As venture-backed businesses raised $14.7 million in the first six months of 2018, digital health funding continues to break new records. A new report from Venture firm Rock Health shows that this amount exceeds the total venture financing raised in 2020. New digital health technologies have been adopted because of the Covid-19 pandemic. The first quarter 2021 venture funding record was $6.7 billion. Rock Health’s CEO Bill Evans stated that he was not surprised by the significant increase in venture funding but consistent with previous years. Evans said that Evans witnessed a steady increase in pace and an increase in the size of each round. This translated into an average of 11 digital health deals each week totaling $548 Million.
The report states that there have been 48 megadeals in 2018 totaling more than $100 million. Bloomberg reported that Noom, the weight loss app, raised $540 million in May to raise $3.7 billion. Ro, a virtual pharmacy startup and primary care provider, was second at $500 million with a valuation of $5billion. Intro (an AI drug discovery firm) came in third at $400 million with its round. Evans says these mega-rounds with multi-billion-dollar valuations were not possible a few years back. However, this is because the sector was still young. In the early stages of growth, there was a boom in digital health startups. These companies are now reaching later-stage growth by raising C and D rounds. He says, “It takes a lot to take a functioning and productive business and scale it.”
Reid Hoffman, a co-founder and CEO of Linkedin invented the term “blitzscaling,” a key concept in the current market. Evans explained that Evans’ idea was to “out-scale the competition” and that competition drives competition. The best example of this approach today is Tiger Global, the giant investment firm that “blitz-funded” 14 deals in digital health, totaling $1.8 million, according to Rock Health’s analysis. VirtaHealth, Cedar, and Rightway are Tiger’s investments – all companies valued at over a million dollars.
Rock Health predicts that there will be more M&A activity in the future, despite the steady rise in funding rounds and valuations. Evans states that while many companies were founded, they may not scale as well as they would in a larger consolidated group. The average digital health acquisition per month in 2021 was 22, almost double the average monthly rate last year.
Evans states that although there has been an incredible increase in digital health funding over this past year, there are still many growth opportunities. The U.S. healthcare budget is approximately 19% of GDP at $3.9 trillion. The digital health sector accounted for around 9% of venture capital dollars in 2020. This figure is well below the healthcare share of the economy. He said, “I don’t believe we’re putting too many dollars” However, it remains to see if the capital flood is being utilized effectively. Only time will tell. He said that funding streams are a rational, competitive move in this market stage for companies.
A rise in company exits is also evident, mainly as prominent purpose acquisition corporations or SPACs offer alternative IPO routes. Eleven digital healthcare companies have already exited this year with six IPOs and five completed SPAC mergers. Additional 11 SPAC mergers are expected to close by year’s end.
While the momentum will continue for the remainder of the year, Evans says that this era with accelerated fundraising and sky-high valuations may eventually slow down. “This market is going to rationalize and eventually come down,” he said. It will then be easier to determine which digital health companies can justify their valuations. Revenue and customer growth are what separates winners from losers. He also said that the most vulnerable companies in the following digital health investment season would be those at the earlier stages who were valued too high.