Your Editor will be blunt. 2022 was a bucket of cold water, a bursting of bubbles, and generally an annus horribilis (as the late Queen Elizabeth referred to 1992, 30 years prior) for digital health, healthcare tech, and healthcare in general.

Here are the highlights of Rock Health’s 2022 full-year report on digital health funding for US-based digital health companies, published late last week and presented this week at JPM, through the gimlet eye of your Editor: 

Total funding for 2022 was $15.3 billion. There were 572 deals, averaging a deal size of $27 million.

• 2022 was just over half in activity compared to 2021’s “to the moon”: $29.3 billion over 738 deals averaging $39.7 million.
• 2022 also barely made it past the pandemic year of 2020 with $14.7 billion over 480 deals averaging $30.6 million.
• 2022 Q4 fell into a hole: $2.7 billion versus 2021’s $7.4 billion

If 2021 matched prior growth trends instead of the bubble it was, 2022 would have been viewed as flat or slightly down. 

Late stage mega deals fell into the same hole. In 2022, 35 digital health startups raised rounds of $100M or more, compared to 2021’s 88 and even 2020’s 43. 

The Covid-driven investment boom across digital health that characterized 2021 is over. The economy with a 6-8% rate of inflation, energy shortages in much of the world, supply chain disruptions, rising interest rates on money, and the rising possibility of recession led to investor cold feet. It ended the 2019-2021 takeoff and started a down cycle.

Recalibration to a ‘more sustainable run rate’ when it comes to investment

“Disrupting healthcare” may sound good, but it has a spotty track record of success. What’s attractive long term? Incremental transformation within conventional healthcare operations that in this Editor’s view cut time, cost, increase reliability, simplify processes and/or workflows, improve interoperability, reduce operational burden, or improve communication. Preferably, a combination of several of the previous!

D2C startups are particularly vulnerable to the economy–they run hot, multiple companies jump in, and then they’re cold. They have to invest a lot of money to establish a presence with consumers and that money is no longer cheap or available. Some with a decent consumer footprint can focus on B2B entry, though that is a long-buy cycle move.

Most companies will be focusing on the near term, with some of the smarter ones planting some ‘seeds’ for the future

A witty note in their report: “In the current VC climate, strong horses will beat out unicorns…though investors run the risk of betting on the wrong equine.” (Editor’s note–it may be hard to tell the difference. And unicorns have horns that poke bubbles.)

What was hot?

• Series A deals, the conservative bets of VCs. Yet, in Rock Health’s view, these may be riskier: “investors are more likely to pay more on a risk-adjusted basis for a startup than its later-stage funders, twisting the risk-adjusted valuation upside down.” 
• In clinical indications, mental health stayed top of the pops. Cardiovascular and oncology rose along with dark horse reproductive and maternal health. What fell? Diabetes.
• In value propositions (sic), on-demand healthcare and R&D flipped positions from 2021. Dark horses nonclinical workflow, disease monitoring, and care coordination moved into the top 5

And what players had problems? Health systems and the tech giants seeking to move into healthcare and away from ad-based or transactional revenue. As we’ve seen, Amazon dumped Care and is facing scrutiny over One Medical, Alphabet is cutting Verily, and Meta is overall pulling back. Microsoft seems to be concentrating on incrementals and Apple has other concerns over sourcing and patents.

Rock Health’s conclusion is ‘kind-of-positive’. (What, you expected doom and gloom?) “We expect that 2023 will be built up on slow, steady, and maybe even boring strategies for healthcare startups and enterprises alike: managing cash, re-structuring to accommodate revenue volatility, and investing in technology infrastructure.”