When it comes to investment and venture funding, digital health has arrived.
In fact, it’s arrived so much that the first financial quarter of 2021 featured more $100 million-plus “mega deals” for digital health companies than all of 2018 and 2019 combined, according to recent data from Rock Health. In total, the $6.7 billion invested in digital health companies in the Q1 2021 represented the biggest quarter ever beating out Q3 and Q4 of 2020 ($4.1B and $4.0B raised, respectively).
Similar tallies from other sources validate an overwhelming truth: investors, venture capitalists, entrepreneurs, and many others are seeing the potential in digital health. Week after week, there are hefty venture capital financing deals for digital health companies. In 2011, according to Rock Health, digital health funding represented 2 percent of all deals. In 2020, it was 9 percent. Chances are it will be even higher in 2021. Whether it’s through SPACs (Special Purpose Acquisition Companies) or traditional avenues, more digital health companies are primed to go public they year than ever before.
What should health care leaders make of this financing free for all? Health Evolution interviewed five people representing five different areas of the health care system impacted by the digital health funding boom.
Payer executive: Sukanya Soderland, Chief Strategy Officer and Senior Vice President for Blue Cross Blue Shield of Massachusetts
Provider executive: Aaron Martin, Executive Vice President, Chief Digital Officer, Providence and Managing General Partner, Providence Ventures
Investor: Bill Evans, CEO, Rock Health
Digital health executive: Sean Duffy, CEO, Omada Health
Industry analyst: Raj Prabhu, CEO and Co-Founder of Mercom Capital Group
What kind of trends have you seen in the digital health funding space in the last few years?
Sukanya Soderland: There has been a mounting tidal wave of funding over the last several years that has intensified over the last couple of years in particular. We’ve seen certain areas that have been getting more funding and attention in the last few years. For example, mental health is one where there’s been an explosion of activity and a mass recognition of the need for de-stigmatization of mental health, the interdependence between mental health and physical health outcomes and costs, and the power and efficacy of digital models to help address rapidly growing and underserved mental health needs. Other areas where there has been growing momentum include the ongoing movement towards lifestyle medicine applications that help people meaningfully improve chronic conditions such as diabetes through behavior modification support. Factors such as what you eat, how much you exercise, how well you sleep, how you manage stress, how connected you feel to others, as well as social determinants of health can materially influence outcomes. We’re seeing digital health models aim to address those factors through coaching, social support communities, sophisticated analytics, and precision medicine advances and remote sensor devices. There is also an increasing recognition of the fatigue around too many niche solutions that don’t offer a seamless experience and still have suboptimal adoption rates. As a result, there is a rising focus on positioning companies as the “integrated platform” with an air traffic controller-like capability, integration into the health insurance benefit stack and hybrid models that integrate with physical physician/clinician locations.
Raj Prabhu: I mean the funding is exploding. It has been since we started tracking it, but there’s significant ramp up in the last few years. Last year was a huge year. 2019 was good but 2020 it went to the next level and this year again we’re on track to do really well.
Bill Evans: We are having these really remarkable moments in digital health funding right now where the space is maturing. There are two things underlying this trend. One is the companies that we see, and everyone in the ecosystem as investors sees, have changed dramatically from when I was picking companies to invest in in 2011-2012. The level of understanding among entrepreneurs and investors and as well as the buy side and most of the big companies that are customers of innovation, it’s just really changed. We’re able to do so much more, more effectively than ten years ago. And there’s a cohort of companies that have been around 5-10 years that are very mature. So there is more fundamental innovation working at a much higher level of performance for the meatiest segment of our economy.
On the other hand, there’s also more money flowing in the private equity and venture than ever before. And digital health as a subset of the broader investment is experiencing large capital inflows and is subject to the broader trends around investment. I think those two things have created this really unique moment.
Aaron Martin: In the last six months, we have had very rapid increases in valuations, especially the later stage companies that have established businesses. We’re also seeing a better quality of company. We always work hard to improve deal flow at Providence Ventures. That being said, when I first started seven years ago, there were a lot of first-time entrepreneurs, coming out of tech. There was a much smaller cadre of experienced entrepreneurs doing health tech for years and years. Now you’re seeing that turnover, people who exited or their first companies didn’t work out, now it’s round two or three for them. There’s just a lot more sophistication. I’m very encouraged.
Sean Duffy: Stating the obvious here but there’s broadened interest. In any private capital lifecycle, there are going to be folks who are willing to make the investment without precedent. Pray with investment but have the conviction there is something here. Then you have periods where it’s like, ‘There have been no exits. Can we return the capital we put in?’ The last phase is proof point of scale businesses that have returned capital to funds. You get a whole second wave. We as a space are firmly in that phase where it’s interesting and people are seeing real business opportunities. Naturally, in the lifecycle, which is unique to the space we’re in, the question becomes, ‘Is it too much capital?’ ‘Did they swing the pendulum too far?’ As the expression goes, what’s old is new again.
What’s happening at large is a magical moment for innovation across the country. Amongst the cacophony, what keeps me centered is that this is just cool. In moments where people are skeptics, you want it to ignore it. In moments where people are a hype factory, stay steady. It’s easy to get caught up in all the buzz.
How has COVID pushed along funding?
Prabhu: To give you a perspective, there was about $9 billion in venture funding for digital health companies in 2019. It was almost $15 billion in 2020. That is the COVID effect. A lot of the funding went to telemedicine and mobile health and things that were directly related to COVID and what happened. There’s been a significant boost in funding into the technologies that were helping with the COVID situation. That has benefitted digital health companies a lot, but let’s see how that turns out this year, especially as the vaccines take hold. By the end of the year, we’ll know what the trend will look like going forward.