Tag: rock health

The end of Q3 means it’s time for another digital health funding wrap-up from our friends over at Rock Health, and many of you can probably guess how the numbers looked:

• Total Q3 funding plunged 48% to $2.2B, the lowest quarterly amount since Q4 2019.

The low total puts us on pace for less than half of last year’s $29.2B haul, but the full story isn’t as grim as it sounds. Smaller round sizes, rather than fewer rounds, dragged down the overall number.

• Q3’s 125 deals only represented a 14% drop, but a newfound preference for early-stage startups caused the $100M+ mega-rounds to dry up completely with the exception of Cleerly ($223M Series C) and Alma ($130M Series D).

• Only six Series C or higher rounds took place during the third quarter, accounting for less than 5% of total funding volume. By comparison, Q2 saw 19 late-stage rounds and Q1 had 32.

Rock Health floats three explanations for the late-stage slowdown: 1) Many rounds were pulled forward to 2021 to strike while the iron was hot. 2) Other raises are taking place behind the scenes through round extensions or venture debt. 3) We’re in the middle of the biggest bear market in a decade… so some funding just isn’t happening.

The other major shift taking place with investors can be seen with the top funded value propositions and clinical indications.

• Value Props: Non-clinical workflow companies vaulted into first place ($1.8B YTD), suggesting that staffing shortages and employee burnout remain top priorities. 

• Clinical Indications: Digital mental health companies held on to the throne ($1.7B YTD), but oncology ($1B) and cardiovascular startups ($0.9B) have been gaining ground.

The Takeaway

It’s no surprise that this year’s public market correction is causing private market investors to hold out for smoother sailing, but if Rock Health’s Q3 report shows us one thing it’s that truly innovative startups will attract capital no matter how turbulent the macroeconomic waters. Rock Health also left us with an important reminder that “rational prices promote long-term market health and, if anything, diminish near-term worries.”

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.

The Takeaway

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

The Takeaway

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.