Just nine months into the year, 2020 has already hit a digital health fundraising high note as investors up their ante in coronavirus-affected health tech markets such as on-demand healthcare services or fitness and wellness platforms, per Rock Health's latest quarterly report.
The digital health-focused venture capital firm reported $4 billion in U.S.-based digital health startup investments during Q3 2020. By their accounts, this brings the year's fundraising total to $9.4 billion, handily beating the prior largest annual sum ($8.2 billion in 2018) with plenty of time to spare. The year has also seen at least 24 digital health "mega deals" of $100 million or more, with the average deal size throughout the year increasing from $19.7 million in 2019 to $30.2 million.
On the other hand, M&A activity within digital health is down by volume. In nine months of 2020 the firm tracked 63 total acquisitions, which they note will likely fall short of 2019's 113 for the full year.
And while the firm speculated that buyers could be holding onto their checkbooks "in light of the economic uncertainty created by COVID-19," the report's authors highlighted the Teladoc-Livongo mega-merger as an outlier in terms of scale and market ramifications. As for the rest of the year's deals, half were the result of one digital health startup acquiring another digital health company – a trend Rock Health said tracks with years prior.
WHY IT MATTERS
From a longitudinal standpoint, a record-breaking year for digital health funding provides many in the industry with opportunities to develop new technologies and pursue adoption and commercialization opportunities. But Rock Health's breakdown of the quarter's funding deals also paints a picture of how investors have been reacting to the uncertainty and demands of COVID-19.
Across the first nine months of 2020, on-demand healthcare services – a focus area that includes telemedicine – outstripped other major categories with 48 deals totaling $2 billion in spending. And while this already represents an increase over last year, the rate of investment appears to be increasing as investors react to the outbreak. Q3 alone represented $720 million in telemedicine investments, while Q1 and Q2 brought in smaller (but still respectable) $444 million and $482 million totals.
"We are quite certain that when telemedicine utilization rates do settle, they will be higher than rates in the past," the report's authors wrote. "Additionally, we expect to see expansion of telemedicine models that break the traditional mold – those that integrate telemedicine touchpoints with continuous remote care, and unhinge themselves from the labor-intensive delivery of traditional telemedicine."
The two next-highest fundraising categories after on-demand healthcare services were R&D catalysts, which brought in $1.32 billion across 25 deals, and fitness and wellness startups, which raised $1.26 across 21 deals.
Both areas were dominated by average deal sizes well higher than the industry-wide average. For R&D catalysts, this trend was explained by the maturity of the investment recipients, since 86% of the funding came from Series B or later rounds. Fitness and wellness also benefitted from this effect, with 92% of its money coming from Series B or later deals, although the report's authors noted that this area would also benefit from COVID-19 lockdowns.
Looking at the digital health investors themselves, Rock Health's data suggest that many of the industry's prior backers returned to the scene. Sixty-four percent of investors across the year's first nine months had previously invested in digital health, a new high for the industry. Just over three-fifths of transactions came at the hands of institutional venture firms, while corporate venture capital comprised 15% – the latter number being particularly reassuring to Rock Health's analysts in light of COVID-19 uncertainty.
Finally, the report highlighted digital health's navigation of broader market and regulatory shifts resulting from COVID-19. A rebounding stock market has led to a new wave of public market entries, while some startups active within digital therapeutics found new opportunities to release their in-development products.
THE LARGER TREND
While the methodologies and inclusion criteria may vary, Rock Health's findings generally fall in line with other early Q3 market reports and roundups. On Thursday, StartUp Health's breakdown of the broader "health innovation" market highlighted $6.6 billion in funding, which it says is the most-funded quarter that it's seen since tracking the space a decade ago. MobiHealthNews' own roundup of funding announcements covered in Q3 2020 came in a bit higher than Rock Health's at $4.6 billion, potentially due to the inclusion of international digital health startups.