According to Rock Health’s latest figures, Q1 2021 closed with $6.7B in US digital health funding, making it the most-funded quarter to date. Also, this massive amount makes the digital health sector on track to significantly outpace 2020’s $14B+.
During the quarter, the average deal size ballooned to $45.9M (up from $31.7M in 2020), and SPACs continued to offer a new path to liquidity — with 10 announced or closed SPAC deals. With growing deal sizes, a faster funding pace, and new exit pathways, Rock Health believes we’re in a period of heightened opportunity.
The pandemic prompted an acceleration in the adoption and mainstreaming of digital health. The surge in funding over the past twelve months likely reflects investors’ appraisal of the opportunity this acceleration creates. And it parallels some of the rapidly-maturing fundamentals of the sector in terms of consumer adoption, clinical impact, and of course, digital health’s role in responding to the pandemic.
Over the past decade, private digital health companies have also captured a larger share of overall venture capital dollars, moving from just 2% of all venture investment in 2011 to 9% in 2020.
Mega deals galore
During Q1 2021, we saw more deals completed (147) relative to the quarterly average of 110 deals throughout 2020. Taken together, this massive increase in funding and moderate increase in deal count led to a Q1 2021 average deal size of $45.9M, a 1.4x increase from 2020’s $31.7M. Of note, funding across Q1 has not been stable-as shown in the figure below, 2021 venture funding started largely on par with 2020, but ramped up significantly in March, producing 5.2x funding compared to March 2020.
Twenty-five digital health companies closed deals larger than $100M in Q1 2021, compared to a total of 14 mega deals in Q1 and Q2 of 2020, and 40 across all of 2020. Perhaps the biggest firework among this explosion in mega deals was the announcement of four $100M+ deals in rapid succession across two days (Clarify, Unite Us, Strive Health, and Insitro)-equating to $805M in funding, or 12% of total funding in Q1 2021. Though companies raising mega deals are tackling a variety of challenges, the most common value propositions were research and development, and population health management, with five deals apiece.
The themes remain the same
Across 2020, investors stayed the course on their investment theses, rather than making a hard pivot in light of the pandemic. This sentiment remains true so far in 2021 as well. Startups offering on-demand healthcare services ($1.2B across 17 deals) and biopharma research and development catalysts ($1.1B across 13 deals) secured the most funding across 2020 and 2021.
The top deals included Ro ($500M), Dispatch Health ($200M), and Lyra Health ($187M) for on-demand healthcare, and Insitro ($400M), Valo Health ($190M), and Evidation Health ($153M) among R&D catalysts. Additionally, just two of Q1 2021’s top six investment themes weren’t among the top six in 2020: population health management and consumer health information.
Meanwhile, Q1 2021 saw an uptick in investment activity for certain clinical issues. Among companies supporting a specific clinical condition, mental health companies garnered the most amount of funding in Q1 2021 (for the fifth year in a row), in large part because of mega deals raised by Lyra Health ($187M), BetterUp ($125M), and Ginger ($100M). Companies offering primary care brought in the second most funding in Q1 2021, driven by a handful of deals: Ro ($500M), DispatchHealth ($200M), and Eden Health ($60M). Musculoskeletal (MSK) and gastrointestinal (GI) companies are newly among the top six funded clinical indications. The increase in MSK and GI funding may be indicative of the rise in virtual care clinics such as Hinge Health ($300M) and Vivante Health ($5.8M), as well as an expansion into these areas among startups such as DispatchHealth.
SPACs are all the rage
Arguably one of the biggest storylines of Q1 for digital health and the broader market is the rise of SPACs (Special Purpose Acquisition Companies), which offer an alternate path to going public compared to the traditional IPO. SPACs are shell companies that raise cash through an IPO and use that capital to acquire or merge with an active company, typically a privately-held, venture-backed startup. In doing so, the SPAC brings the startup public. A SPAC company must typically acquire its target within a two-year window.
In the first quarter of 2021, US SPACs across all industries raised more capital ($83.1B) than across all of 2020 ($82.6B). Amidst this activity, 2021 welcomed the announcement and/or closure of 10 digital health SPAC deals-Hims&Hers and Butterfly Network went public via SPAC, while Talkspace, Uphealth and Cloudbreak, 23andMe, Sema4, Sharecare, Owlet, QuantumSi, and DocGo announced SPAC deals which have yet to close.
During this uncertain time, exits via SPAC offer private companies a liquidity opportunity that allows them to sidestep a lengthy IPO process and exposure to market volatility. In the short-term, it’s possible the liquidity generated via SPAC exits will create confidence among venture firms to continue investing in digital health, perpetuating the cycle the market is currently in of high investment and valuations. In the long-term, however, SPACs may introduce new risks to the market, and the healthcare SPAC craze will remain tied to broader market sentiment. The boom-to-bust dynamics of reverse mergers might come into play-if market valuations of new SPACs go sour, this could trigger skepticism of SPACs as a viable exit vehicle. And recently, federal regulatory concern has struck a note of caution toward SPAC investments. All in all, focus will be on the performance of digital health SPACs as they will either showcase opportunity-or a cautionary tale-to private companies on the path to liquidity.
In a conclusion, Rock noted that digital health is in a pivotal moment. Innovators, investors, and buyers are rightfully exuberant for digital health to transform discovery, care delivery, and well-being.
You can read the full insights from Rock Health’s website.