Digital health funding plunges to 5-year low in Q4

The final quarter of 2022 didn’t provide a rebound for digital health.

Digital health in the fourth quarter of 2022 fell to the lowest level of any quarter since 2017, according to an analysis released Jan. 25 by CB Insights.

Overall, digital funding dropped to $25.9 billion in 2022, according to the report. While 2021 was a record year with $59.7 billion, funding dropped 57% in 2022.

In the final quarter of 2022, digital deals dropped 33% year-over-year, the report stated. There were only 21 digital health mergers and acquisitions in the fourth quarter, which was also the lowest number in five years.

Digital health mergers and acquisitions basically fell in half in the past year, falling from 611 in 2021 to 305 in 2022.

Overall, investors are expecting to see more mergers in healthcare and the life sciences in 2023, according to a KPMG report. Analysts are expecting to see more hospital mergers and partnerships as well.

Still, it’s been a trying time for digital health.

The report notes there were no new “unicorns” to arrive in the fourth quarter, marking the first quarter since 2018 without the birth of a unicorn. A unicorn is a startup with a valuation that surpasses $1 billion. Even with the quiet fourth quarter, there were 107 startups that emerged as unicorns in 2022, second only to 2021, according to CB Insights.

Funding for telehealth and digital mental health both dropped by more than half in 2022, the report stated.

In telehealth, funding dropped from $17.5 billion in 2021 to $7.5 billion in 2022, a 57% decline, according to the report. The number of deals dropped from 655 to 455.

In mental health, funding fell from $5.5 billion in 2021 to $2.6 billion in 2022, a 53% drop. The number of deals fell to 289 in 2022, down from 354 the previous year.

The digital health market is in a state of correction, investors said during a panel discussion at the HLTH Conference in Las Vegas. Investors are more careful about putting their money in digital health startups and want to be convinced of sound business plans.

Cheri Mowrey, head of U.S. healthcare investment banking for Morgan Stanley, said during the panel, “This is a pendulum that swings. It will swing back again.”

Investors “are going to do much more diligence” before putting money into digital health companies, Mowrey said.

During the HLTH panel, Michael Yang, managing partner of OMERS Ventures, said the pendulum has swung too far in digital health. While investors may have been too lax in doing their homework before investing a couple of years ago, Yang said investors are now being too cautious.

“We’ve overcorrected,” Yang said. “Now it’s nuts on the other side.”

Yang said founders are still going to be able to find investors if they have novel technologies and solid business plans to produce profits.

“If you as a founder believe in your mission, you’ve got to do whatever it takes to get to the other side,” Yang said.