Rock Health: Digital Health Venture Funding Reached $5.8B in 2017

Digital health venture funding in 2017 approached $6 billion and had the most mega deals ($100 million+) to date, according to a year-end report from San Francisco-based Rock Health.

According to the report’s authors, “While investor appetite certainly increased in 2017, exits waned with only 119 disclosed acquisitions of digital health companies and a surprising zero IPOs (initial public offerings). However, there are more highly-capitalized, privately-held companies than ever, and investors are anxious for potential exit opportunities. Looking back over 2017—and the seven years since we began tracking funding in 2011—it’s clear that the early game has concluded and digital health is entering the ‘middle innings’ as an investment sector. We’re at the end of the beginning of digital health.”

More than $23 billion flowed into digital health startups over the past seven years, Rock Health researchers pointed out. But the early years—2011 and 2012—each represented just 5 percent and 7 percent of that total, and “steady state” investment levels took hold starting in 2014. As such, “the far larger cohort of companies fundraising between 2014 to 2016 is maturing, and 2017 arguably saw more mega deals simply because there exists a greater number of mature companies in search of large investments,” the authors stated. They further said, “Moreover, it’s worth noting that the record year in digital health funding occurred even in the face of substantial political turmoil, with healthcare policy playing a leading role in a hard-fought, high-stakes political battle at a national level.”

However, according to the report, despite these achievements, investors and entrepreneurs face the challenge of a frozen IPO market, with zero digital health IPOs in 2017. This was the first time since the 1960s when such few companies were listed on American stock exchanges. The report’s authors wrote, “The secular trends in American capital markets represent a headwind for public listings as a source of liquidity for private investors. So far, digital health has been subject to the same law of gravity. For now, at least, M&A is the new digital health IPO.”

Getting into the specifics of deals, the report noted that 2017 saw the greatest amount of funding being poured into digital health to date, with a steady but not dramatic increase in completed deals. Outcome Health and Peloton Interactive raised the largest digital health investments on record at $500 million and $325 million, respectively. Boosted by these mega deals, the average deal size hit an all-time high of $16.7 million.

Collectively, the eight mega deals in 2017 represent 31 percent of total digital health funding for the year. These mega deals were raised by digital health companies across the U.S.—only two are headquartered in California. Several of the companies were more mature, established players, with an average company age of 11 years. And despite a record seven mega deals in the first half of 2017, there was only one mega deal in the latter half—$250 million to 23andMe (the company’s second such mega deal, contributing to the $423 million total raised since 2011), according to the report.

What’s more, in 2017, consumer health information was the most funded value proposition, bolstered by five of the eight mega deals. While Outcome Health carried the category with the largest deal, consumer health information would have topped the charts regardless. Other deals within this value proposition include: PatientPoint, which employs tablet- and screen-based media to enhance patient-provider discussions; 23andMe, which provides individuals with their genetic health risk; and ShareCare, which uses surveys to assess wellness and answers questions based on symptoms.

Companies advancing the next leading value proposition, clinical decision support and precision medicine, raised half the amount of funding ($811 million) that was raised by consumer health information companies ($1.6 billion). Over the last two years, as investors have pursued solutions delivering tangible clinical impact, investment in monitoring, treating, and diagnosing diseases has increased within each category (ranging 60 to 115 percent).

Further, the number of disclosed mergers and acquisitions declined for the second year in a row. The year closed with 18 percent fewer digital health M&A deals than 2016 and 36 percent fewer than 2015, when M&A activity peaked. Leah Sparks, Co-founder and CEO of Wildflower Health, commented, “The big companies are going to wake up and realize they have to buy innovation—they can’t create it internally. However, the long sales cycle may just mean that few companies are yet at a scale from which a large enterprise can capture value by acquiring.”

Since 2015, companies focused on enhancing electronic health record (EHR) functionality and/or improving the clinical workflow have been the most likely to be acquired. “With penalties for [meaningful use] non-compliance rising, we are seeing continued interest in companies serving this space,” the authors wrote.