Digital health investment slows as investors dwindle

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Digital health startups in the United States have seen a decline in funding, with the sector on track for its lowest funding year since 2019, according to the latest quarterly report by Rock Health.

The decline in funding follows a significant boom in 2021, when U.S. digital health startups raised $29.1 billion across 737 deals.

In the first half of 2023, startups managed to raise $6.1 billion through 244 deals, with an average deal size of nearly $25 million. 

However, the number of investors participating in digital health funding rounds fell to 555 investors joining in the first six months of 2023, compared to 775 during the same period last year. 

Despite this trend, there are still some notable exceptions, as 12 mega-deals worth $100 million or more were made.

The report cautioned that if funding activity in the second half of the year continues at the same rate as the first half of 2023, digital health fundraising is on track for the worst performance since 2019.

WHAT'S THE IMPACT?

The slowdown could have an impact on investment in digital health firms specializing in artificial intelligence technology, which has been heralded as a potentially revolutionizing force in healthcare IT. 

The report noted in fact that some digital health startups are gaining second lives through asset acquisitions and relaunches, including Transcarent's purchase of 98point6's AI-powered virtual care platform and care business.

Dr. Harvey Castro points out that, while AI holds a lot of promise for revolutionizing various aspects of healthcare, there is the risk of an "AI bubble" if the rush of funding towards AI-centric health technology companies becomes too overheated.

"The AI bubble in healthcare could take several forms. Firstly, overinvestment in AI startups could lead to an oversupply of AI solutions, not all of which may be viable or beneficial," he said. "There could be an overemphasis on AI for its own sake without adequate consideration of whether the technology is being applied to improve healthcare outcomes genuinely."

Moreover, excessive investment in AI could lead to inflated valuations of AI health tech startups, which may not be sustainable in the long term.

"If these inflated expectations are not met, this could cause a crash in valuations and lead to significant financial losses for investors," Castro said. 

THE LARGER TREND 

A slowdown in digital health investment could decrease pure plays in digital health, Castro cautioned, but sees the investment climate improving again following the presidential election in 2024. 

He added overinvestment in any area – including AI – could lead to market distortions and long-term sustainability issues.

"The health tech sector must continue fostering a diverse ecosystem of solutions best to meet healthcare challenges and needs," he said. 

Meanwhile, a report from PricewaterhouseCoopers sounded an optimistic note over the outlook for health services deals for the remainder of the year.

Both corporate and private equity players are holding onto large chunks of capital that need to be deployed, and sector dynamics are driving a need for health services companies to adapt and reinvent themselves.