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Investor appetite for digital health hits new high

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Digital health venture funding hit a record US$6.7bn in the US in the first quarter of the year, data shows.

This compares to US$4.1bn and US$4bn in Q3 and Q4 2020 respectively – and puts 2021 well on track to eclipse last year’s total of US$14bn in US-based digital health venture funding.

Meanwhile, average deal size in Q1 2021 hit US$45.9m, up from US$31.7m in 2020.

Special-purpose acquisition companies (SPACs) continued to offer a new path to liquidity, with 10 announced or closed SPAC deals, according to Rock Health, which compiled the figures.

Its digital health venture funding report notes that the “pandemic prompted an acceleration in the adoption and mainstreaming of digital health”.

The surge in venture funding over the past twelve months likely reflects investors’ “appraisal of the opportunity this acceleration creates”.

Rock Health said: “[This] 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 two per cent of all venture investment in 2011 to 9 per cent in 2020.”

Twenty-five digital health companies closed deals larger than US$100M in Q1 2021, compared to a total of 14 “mega deals” in Q1 and Q2 of 2020, and 40 across all of 2020.

Highlights of the quarter include four US$100m+ deals announced in rapid succession across two days, involving ClarifyUnite UsStrive Health, and Insitro. These alone equated to US$805M in funding, or 12 per cent 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,” Rock Health said.

Not only are more startups raising mega deals, they’re also doing so at a faster pace.

The average age of startups at the time of their first mega deal raise has been cut in half over the past few years, from 12 years in 2017, to just six years among the Q1 2021 mega deal companies.

Among the Q1 2021 mega deals, Valo Health observed the shortest time to its first mega deal (1.5 years).

While encouraged by the progress of digital health in terms of its appeal to investors, Rock Health cautioned:

“Bursts of heightened activity—particularly from an investment and exit standpoint—must also be examined with caution.

“This means closely evaluating untested business models, new investment vehicles, sky-high valuations, and funding trajectories that don’t match the recent past.

“These departures from a more tempered market will enable breakthrough winners and impact. But we also anticipate some Icarus-esque endings. In this growing market, exercising judgment will be critical.

“Stakeholders will need to separate long-term value creation from short-term financial opportunity, and distinguish between individual company hype cycles from overall sector fundamentals and growth.”

Read the full report here.

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