Dive Brief:
- Global digital health funding slumped in the first quarter, falling 36% sequentially to its lowest level since 2020, according to a report by CB Insights. The decline was driven by a halving of the funding committed in $100 million-plus mega-rounds.
- Public markets felt the squeeze, too, with the number of IPOs falling 96%. Only one digital health company tracked by CB Insights completed an IPO in the first quarter, and no businesses went public via mergers with special purpose acquisition companies (SPACs).
- The data is directionally in line with the findings of an earlier report from Rock Health, which described how the drying up of deals in February and March may be an early sign of a correction in digital health venture capital funding.
Dive Insight:
The first quarter of 2022 was an unusually turbulent time, with the Russian invasion of Ukraine, supply and energy disruptions, and other factors combining to drive the Nasdaq stock market that is home to many publicly traded digital health companies down 9%. However, venture capitalist groups still have money to deploy from funds raised before the upheaval, potentially holding up private valuations, Evercore ISI analysts wrote in an April 7 research note.
CB Insights calculated that globally, digital health companies raised $10.4 billion across 653 deals in the first quarter. The funding figure is well down on the $16.2 billion raised in the fourth quarter of 2021, and the lowest haul by the sector since the third quarter of 2020.
In an April 4 report, Rock Health also noted a similar trend. It put U.S. digital health funding in the first quarter at $6 billion, compared to $7.3 billion in the fourth quarter of 2021.
According to Rock Health, the first quarter is typically fairly slow, with the $6.7 billion raised over the first three months of 2021 coming in below the quarterly average of $7.1 billion for the year, but the 2022 figure still stands out as being particularly low by recent standards. Rock Health attributed the sluggishness to the lack of deals in February and March. Across those two months, half of the total quarter haul was raised.
"This could be related to seasonality — February is a shorter month, and late-stage deals can skew monthly patterns — but this quarter’s monthly funding numbers may be early indicators of a digital health venture funding correction," Rock Health wrote.
CB Insights dug into the subsectors of the industry to explain the decline. The amount raised in $100 million-plus deals fell 52%, bringing down the proportion of global funding generated by mega-rounds. Mental health tech had a slow quarter, too, with funding falling 60% from the record set in the last quarter of 2021.
The exit routes available to investors who back digital health startups shifted in the quarter. Consolidation continued, with the 138 M&A deals tracked by CB Insights being in line with the prior period. The industry has now had seven consecutive quarters with more than 100 M&A deals.
CB Insights expects the trend to continue as "dominant players emerge in this fragmented market."
A lack of alternative exit routes could drive more M&A. In the fourth quarter, CB Insights saw 29 digital health companies go public, mostly via IPOs but in some cases via SPAC mergers. CB Insights reported just one IPO and no SPAC mergers in the first quarter.
The decline follows drops in the share prices of public firms. From July 1, 2021, to March 31, Rock Health’s index of digital health stocks fell 38%, versus a 5% dip in the S&P 500. Traditional healthcare stocks beat the S&P 500 over the same period.
