Let’s discuss the bad news first. Rock Health‘s tracked funding for digital health startups and M&A this quarter was the second lowest quarter in funding since Q4 2019–an anemic $2.5 billion across 119 deals. (Q4 2019: $2.1 billion). Q3 2023 was almost identical to Q2’s $2.5 billion across 113 deals [TTA 11 July]. Year-to-date is now $8.6 billion raised across 365 deals. The past four of five quarters were all in the $2 billion funding range with deal numbers in the low hundreds.
If Q4 replicates Q3, 2023 in this Editor’s projection will wind up in the $11 billion range with under 500 deals. Year 2023 would find itself in a gulf between 2019’s total of $8.1 billion and 2020’s startling runup of $14.3 billion. Interestingly, Rock Health doesn’t go there as they used to in palmier times.
Here’s another depressing fact. If adjusting for inflation about 20%, in 2019 dollars the funding for Q3 would be about $2 billion, less than Q4 2019. In other words, 2023 looks like it will be a rerun of 2019, flat as a pancake, without a swan event on the horizon to pull everything up.
Getting back to Rock Health’s report, the reasons for funding staying in the horse latitude doldrums are understandably circular. Forecasting a slower economy wet blanketed by high interest rates leads to less capital raises. Less capital, less funding for startups, less IPO activity, lower portfolio valuations. Doing deals in this constrained environment requires, in Rock Health’s terms, ‘a more conservative mindset’ which further depresses funding. Unappetizing circles feed on themselves until they work themselves out slowly, or a ‘swan’ event blows a hole in it.
IPOs remain on a starvation diet. This is reasonable based on the continued cracking of SPAC-funded companies, touted as the alternative to IPOs. Further depressing the market were total hull loss bankruptcies of Babylon Health, Pear Therapeutics, and Friday Health. This Editor will add to this the troubles of Cano Health, Bright Health, SimpleHealth, The Pill Club, Hurdle, and Quil Health, plus the dancing on the edge of Clover and Oscar Health. NextGen Healthcare decided that 41 years of being a public company were enough, and went private two weeks ago.
Overall, what there is of funding is shifting over to disease treatment, non-clinical workflow, and healthcare marketplace/value-based care as the top three value propositions so far this year. In 2022, these three categories were #5, 3, and 8 respectively. Examples of companies are Vivante Health and Synapse Health. Mental health, surprisingly with the recent implosions and a crowded field, remains far in front as the #1 clinical area though in funding only half of full year 2022. Nephrology (renal health) and neurology are the up and comers.
Rock Health’s writers try to put the most optimistic face on this continued slide with phraseology like “digital health’s new reality is “smaller but mighty” and even the well-worn ‘new normal.’ But right now, it’s hard to suss out the ‘mighty’ or normal part. Rock Health’s Q3 report