Digital health funding began 2020 very strongly, bringing in a record $3.1 billion over 107 deals in the first quarter of the year, according to a new study by Rock Health. However, economic headwinds, brought about by the coronavirus pandemic could see financing of deals slowing down during the rest of the year.
Rock Health said the $3.1 billion generated in Q1 2020 was more than one-and-a-half times larger than the total funding in the first quarter of any previous year, and the second largest quarter of all time. The study further said Q1 of 2020 was the second-largest quarter in terms of total funding and 57 percent greater than the average quarterly funding across 2018-19.
Notable deals of the quarter
According to Rock Health’s survey, the average deal size peaked in the first quarter of 2020 at $29 million — compared to $19.5 million in 2019 and $21.5 million in 2018. The study says this was due to a notable shift in funding toward later-stage deals as the digital health market matured.
During the quarter, there were six mega deals — funding rounds worth more than $100 million. Classpass led the financing, raising $285 million in a Series E funding round, while Alto Pharmacy bagged $250 million in a Series D financing. Element Science raised $146 million in a Series C financing, Outset ($125 Series E), Verana Health ($100 million Series D) and Tempus $100 million Series G) also raised large amounts of cash.
A significant proportion of startups funded in Q1 2020 are developing solutions for providers seeking to improve efficacy, capacity, and workflows with technology. Sixty-eight startups serving other providers raised rounds in Q1 2019, the Rock Health study found.
The report said a significant portion of the money went to startups developing provider-facing products, a trend that could ebb or strengthen as hospitals and doctor’s offices struggle with capacity and resources from COVID-19, Rock Health found.
Had it not been for the coronavirus, digital health funding was well on its way to bettering the money that was raised between 2016 and 2019. In the whole of 2016, digital funding generated $4.6 billion, $5.8 billion in 2017, while 2018 saw deals worth $8.2 billion.
There was a slight downturn in 2019; digital health funding was at $7.2 billion.
Coronavirus to slow down digital health deals
But there are fears that the coronavirus outbreak will slow down investments in digital health, with the authors of the Rock Health report saying “we do not anticipate investment activity to keep pace with Q1 levels in the coming months.”
Rock Health researcher, Sean Day was quoted as saying: “We would expect that investors will continue to deploy capital in digital health but perhaps they will be a bit more reserved and cautious. At the moment we are not expecting a sharp contraction in the funding environment. We expect the moderation that’s been going on in the past 12 to18 months already to simply continue.”
Rock Health is, however, optimistic about the prospects of digital health funding in spite of the coronavirus outbreak. This is because venture capital firms are still sitting on record levels of “dry powder” — that is funds that have been raised but not yet deployed.
In addition, the researchers said digital health startups are, in some cases, 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 driver’s seat.
To assess the scale, direction, and timing of the coronavirus impact, Rock Health surveyed 12 leading healthcare investors between March 16 and March 20, 2020. “Although the responses paint a somber picture of the emerging funding environment, there is a tangible sense of resolve to not waste this crisis — to leverage digital health solutions to immediately combat the pandemic and build on that momentum to radically reshape the way healthcare is delivered in the US and globally,” the researchers wrote.
The majority of the respondents said they expected a slowdown in M&A activity — digital health startups’ go-to market exit strategy over the past few years. But Business Insider forecast that M&A within the telehealth space will be an exception to the M&A standstill — a trend that materialized over the past year — as leading telehealth providers are pressured to appeal to a wider range of customers with their tech amid the coronavirus. Bigger players like American Well and Teladoc might seek to more quickly scale and reach hospital clients by scooping up smaller firms.
A note written by Sequoia Capital to its companies noted that due to the coronavirus, funders and chief executive officers should brace for turbulence. Among the major concerns were a drop in business activity, supply chain disruptions and curtailment of travel and canceled meetings. Sequoia Capital warned that private financings could soften significantly, as happened in 2001 and 2009.