How Will COVID-19 Impact 2020 Digital Health Venture Funding?

April 7, 2020
Funding got off to a great start this year, but plenty of questions remain as the pandemic continues to play itself out

Digital health venture funding had its strongest start ever in 2020, with $3.1 billion invested across Q1, according to a new analysis from Rock Health, a venture fund dedicated to digital health. The firm’s researchers noted that while the COVID-19 epidemic has created “twin crises of a global pandemic and massive economic shifts that will rapidly impact all market sectors, including digital health,” solutions in this space can “immediately combat the pandemic.”

Rock Health surveyed 12 healthcare investors in mid-March who painted a somber picture of the emerging funding environment, while noting there is a tangible sense of resolve to not waste this crisis and build on the early Q1 momentum.

Indeed, the report revealed, before the COVID-19 impact was felt in the U.S., digital health venture funding “was off to the races in Q1 of 2020.” The $3.1 billion raised was across 107 deals—more than 1.5 times the total funding in Q1 of any previous year.

In fact, Q1 2020 was the second largest quarter in terms of total funding, and 57 percent greater than the average quarterly funding across 2018 to 2019. This caps off the largest ever twelve-month funding period for digital health, with $9.3 billion invested across Q2 2019 to Q1 2020.

According to the research, while a COVID-19-induced economic downturn is under way, “the differential impact across sectors of the economy has yet to play out.” The analysis stated, “The healthcare industry is hardly immune to the financial stresses of the economy at large and although digital health startups are at the center of the response to COVID-19, they’re no exception.”

Researchers believe that two important factors may buffer a contraction in digital health venture funding. First, venture capital firms are sitting on record levels of cash, or “dry powder”—funds that have been raised but not yet deployed—and because venture fund partnership agreements make it difficult for limited partners who supply the capital to back away, “defaults” are a rare event, they noted.

And second, digital health startups can be “uniquely positioned to play both an outsized role in ameliorating the immediate effects of the crisis and in driving sustained, positive changes in its aftermath. While other industries (or other segments within healthcare) must simply cope, some digital health companies are in the drivers’ seat,” they noted.

Digital health companies offer technologies that support the delivery of care virtually, scaling the medical workforce, and the acceleration of R&D for diagnostics and treatments. Telemedicine, in particular, is deployed at the front lines of the pandemic. “We expect [telemedicine] adoption to tick up significantly this year, and are cautiously optimistic that consumers and providers who use telemedicine for the first time will remain long-term users. The investors we surveyed also expect virtual care to gain traction: 100 percent of respondents agree telemedicine is positioned for greater growth in 2020 than originally anticipated because of the pandemic.”

Surveyed investors also anticipate growth in remote monitoring, symptom checkers, and triage tools.

At the same time, the report pointed out that COVID-19 has and will continue to cause supply chain disruptions, reductions in growth forecasts, and changes in hiring plans. As such eight of the 12 investors that were surveyed felt that digital health startups will have a “much harder time” raising capital in 2020 than they did in 2019.

However, the surveyed investors reported that they are largely not reducing the amount of capital they plan to invest in 2020—only three “somewhat agreed” (and no one “strongly agreed”) with the statement “I expect I will deploy less capital in 2020 than I anticipated at the start of the year.”

Consequently, there is an apparent tension between respondents’ plans to maintain their investment activity this year and their expectation that startups will have a much harder time raising capital in 2020, according to researchers. “The discrepancy may reflect a belief that in aggregate, digital health investors will deploy capital into new investments more cautiously during a recession while they simultaneously take action to support their existing portfolio companies,” they said.

According to Tom Cassels, president, Rock Health Inc., “The most significant problem facing healthcare is a historic mismatch between supply and demand. This was true before the onset of the pandemic and it will remain true after COVID-19 peaks. The human capital (MDs and nurses) mismatch is most acute today, hence the lift off for telemedicine and remote patient monitoring solutions. If there is one thing I am confident in predicting, it is that overcoming COVID-19 will reinforce that healthcare cannot go back to a time when virtual or automated care was not normal operating procedure.”

Overall, in Q1 of 2020, investors backed a wide variety of solutions for providers, clinics, and health systems, with the largest rounds focusing on data collection, clinical workflow, and health system administration.

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