[Corrected 5/12/14, 11:15 am. See below.] Digital health funding is booming, but one of the most visible areas of the nascent field is looking a little tired.
Those were two of the messages brought to bear Friday by a gathering of entrepreneurs, financiers, and others at a half-day event hosted by law firm Fenwick & West. The incubator Rock Health, which also provides research and seed capital for the sector, said by its internal count digital health has attracted nearly $1.5 billion in funding in 2014, which makes the field almost certain to blow past its 2013 total of nearly $2 billion.
To put that in perspective, the Money Tree venture survey tallied biopharmaceutical funding in 2013 at $4.5 billion, medical device funding at $2.1 billion, and healthcare services at $286 million. There’s certainly some overlap in those numbers, as many digital health products incorporate devices, services, and drugs (or drug compliance) and could be counted in each category.
The types of companies and products being funded are broad, from back-end medical record software to disease analysis tools to personal fitness apps and devices. Despite news such as last fall’s $150 million acquisition of Austin, TX-based MapMyRun by apparel maker Under Armour (NYSE: [[ticker:UA]]), the fitness category attracted the most skepticism at Friday’s event. Good news has been overshadowed by Nike’s announcement last month that it pulled the plug on its FuelBand fitness-data bracelet, which was still top of mind for attendees. “The consumer stuff might be a wave that has passed,” said Asset Management Ventures partner Skip Fleshman, whose 50-year-old firm began looking at digital health five years ago. “There are so many wearables out there, we’re skeptical that people will actually pay [for them].”
“We’re interested in truly habit-forming mobile apps” that show clear evidence of use and revenues, said InterWest Partners general partner Nina Kjellson.
Even Rock Health, which serves as perhaps the sector’s biggest booster, tempered its outlook in the face of what chief strategy officer Malay Gandhi called “aggressive” pessimism from the press and public. “We see use [of wearables] within healthcare, but perhaps not personal use,” said Gandhi.
Overall, however, Gandhi’s numbers showed the area is attracting a deeper and broader pool of investors. Most of the 302 VCs or angels who participated in digital health deals in 2013 were “dabblers” in just one deal. But the number of investors who did three or more deals more than tripled, from eight in 2012 to 27 in 2013.
By Gandhi’s count, telecom firm Qualcomm’s venture team has been the busiest digital health investor since the start of 2011, with 15 deals of more than $2M. [An earlier version of this story misidentified the time range and Qualcomm’s deal count. We regret the error.] Others in double digit figures included Norwest Venture Partners, Kleiner Perkins Caufield & Byers, and the American drug giant Merck, which launched two venture funds in 2011 with a total of $500 million to invest. One of those funds is dedicated to digital health and other non-pharmaceutical investments.
There’s more money flowing into the space, which in Silicon Valley inevitably leads to the age-old parlor game: Who will exit next? With the $178 million IPO of healthcare software-as-a-service company Castlight Health (NYSE: [[ticker:CSLT]]) in March, attention at Friday’s event turned to the 10 private companies in the space that have raised an aggregate of $1.2 billion (and counting) in venture cash. (A thoroughly unscientific poll of attendees tabbed Practice Fusion, a maker of ad-supported electronic medical records, as the most likely to debut next.) But with the IPO window narrower now than it’s been for more than a year, and Castlight’s dreadful post-IPO performance casting a shadow, relief from exit pressures might not be so close at hand.
