Digital health deal count declines in Q3, but check sizes stabilize: Rock Health

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Dive Brief:

• Investors inked fewer digital health funding deals in the third quarter, but average check sizes stayed consistent quarter to quarter, according to a report released Monday by Rock Health. 
• U.S. digital health startups received $2.4 billion in venture capital investment across 110 deals in the third quarter this year. That’s a decline from the 133 deals recorded last quarter, but average deal size held at $22 million in the second and third quarters — suggesting funders are making “fewer, more focused bets,” according to the consultancy and venture capital firm.
• Merger and acquisition activity in the sector was low too. There were only 21 M&A deals in the third quarter, compared with a quarterly average of 37 last year. 

Dive Insight: 

The digital health sector has logged $8.2 billion in funding across 379 investments so far this year, compared with $10.8 billion across 500 deals in full-year 2023.

Those funding totals are a far cry from the funding boom in the sector during the COVID-19 pandemic. Investors poured more than $29 billion into startups in 2021, and a number of larger firms hit the public markets.

But the hot funding environment began to cool down in 2022, and investment dipped further last year. Investors began to look for companies that could deliver return on investment more quickly and meet performance metrics, experts said. 

Now, digital health companies are looking to build up their offerings, sometimes through strategic acquisitions, to compete with legacy healthcare firms, according to the latest Rock Health report. 

The sector has seen relatively few cases of companies acquiring their competitors this year, a type of M&A that drove increased consolidation in 2021 and 2022.

But the analysis noted some digital health companies are using M&A to add new features and capabilities into their products, rather than just grow the company overall. That could be especially wise after a period of valuation decline among digital health startups, report authors Adriana Krasniansky, Sari Kaganoff and Tiffany Marie Ramos wrote.

“Acquiring a startup with a built-out product and sales, potentially at a depressed price, can be more affordable than building a new product and customer base from scratch,” they said.

For example, Fabric, a startup formerly known as Florence, has made multiple acquisitions over the past year, including Walmart’s MeMD virtual care business and Bright Health’s telehealth company Zipnosis.