The first quarter of 2024 marked a shift in digital health funding characterized by higher deal volumes paired with lower check sizes, indicating a recalibration in the financial dynamics of the industry. While the total funding dipped compared to the previous year, U.S. digital health startups demonstrated resilience by raising $2.7 billion across 133 deals, with an average deal size of $20.6 million, as reported by Rock Health, a leading venture fund dedicated to digital health. This trend reflects an industry that is adapting to new financing challenges while maintaining a strong pace of deal-making. The decline in total funding from $3.6 billion in the first quarter of 2023, suggests a more cautious investment climate. The growth in deal volume, surpassing the numbers of the past six quarters, highlights the industry’s ability to navigate a tighter funding market. The prevalence of creative financing measures, with nearly half of the fundraising deals being unlabeled rounds, outlines the agility and adaptability of digital health startups in securing necessary capital.
AI-driven investment emerged as a dominant trend in the first quarter of 2024, with AI-enabled digital health startups securing a large portion of funding. AI-based companies accounted for 40% of Q1’s total funding, amounting to $1.1 billion across 45 deals, according to Rock Health’s report. This indicates a growing investor interest in leveraging artificial intelligence to enhance healthcare solutions. The success of AI-focused startups such as Abridge and Zephyr AI, which secured large amounts of Series C and Series A funding respectively, shows the importance of AI in driving innovation within the sector. The adoption of AI technologies in healthcare has the potential to revolutionize patient care, diagnosis, and treatment, making it a focal point for investors seeking disruptive opportunities in the digital health space.
There is a notable emphasis on scrutinizing clinical outcomes and value-for-investment in digital health solutions. With no industry-wide standard for evaluating efficacy, investors, employers, and health plans are increasingly focusing on strong outcomes data as a differentiator in a crowded market. The analysis from the Peterson Health Technology Institute highlights the growing importance of evidence-based outcomes research in understanding the value proposition of digital health solutions. As crowded digital solution spaces push enterprise buyers to seek out outcomes data, investors are prioritizing companies that can demonstrate efficacy early in their development. This trend has made outcomes data more central to fundraising conversations, prompting startups to invest in outcome measurement and reporting mechanisms to differentiate themselves in the market.
The public markets are witnessing a parallel reset, with several digital health companies opting to delist from major exchanges. Notable examples include Science 37, Better Therapeutics, and Veradigm. Delistings recalibrate expectations for startups eyeing public exits and offer an opportunity for companies to reassess their strategies and operations, potentially leading to long-term stability and growth. While some companies may choose to go private to alleviate the pressure of quarterly reporting and market scrutiny, others may see delisting as an opportunity to restructure and focus on long-term value creation. The dynamic nature of the public markets outlines the importance of adaptability and planning for digital health companies seeking to manage the complexities of the financial landscape.
As the digital health sector matures, companies are shifting towards more conservative forecasting and deal structuring, aligning with the industry’s evolving metrics of success. This transition from growth-oriented mindsets to a focus on strong outcomes and healthy margins reflects a maturation process necessary for the long-term sustainability of the industry. Despite the challenges posed by a tougher funding climate, the sector remains resilient, with the pressure to deliver driving innovation and pushing companies to demonstrate their value proposition. The first quarter of 2024 marks an important moment in the evolution of digital health funding, characterized by adaptation, innovation, and a renewed focus on delivering meaningful outcomes for patients and stakeholders.
