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Digital Health Investments on Track to Surpass 2017

July 6, 2018
by Heather Landi
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Digital health venture funding in the first half of 2018 totaled $3.4 billion, and if funding continues at this pace, 2018 will surpass 2017 for both dollars raised and number of investments, according to Rock Health’s mid-year report.

From January 1 through June 30, 2018, 193 digital health deals closed. According to San Francisco-based Rock Health, investors are betting on more companies with larger deals rather than concentrating capital in fewer startups. Consequently, the average deal size significantly increased to a record $17.9 million in the first half of 2018.

At the current pace, Rock Health estimates that digital health funding could top $6.9 billion by the end of 2018, with an estimated 386 deals, far outpacing 2017’s $5.6 billion in total investments.

By mid-year 2017, there had been 188 digital health deals totaling $3.5 billion, a record-setting first half. Digital health funding in 2017 closed out with 352 deals, according to Rock Health's 2017 year-end report.

“On the heels of last year’s record funding for digital health startups, venture dollars continue to flow into the sector at unprecedented levels. The continued upward trajectory of the first half of 2018 is not a fluke. Rather, two forces are at work: First, this sustained growth is indicative of the maturation one would expect from a stable, emerging investment sector. Digital health is increasingly defined by stalwart, repeat investors and a cohort of emerging, dominant companies backed by larger, later-stage funding rounds. Second, venture investors (across all sectors, including digital health) are deploying capital at the fastest pace since 2006,” the report authors wrote.

Rock Health notes that as the digital health space matures, more later stage companies are raising sizable rounds. In the first half of this year, four companies raised mega deals over $100 million. Collectively, these deals represent about one-fifth of total funding so far in 2018, and were all raised by companies in the Bay Area, the report states.

Among the mega deals were HeartFlow raising $240 million in series E funding; Helix raising $200 million in a series B funding round; Collective Health raised $110 million in series D funding and Livongo raised $105 million.

Rock Health notes that across almost every stage, the average deal size has increased since last year. Additionally, the percentage of seed stage deals contracted from 23 percent in 2017 to 21 percent in H1 2018, while the number of B rounds grew.

In its analysis of the market, Rock Health investors also note that digital health companies are increasingly hitting validation milestones and are being rewarded by investors for it. The report cites examples such as Virta, which released one-year results from its clinical trial, raised $45 million in Series B funding, and Propeller Health raised $20 million in the second quarter to expand its longstanding commitment to clinical research.

“More companies are pursuing validation at an earlier stage and investors have elevated their expectations, creating a competitive environment based not on hype, but on proven outcomes,” the report authors note.

The digital health space also is attracting repeat investors. Since 2016, there have been more repeat investors than new investors in digital health, and the spread between the two is growing, according to the report.

Sixty-two percent of investors in H1 2018 had already participated in at least one digital health deal since 2011; last year, repeat investors represented 51 percent of total investors.

Overall, M&A activity during H1 2018 is on-pace with 2017 with 60 disclosed digital health acquisitions. The sector is still down from the height of 2015, but Rock Health investors note that this isn’t unique to digital health.

An IPO drought has persisted since 2016 when iRhythm Technologies went public on October 20, the report states.” The drought, however, is not due to a shortage of highly-capitalized companies. Historically, digital health companies have averaged $136M in funding from venture capitalists before going public—and there are currently 13 private digital health companies that have raised over $200M since 2011 that are still active today. But with greater access to capital, companies are staying private longer (for a median of 8.2 years, across all sectors),” the authors wrote.

Examining other trends, the report notes that with national attention turning to mental health issues, technology-driven behavioral health solutions have received more funding than ever. Behavioral health startups received more funding this half than in any prior six-month period, with a cumulative $273 million for 15 unique companies (nearly double the $137 million closed in H1 2016, the previous record half for funding of behavioral health companies). Of these 15 companies, more than half have a virtual or on-demand component.

“We expect the momentum of the first half of the year to carry throughout 2018. Venture investment is on pace for another record-breaking year in terms of total funding, number of deals, and average deal size. With a robust and well-capitalized startup pipeline, and new enterprise entrants with big ambitions to grow their healthcare capabilities, we anticipate more exits in the near future,” the report authors wrote.

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