Investments in digital health startups totaled $8.1 billion in 2018, a record year that marked a 42 percent increase over 2017’s total, according to a report released this week by Rock Health. But the report’s authors say it’s unlikely that venture capital investments in digital health, an area that encompasses the use of software and technology to try to improve care and lower costs, will continue growing at such a brisk pace.
“We wouldn’t be surprised to see venture funding for digital health flatten somewhat over the next few years,” writes the team behind the report at San Francisco-based Rock Health, which tracks startup activity and venture funding in the healthcare technology sector.
Digital health startups received more than 9 percent of the estimated $73.7 billion worth of venture capital invested in the U.S. in 2018, according to the report. That represented a larger slice of the VC pie than in 2017, when investments in digital health startups made up 7.5 percent of the $76 billion total tracked by Rock Health. (It’s worth noting that such VC data should be taken with a grain of salt because different groups come up with different numbers. For example, the Venture Monitor report from PitchBook and the National Venture Capital Association found that U.S. startups took in $130.9 billion in VC in 2018, while the MoneyTree Report from CB Insights and PwC pegged the 2018 total at $99.5 billion.)
One could point to attributes such as “unclear exit pathways” and “high cash burn rates” to argue that digital health is in a bubble, the report’s authors write. (If recent warnings about the sector being in a bubble are proven correct, the bursting of the bubble could be marked by a dramatic slowdown in investment activity and steep drop in company valuations.)
Rock Health’s team asserts digital health is not in a bubble, though. In the report, they write that “investors and entrepreneurs are pursuing new and sustainable paths to revenue and scale.” They anticipate a “tighter” market in 2019 for both digital health startups and the overall early-stage business community. That presumably means market conditions will make it harder to raise funding this year than in 2018 and other recent years.
According to the report, no digital health company held an initial public offering last year, which was also the case in 2017. An estimated 110 startups in the sector were acquired last year. That figure has declined each year since 2015, when there were 188 acquisitions of digital health companies, Rock Health says.
The report’s authors reiterated previous findings indicating that 2018 was shaping up to be an “entrepreneurs’ market.” Of the 368 venture investments digital health received last year, about half were seed or Series A rounds, Rock Health says. Since 2011, the number of months between when a startup raises a seed round and its Series A round has on average decreased by about 50 percent, according to the report. That may indicate that fewer digital health companies fall into the so-called “valley of death” than startups in other industries.
Another interesting finding in the report is that while the total amount of money invested in digital health startups rose significantly from 2017 to 2018, the number of investments increased by a comparatively modest 2.5 percent. That tracks somewhat with VC trends across all sectors, which have seen larger investments in fewer companies.
Among the large funding rounds in the digital health sector last year were: Devoted Health ($300 million), Butterfly Network ($250 million), HeartFlow ($240 million), Tempus ($110 million), Livongo Health ($105 million), Iora Health ($100 million), Welltok ($75 million), and Doctor On Demand ($74 million).
Last year was also notable for tech giants like Amazon (NASDAQ: [[ticker:AMZN]]) and Apple (NASDAQ: [[ticker:AAPL]]) moving deeper into digital health by introducing tools to process computerized health data more easily and help patients access their medical history, for example.
