Soon after StartUp Health, we have Rock Health releasing its digital health funding figures for 2017. It too has found it to be the record-smashing year for the industry, with venture funding approaching $6B and the most mega deals ($100M+) to date.
However, while investor appetite increased in 2017, exits waned with only 119 disclosed acquisitions of digital health companies and a surprising zero IPOs. Also, there are now more highly-capitalized, privately-held companies than ever, and investors are anxious for potential exit opportunities.
Looking back over 2017 and the seven years since it began tracking funding, Rock Health has caught $23B flowing into digital health startups.
During last year, the size (and number) of late-stage mega deals hit a peak, and so has the number of repeat digital health investors. Moreover, it's worth noting that the record year in digital health funding occurred even in the face of substantial political turmoil, with healthcare policy playing a leading role in a hard-fought, high-stakes political battle at a national level.
Dollars and deals
Annual funding of digital health companies surpassed $5B for the first time ever in 2017.
Rock Health says that investors in the space got more comfortable, confident, and willing to make larger investments in digital health companies. In fact, Outcome Health and Peloton Interactive raised the largest digital health investments on record at $500M and $325M, respectively. Boosted by these mega deals, the average deal size hit an all-time high of $16.7M.
Then again, after a record-breaking seven $100M+ mega deals in H1 2017, only 23andMe had a $100M+ deal in H2.
Collectively, the eight mega deals in 2017 represent 31% of total digital health funding for the year. These mega deals were raised by digital health companies across the US, with only two of them being headquartered in California. Several of the companies were more mature, established players, with an average company age of 11 years.
Driven by mega deals, the average deal size of Series D+ deals increased by 60% in 2017.
The overall distribution of 2017 funding across company stages mirrors that of previous years — Seed and Series A deals continue to account for the majority of deals.
Top value propositions
In 2017, consumer health information was the most funded value proposition, bolstered by five of the eight mega deals, including Outcome Health, PatientPoint, 23andMe, and ShareCare.
Companies advancing the next leading value proposition, clinical decision support & precision medicine, raised half the amount of funding ($811M) that was raised by consumer health information companies ($1.6B). Over the last two years, as investors have pursued solutions delivering tangible clinical impact, investment in monitoring, treating, and diagnosing diseases has increased within each category (ranging 60-115%).
The number of disclosed mergers and acquisitions declined for the second year in a row. 2017 closed with 18% fewer digital health M&A deals than 2016 and 36% fewer than 2015, when M&A activity peaked.
Since 2015, companies focused on enhancing EHR functionality and/or improving the clinical workflow have been the most likely to be acquired. It has been four years since the EMR mandate went into effect, requiring hospitals to demonstrate meaningful use of an electronic medical record in order to maintain Medicare and Medicaid reimbursement rates. With penalties for noncompliance rising, we are seeing continued interest in companies serving this space.
Surprisingly, not a single digital health company raised money on the public markets in 2017. But the Digital Health Public Company Index fared well in 2017 nonetheless, outperforming the broader S&P 500 public market index.
Rock Health counts itself among committed investors who firmly believe there's still plenty of room to make healthcare massively better for every human being. For them, 2018 represents the end of the beginning in digital health, the start of a new era with new challenge — not the beginning of the end.