It’s no secret investors are actively pouring money into the digital health arena. This was particularly true in 2018, which saw a 42 percent increase from 2017’s digital health investments, with the industry raking in around $8.1 billion, according to a recently released RockHealth funding report.
Over all, digital health investments have been steadily on the rise since 2011 (expect for 2016 which saw a minor dip), and last year was no different setting a new record high. But it wasn’t just the total funding amount that set the record; this year also had the highest average deal size at $21.9 million. That number is up from $15.9 million last year, according to the report.
Why it matters
But this staggering amount of money flowing into the space is starting to cause some to ask if digital health investment is a bubble that is going to burst.
“With the surge in funding, and absence of an equally robust exit market, there is more scrutiny on digital health than ever before, begging the question: will value creation track with recent investment trends?” authors of the report wrote. “Given that over $30 billion in venture dollars have been invested in digital health since 2011, and assuming investors expect an approximate 4X return over 10 years, the market should grow to $120 billion in the next 4 to 6 years. That is a pretty large number, but with a $3.5 trillion healthcare market, this magnitude of return is conceivable. However, with today’s high but as-yet-unrealized expectations, we aren’t surprised to see the b-word increasingly pop up in conversations.”
RockHealth zeroed in on six factors that have been observed in bubbles before including; hype in relation to the business model, high cash burn rates, unclear exit pathways, a surge of cash from new investors, high valuation decoupled from fundamentals and fraud or misuse of funds.
“High valuations and burn rates are signals that the funding cycle is nearing its peak,” authors wrote. “But we don’t think there’s a bubble to burst given the smart investors and entrepreneurs invested in finding paths to validation and revenue, the viable exit paths and consolidation on the horizon, and the large overall opportunity for innovation in healthcare. But everyone should prepare for a moderation in funding—when it comes, the real value-creators in digital health will stand tall.”
Authors concluded that many of the startups are adding value to the industry even if 2019 may not see the same rate of growth as the other years.
“There is significant value being created by digital health startups, and investors and entrepreneurs are pursuing new and sustainable paths to revenue and scale. On the whole, we see highly-capitalized companies that are consistently meeting validation and reimbursement milestones,” authors wrote. “However, these same signals—large, late-stage rounds at high valuations and shorter periods between rounds—are those of an investment cycle nearing its peak. While the future is not yet written, it seems unlikely that capital will continue to flow at the current rate. Though not a bubble burst, we anticipate the growth trajectory of venture investment in digital health to slow along with general venture investment conditions in 2019."
While the report predicts that 2019 may be a slower year for digital health funding, it appears to be off to a strong start. Within the last week Verily landed $1 billion, Pear Therapeutics scored $64 million and EarlySense snagged $39 million. These recent funding announcements means that less than a week into the quarter it is fast approaching 2018 Q1 funding amount of $1.2 billion.