US digital health funding soared to $8.1 billion in 2018
US digital health funding soared to $8.1 billion in 2018 - up nearly 40% from 2017, which was previously the highest funding year. And digital health funding now accounts for almost 10% of all venture funding - up from 7.5% in 2017 - highlighting blooming investor confidence in the sector.
- Funding rounds are larger across every stage. The average digital health deal size climbed 38% to nearly $22 million dollars, though the number of deals in 2018 (368) was roughly on par with the number that occurred in 2017 (360).
- Unicorns with clinical-grade products were central to digital health's record-high 2018 funding levels. These digital health unicorns may be symbols of more a mature market, as companies typically need to prove their worth over time and offer products with proven market value before earning a $1 billion valuation. Of the seven digital health unicorns, six held funding rounds in 2018, raising an average of $231 million per deal. And some of these companies - such as Butterfly, Heartflow, and Tempus - provide clinical-grade products currently deployed by US health systems, suggesting they've proven their market value.
And there's room for early-stage startups to succeed despite the market's maturation:
- Investors are still flocking to early-stage deals. Half of all digital health funding deals in 2018 were seed or Series A, which mirrors a trend seen in recent years. Investors' continued appetite for early-stage deals bodes well for aspiring entrants that seek capital to get off the ground.
- And the pace at which startups can raise consecutive funding rounds is accelerating. The average time between raising seed and Series A rounds has been cut roughly in half since 2011, dropping from 30 months to 15 months. The ability to raise multiple rounds in short order likely helps digital health startups stay afloat during early growth phases, when the cost of scaling labor and real estate may inflate operating expenses.
Despite the current growth trajectory, digital health funding may plateau in the coming years. For one, there hasn't been a digital health initial public offering (IPO) since 2016, Rock Health notes.
While we expect to see at least one digital health company go public in 2019, the recent lack of successful market exits may shake investor confidence in the long-term viability of digital health startups. This could suppress funding levels, making it unlikely digital health funding will sustain 40% annual growth.