address the nuanced needs of individuals, serving as a tool for care rather than a business model. Rock Health holds an optimistic view about the future of telemedicine, and with more scalable and equitable solutions hitting the market every day, that’s a safe stance to take.
With three months left in 2021, digital health funding has reached a staggering total of $21.3b across 541 deals.
To put that number into perspective, last year was the first year that total digital health funding surpassed $10b, and 2019’s total was a small-by-comparison $7.9b.
These figures are from Rock Health’s Q3 2021 Digital Health Funding Report, which analyzed how 2021’s financing boom is shifting market expectations and creating a landscape that’s ripe for consolidation.
Funding themes remained similar to prior years, with investors focusing on value propositions such as R&D software and clinical indications like mental health. R&D funding was lifted by mega rounds from XtalPi ($400m) and Reify Health ($220m), while mental health services saw an influx of capital at Spring Health ($190m) and SonderMind ($150m).
Most funded value propositions:
- R&D catalysts ($4.7b)
- On-demand healthcare ($3.4b)
- Treatment of disease ($3.1b)
- Fitness & wellness ($2.9b)
- Non-clinical workflow ($2.1b)
- Consumer health information ($2.0b)
Most funded clinical indications:
- Mental health ($3.1b)
- Cardiovascular disease ($1.4b)
- Diabetes ($1.4b)
- Primary care ($1.4b)
- Oncology ($1.2b)
- Substance use disorder ($793m)
This year’s unprecedented funding signals that investors are betting on a continued surge in healthcare innovation, but the wave of new entrants is creating a clutter of digital health options for patients and providers. As the market begins to call for more unified offerings, companies are turning to M&A for the answer.
The 216 digital health M&A deals through the first three quarters of the year have already eclipsed the 146 deals in 2020. Companies like Headspace and Ginger have combined to vertically integrate their solutions to provide their user base with a deeper well of resources. Other deals, like K Health’s recent Trusst acquisition, are focusing on horizontal integration to serve multiple channels with a single tech interface.
Regardless of the strategy, the rate of the dealmaking is causing many to wonder if company valuations can continue rising at the same pace for much longer, but for now it seems like we could be in the early innings of another record breaking Q4.
Digital health venture fund and advisory team Rock Health recently published an excellent blog post outlining what they call healthcare’s “middle children,” defined as large-but-not-huge companies that should be eyeing expansion into healthcare.
The authors argue that these middle children have distinct competitive advantages over the cohort of technology giants that have recently been pursuing the healthcare space, which include the likes of Amazon, Alphabet, and Apple.
- Middle children with market capitalizations between $10b and $350b are large enough to make an impact in healthcare, but small enough to avoid the scrutiny of massive players. They are often consumer-facing, with business lines that could pivot towards a healthcare use case (picture Lululemon’s acquisition of Mirror).
- Larger middle children have deep pockets and talents pools (Salesforce, Nike), with the capabilities to pursue large healthcare goals.
- Smaller middle children have more specialized capabilities (Garmin, Airbnb), that could help with solving more focused problems.
Middle Children Advantages
- Smaller healthcare goals are big enough for middle children to pursue for growth, whereas much larger companies need loftier projects to warrant market expansion.
- Loyal customer bases can be activated by middle children to establish initial users while avoiding the regulatory attention quickly drawn by larger competitors.
- Specialized assets from middle children, such as logistics expertise or data analytics, can provide a competitive edge in healthcare.
Potential Middle Children Plays
- Blizzard could passively monitor behavioral health conditions for children playing its games
- Paypal could integrate Health Savings Accounts to help users manage healthcare spending
- Hello Fresh could offer health insights and recommend food products for delivery
Gaining share within the $3.5t US healthcare market is a powerful motivator for any company looking to pursue a strategy shift, but even consumer-favorite brands will need humility to navigate the complex and quickly evolving environment.
Although middle children don’t specialize in the sector, Rock Health makes a solid case that they might be some of the best-positioned companies for healthcare disruption, and I wouldn’t be surprised if we’re reading about some of the plays listed in this blog post in next year’s business news.