Dive brief:

• Digital health funding surpassed the previous annual high of $4.6 billion in 2015, reaching $4.7 billion in the 2017 third quarter, according to a new Rock Health report. Q3 funding totaled $1.2 billion on 74 deals.
• The digital health sector is also on track to have a record-breaking number of deals in 2017 with 268 transactions across 261 companies at Q3’s end versus 240 deals by the same time a year ago.
• Of the 74 companies funded in the quarter, 16% have female CEOs, up from 11% in the first half of the year.

Dive insight:

The Q3 results, while strong, didn't match a record-shattering second quarter that pushed digital health funding to $3.5 billion in 188 deals in the first six months of the year.

While there were a number of megadeals in the first half of the year, only 23andMe claimed one in the third quarter, securing a $250 million funding round led by Sequoia Capital. The next largest deal was for Tempus, which snagged $70 million in a Series C round led by New Enterprise Associations and Revolution Growth, the report notes.

Top funding categories are consumer health information, personal health tools and tracking, healthcare consumer engagement, digital gym equipment, EHR/clinical workflow and digital therapies.

The report also notes a continued shift from a B2C to B2B business model in digital health. According to a recent Rock health survey, just 14% of digital health startups are B2C. Of companies that started as B2C, 61% made the switch to B2B or B2B2C.

Despite major investments in the sector, 2017 has trailed recent years in IPOs and mergers and acquisitions with no IPOs and just 83 deals this year. By contrast, there were 112 digital health M&A deals by the close of Q3 2016 and 146 at the 2015 Q3 mark.

“One can certainly argue digital health is still in its infancy, and the prime exits are yet to come,” the report says. “We will be keeping an eye on whether the slowdown in exit activity has an impact on future investor excitement in the space.”

While much of focus on digital health is on venture capital, many potential buyers are adopting a wait-and-see stance, Dan Farrell, a partner at PriceWaterhouseCoopers, told Healthcare Dive earlier this year. “There’s a lot of players in this sector right now all racing to come up with a better mousetrap,” he said. “Those companies that are able to show the value, prove it and demonstrate that they can control healthcare costs — those will be the winners.”