‘Turbulent waters’: The rocky digital health funding market post-SVB collapse
This year was shaping up to be a rebound year for digital health funding before the collapse of Silicon Valley Bank in March and the subsequent collapse of similar banks threw the future of digital health funding back into disarray.
Digital health startups are holding tight to liquid assets and capitalizing on existing resources as 2023 funding looks poised to drop below pre-pandemic levels, according to a new report from Rock Health.
In the first quarter, digital health companies in the U.S. brought in $3.4 billion in funding across 132 deals, the report found. The amount tops both the third and fourth quarters of 2022, but isn’t enough to signal a new “bull run,” according to the report.
If funding in the next three quarters matches the average funding in the prior three, 2023 is on pace to see the lowest level of digital health funding since 2019.
Megadeals, or funding rounds that net over $100 million, made up 40% of overall dollars in the quarter. The amount of megadeals suggests that the current market is being driven by a small number of large transactions from deep-pocketed investors, and doesn’t foreshadow a sector rebound, Rock Health found.
Six megadeals occurred during the first quarter: a $375 million funding round for value-based provider Monogram Health; a $300 million round for health staffing startup ShiftKey; a $203 million Series A for clinical trial tech platform Paradigm; a $200 million funding round for health workforce manager ShiftMed; a $179 million equity investment in health benefits company Gravie; and a $100 million round for provider enablement platform Vytalize Health.
The rapid and unexpected collapse of SVB — a major lender to digital health startups — was a reckoning moment in March. The bank’s fall nearly set off a liquidity crisis, and halted any funding momentum from January and February in its tracks, the report said. Startups were left with the question of who to bank with next. Many companies are turning to bigger banks after the collapse of the regional lenders, which could hamper access to quick, short-term cash.
In addition, foreign startups and those with nascent teams may need to turn to more restrictive and expensive alternatives for financial operations and loans, according to Rock Health.
The next few quarters of startup financing are likely to be more conservative, the report said. Some companies may look for buyers as a result as cash runs out, while others will face pressure to fundraise due to inflation concerns.
“It’s hard to overstate just how supportive SVB was of the startup ecosystem, and the full ramifications of its closure and acquisition on technology innovation may not be felt until quarters later,” analysts said.
Digital health companies continued not to seek public market exits in the first quarter, continuing a trend from late last year, as startups remained fearful of low initial public offering prices. To seek out cash, startups will either turn to private funders — deals which can involve valuation adjustments or operational reorganizations — or pursue alternative exit avenues, like becoming a public benefit corporation. Startups might also turn to debt financing, or sell assets in exchange for capital.
But such strategies won’t work for everyone, Rock Health said, reiterating warnings from prominent investors that startups need to be conservative and disciplined to make it through the next few quarters.
“Either by personal choice or business requirements, we are likely to see some startups give in to turbulent waters—seeking out buyers or shutting down completely over the next several months,” analysts said.
Rebecca Pifer/Healthcare Dive; Rock Health data