In 2020 and 2021, investors took risks amid low interest rates and there was a colossal influx of investment dollars into startups. They were willing to pay more at high valuations to get a piece of innovative healthcare companies. Now all that has changed. In fact, the healthcare sector experienced an acute slowdown in investment last year.
The investment slowdown was so severe that the fourth quarter of 2022 marked the lowest quarterly digital health funding total -$3.4 billion — in the past five years. It is according to a report published Tuesday by research and data company CB insight. Q4 was also the first quarter with no new unicorns since 2018.
Digital health total funding in 2022 was $25.9 billion, down 57% from 2021’s record high of $59.7 billion. Total funding fell each quarter, with Q4’s $3.4 billion being the lowest. Last year’s nearly $26 billion in digital health financing was spread across 2,122 deals, down 33% from 3,160 deals the year before.
Still, there were a few bright spots. Three companies were able to complete funding rounds totaling more than $100 million in Q4. DispatchHealth, Komodo health and Tiredness raised 259 million dollars, 200 million dollars and 112 million dollarsrespectively.
Of the 2,122 digital health deals that took place last year, nearly 300 fell under the category of mental health technology, an area of the digital health sector that saw a megaboom of funding during the pandemic. However, funding for mental health technology fell by 53% in 2022. In addition, the average deal size in the mental health field fell by 44% last year – it was $10.4 million, down from $18.6 million in 2021.
However, there are still a few companies that stood out in the mental health technology space from a funding perspective. E.g, Stomach clinic raised 90 million dollars in series E financing in the 4th quarter. The next two largest collections of the quarter came from Valera health and Brave healthwho traveled 45 million dollars and 40 million dollarsrespectively.
Another target that fell sharply in 2022 was the number of global initial public offerings in the digital health space. IPOs fell from 81 in 2021 to just 14 last year. Exits from specialty buyouts also fell year-on-year, from 18 to four.
Digital healthcare IPOs were so scarce last year that the US only saw one – a medical device maker Cardiac testing laboratories announced his 6.4 million dollars IPO in June. The US was also home to only one SPAC exit, which came from Mind Interactive Labs January last year. The digital therapeutic technology company inked a $1 billion reverse merger deal with a SPAC called Social Capital Suvretta Holdings.
U.S.-based digital health investments are still largely in the same geographies, according to the report. Nearly two-thirds of the country’s $17.7 billion in digital health investment by 2022 was pumped into startups based in Silicon Valley, New York and Boston. As much as 5.6 billion dollars went to Silicon Valley, while companies in New York and Boston received $2.8 billion and $2.7 billion, respectively.
Last year’s funding decline is not completely out of the blue – experts expected this is happening as a natural result of the investment frenzy that took place in 2020 and 2021. Macroeconomic trends and a change in the pandemic phase are also contributing factors to the decline in investment. Interest in telehealth has waned and the economy is on the decline. This new fundraising environment will make it more difficult for some startups to secure capital and increase their valuations. But smart startups could have seen this coming, according to the report.
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