Dive Brief:

• Investors continued to pour venture dollars into digital health companies in the first half of 2019, and the annual pace may top 2018's peak funding total, a new report from Rock Health projects. Yet even with record levels of funds flowing in, the digital health sector is not in a bubble, the analysis concludes.
• There is $29.4 billion in active venture capital that has been invested in digital health startups since 2011, Rock Health calculated. The rekindled IPO market for digital health companies will provide an exit opportunity for capital invested in some of the most mature startups. 
• About 30% of the fresh investment in the sector in the first half of 2019 went into large deals worth $100 million or more, according to the report. In all, digital health companies raised a total of $4.2 billion in 180 deals during the six-month period.

Dive Insight:

The maturing digital health investment environment remains robust, according to Rock Health's research. There are a number of digital health IPOs on the horizon, with recent activity from Livongo, Health Catalyst, Change Healthcare and Phreesia.

M&A has otherwise been the exit route offering liquidity for digital health investors. There were 43 acquisitions in the first six months of 2019. If the pace continues for the rest of the year, there would be about 25% fewer mergers than in recent years, Rock Health said.

The investment pace so far in 2019 builds on the steady rise in funding to the sector seen since 2011. Experienced investors keep coming back to the sector, with 69% of those who invested in the first half being repeat investors. Rock Health expects this trend to continue.

The group expects acquisitions by large healthcare and non-healthcare companies to continue to be a major source of liquidity and returns for digital health investors. "Clear paths to an exit are what will ultimately justify and sustain investment in the digital technologies transforming our healthcare industry," the report said.

Rock Health does not foresee formation of an investment bubble forming, which it defines as an investment cycle in which asset prices rise beyond and decouple from what business fundamentals justify. Investment bubbles share six attributes: hype exceeding fundamentals, high cash burn rates, high valuations, a surge of new cash invested, fraud, and unclear exit pathways.

Digital health startups, like other young companies outside of healthcare, are raising historically large funding rounds, Rock Health said. The median size of a Series A digital health deal is $10 million so far this year, up 11% from the $9 million median in 2018 and two times the median Series A investment in 2011. Series B deals have experienced similar growth, with the median of $17 million this year at 2.1 times the median Series B deal in 2011.

Investors in general have learned from past mistakes and continue to fund startups with business-to-business models, the report said. The researchers found 87% of funded digital health companies in the first half of 2019 sell to enterprises such as employers, payers, providers and others that hold the purse strings in U.S. healthcare.