Healthy Profits Await Investors in Digital Health Tech

Given the whirl of investments we’ve seen in the digital health tech space, it looks like 2021 may prove to be a crowning point of opportunity for innovators and entrepreneurs.

Investor interest in digital health tech has continued to grow, both in total funding and average deal size. The COVID-19 crisis only added to the investment frenzy in 2020, which saw a record-breaking $10.2 billion year-end funding in health tech.

Q1 of 2021 was the most funded quarter in the digital health space, with $6.7 billion in investments. Deal sizes increased from $31.7 million in 2020 to $45.9 million. In this quarter, ten SPAC deals presented startups new paths to liquidity.

Growing deal sizes, a faster funding pace and new exit pathways have amplified the opportunities to enter, invest and collaborate in the digital health market.

Where are health tech investors putting their money?

Over the years,funding across the different segments of health tech has shifted. The pandemic helped proliferate the care-delivery category and segments like remote patient support, which picked up nearly half of the digital health funding. At-home diagnostics, precision medicine, clinical trial solutions and digital pharmacies have also grown over the years.

The increase in care-delivery funding has taken a bite out of other segments, such as wellness and disease prevention, finance and operations. According to McKinsey, these shifts may signal “greater venture capital appetite for the often payer-oriented business models adopted by care-delivery companies versus the consumer-oriented focus of wellness and disease-prevention firms.”

In the first quarter of 2021, on-demand healthcare services received the most funding with $1.2 billion across 17 deals. The second most funded segment was research and development with $1.1 billion across 13 deals, followed by population health management with $847 million across 12 deals. 

There was also increased investor activity for companies supporting specific clinical issues, such as mental health, musculoskeletal and gastrointestinal. Of these, mental health companies raised the most money, including Lyra Health ($187M), BetterUp ($125M) and Ginger ($100M).

Health tech mega-deals

The record-breaking first quarter of 2021 was fueled by 25 mega-deals of $100+ million each, which made up 66% of the total funding in digital health. Compared to a total of 14 mega deals in Q1 and Q2 of 2020, this was a significant increase.

Startups have also shortened the path to mega deals from 12 years in 2017 to just six years in Q1 of 2021. Targeted drug discovery and development company Valo Health raised two mega deals this quarter within 1.5 years of founding. The shortened time to bigger funding rounds is a big shift in an industry known for long enterprise sales cycles.

Other mega deals of this period included Clarify, Unite Us, Strive Health and Insitro, which together amounted to $850 million in raised capital or 12% of the total funding of Q1 of 2021.

Bigger deals. Faster funding.

Startups are not only making a beeline for mega-deals, they’re also shortening the time between rounds. In the last year, 55 startups have raised at least two venture rounds. 

Deal sizes across all stages have also increased in the past four years. Series A rounds grew 60% from 2017 to Q1 of 2021, Series B 32% and Series C nearly 34%. 

Along with innovative health tech products, the digital health space is seeing an equally impressive number of support applications, from regulatory compliance to digital patient record integration to pharmacy services.

A safe way out with SPACs

The digital health sector is also seeing an increased number of special purpose acquisition companies (SPACs) providing health tech startups an alternate path to going public compared to a traditional IPO. SPACs are shell companies that raise cash and invest the funds to acquire or merge with a startup that is likely privately held and venture-backed.

The startup gains liquidity by sidestepping the lengthy IPO process and exposure to market volatility. The liquidity generated by SPACs can also encourage venture firms to continue investing in health tech.

The first quarter of 2021 saw an impressive ten digital health SPAC deals closed or announced, including Hims&Hers, Butterfly Network, Talkspace, Uphealth, Cloudbreak, 23andMe, Sema4, Sharecare, Owlet, QuantumSi, and DocGo.

While it remains to be seen whether the boom created by SPACs will be long lasting, there’s increased momentum for change in healthcare and entrepreneurs and investors are capitalizing on it. But in its current state, digital health players need to get their bearing to remain agile and act decisively.