After a very active and lucrative Q1 and Q2, funding for digital health companies has cooled a bit in Q3, according to the latest Rock Health report. The raises came in at a total of $1.3 billion this last quarter, down from the roughly $2 billion seen in Q1 and Q2.
Additionally, the report points to three major trends this quarter: more mega deals over $100 million, companies exiting via IPOs and the rise of behavioral health and femtech products.
After a few frigid years without any digital health IPOs, 2019 has turned a corner. So far five digital health companies have gone public, according to the report.
However, results have been lukewarm now that these digital health companies are in the public arena, the Rock Health researchers wrote.
“Early public market performance for these IPOs has been mixed,” Sean Day, a researcher at Rock Health and author of the report, wrote in the document. “As of October 1, Health Catalyst is trading about 20% below its closing price on the first day of trading after increasing more than 20% in the weeks following its public offering. Livongo’s share price fell following its first earnings report as losses were greater than analysts expected, despite 156% revenue growth that beat Wall Street estimates. Phreesia and Change Healthcare have largely traded within +/- 10% of their offering price. And Peloton’s stock price dipped after the company went public on September 26, which some took as a sign that 2019’s hot IPO market is cooling off for the moment.”
Rock Health also reported that digital behavior health companies accounted for 8% the total funding this quarter. Behavioral health companies have also seen an increase in the size of their deals to $26 million, up a staggering 73% from 2018.
Women’s health companies have also seen significant rises in funding as well. Rock Health reports that funding for women’s health companies increased by 812% from 2014 to 2018.
WHY IT MATTERS
For nearly a decade the industry has seen digital health deals pushing ahead at breakneck speed. This new report shows the industry is cooling — even if it is just by a hair.
“As with the overall VC industry, large deals are driving the funding trend in digital health,” Day wrote in the report. "Investors are placing bigger bets on a small number of companies — average deal size in 2019 is $20.9 million, up 32% from 2017 and in line with 2018’s $21.7 million average deal size. Meanwhile, we anticipate the number of digital health deals in 2019 will be 5-10% lower than in 2018 — potentially the first time deal count has declined year-over-year since we began tracking in 2011.”
Rock Health actually predict this slowdown in its 2018 end of year funding report.
THE LARGER TREND
It’s no secret investors are opening their wallets for digital health companies in a big way. Last year digital health companies raked in $8.1 billion in funding, up 42% year-over-year, according to Rock Health’s 2018 funding report. While 2019 isn’t quite on track for such a well-funded year, Rock Health predicts it will reach around $7.3 billion as it is clear investors are still pouring money into digital health companies.