After Two Exuberant Years, Health Innovation Funding Recalibrates to Pre-Pandemic Levels
The third quarter of 2022 saw a 40% drop in global health innovation funding from the previous quarter, continuing a year-long trend of market contraction. Is this a new normal for the health sector or just investors reacting temporarily to macro market forces? Much depends on your mindset — and your destination. One thing is certain: there’s still a massive need and desire to achieve audacious heath moonshots.
StartUp Health Insights — 2022 Q3 Report
For more than a decade, StartUp Health has tracked data on global health innovation funding and shared it in a quarterly Insights Report. In our midyear write-up back in July of 2022, we described how these reports have fallen into three distinct phases. Pre-COVID we tracked a steady seven-year increase in funding. The growth was positive, but nowhere near where we knew it could be, or needed to be, in order to leverage technology to address the greatest health challenges of our time — what we call health moonshots. We knew then, and told anyone who would listen, that the time had come for the “creative destruction” of healthcare in which technology would transform the industry the same way it had upended the travel and retail industries.
Then COVID-19 hit, and the need for tech-enabled healthcare services moved from “maybe tomorrow” to “we need it yesterday.” Thus followed two years of exuberant interest in digital health and virtual care companies. 2021 was a particular anomaly, nearly doubling the funding in this sector in a single year from $22.8B to $44.6B.
Now, with three quarters of 2022 in the rearview mirror, we know that 2020 and 2021 were an inflection point, a period of excited expansion in a market that desperately needed it. After years of being treated like a sideshow (because, let’s be honest, senior care, primary care, and chronic disease management aren’t as splashy as Peloton and SpaceX), health innovation got the front stage attention it deserved. The COVID-fueled push for telemedicine reimbursement, data sharing, and price transparency will continue to shape the industry for decades to come.
That brings us to the third quarter of 2022 and there’s no sugar coating it: health innovation funding, like the broader VC landscape, is way down. We tracked about $4B raised in Q3, which was a 40% drop from Q2 and a 57% drop from Q1. That brings the 2022 funding total to $20B for three quarters, a 55% drop from the $34B that was raised over the same period in 2021. As dramatic as those decreases appear, funds raised YTD are higher than the same period than 2020 and appear to be normalizing after a significant COVID bump. The decrease in funding that we’ve tracked, which takes into account global deals, is in line with the domestic-only numbers gathered by groups like Rock Health, who reported a 48% drop between Q2 and Q3 for this year.
While total funding has dipped, median deal size has stayed high. So far this year median deal size has been $14.5M compared to $16M in 2021 and $10M in 2020. For a dose of perspective, just three years ago, the median deal size was $7.3M, half of what it is today. The fact that median deal size and deal count have stayed high while total capital raised fell sharply year over year suggests that we’re seeing fewer blockbuster deals at the top of the market. According to CB Insights, the broader market has seen mega-rounds ($100M+ deals) fall for three straight quarters “to its lowest level since the early days of the pandemic.” We’re seeing similar trends in our month-over-month chart of median deal size for 2022.
What everyone wants to know is whether these seemingly dramatic quarter-over-quarter decreases in funding are harbingers of even deeper cuts to come, a new normal, or are they the natural, even necessary, contractions of an exuberant market that leads to a healthy upturn in the near future?
Some analysts suggest that the contraction in the market could lead to more acquisitions and roll-ups as well capitalized companies consolidate services. Anecdotally, we’ve heard from StartUp Health portfolio companies that acquisition offers have been coming in more frequently than in the past, but the data has yet to reflect that reality. In the first three quarters of 2022 we tracked 57 acquisitions, compared with 90 over the same period last year. We’ll be watching these metrics closely in coming quarters.
We’re not fortune tellers, but we do have our ears to the ground. Based on our conversations with founders from our portfolio that spans 435+ companies across 29 countries, it seems clear that health tech investors are retrenching to the essentials, focusing on businesses with a more rational ROI thesis.
We also know that in an economy dominated by concerns about inflation, digital health platforms become powerful tools for lowering costs. Telemedicine companies can reduce healthcare expenses for patients and providers by allowing them to reach rural communities virtually, like the way Modern Ritual has increased access to skin cancer specialists. Digital health startups can also increase earning power by helping people reduce time off of work. For example, Everyplace Labs puts medical testing kiosks in large facilities to provide on-site medical diagnostics.
We know that in a period marked by labor shortages — especially in healthcare — digital solutions offer a lifeline. There simply aren’t enough nurses, primary care doctors, geriatricians, fill-in-the-blank, to handle the needs of rural and traditionally underserved communities. Digital health platforms that redistribute talent virtually will help alleviate that burden. We see this everyday in our portfolio, particularly in telemedicine companies like 1Doc3, Beam Health, and Rejuvenan, just to name a few.
The challenges being addressed by our global army of Health Transformers aren’t going anywhere. Funding may dip for a quarter or three, but the need for new solutions to address chronic societal problems like Type 2 diabetes, obesity, and heart disease are as present as ever. The need to cure and treat cancer and deliver mental healthcare to the millions of people struggling with anxiety and depression is growing, not diminishing. These will continue to be high-demand essential services, not just consumer conveniences, and we’re confident funding will grow to reflect that reality in the future.
Top Deals
Each quarter we review the largest health innovation deals around the world and see what we can learn from following the money. This exercise feels even more important than usual given that these are the companies receiving large amounts of capital in spite of turbulent economic forces.
Topping our list of US deals is Cleerly’s $192M raise for its AI-assisted heart disease detection platform. The “AI for X” sector in healthcare continues to be one of the most exciting and fast-moving evolutions in health innovation. We see these products taking shape in a range of verticals across our portfolio, like “AI for prenatal ultrasound” (BioticsAI), “AI for pathology” (Crosscope), “AI for MRI” (BrainScanology) and “AI for echo exams” (Us2.ai). The list goes on. This market is only getting hotter as the data sets get richer and the algorithms get smarter.
Another top deal that is a sign of the times, this time from the global markets, is Cera’s $320M raise to support their aging-in-place platform. Geriatrics hasn’t traditionally been associated with high-tech innovation, but with a tidal wave of seniors aging up and needing advanced care, there’s an enormous need for purpose-built tools and services. We’re seeing this emphasis on senior care in many of the young companies we backed in the last two years, like MoodSpark, Determined Health, Lena, and Eternally. They’re building on the established work of companies like LifeBio, who’s tackling senior loneliness, and CarePredict, which is upgrading remote monitoring for seniors.
Everside’s $164M raise marks a rare top dollar fundraise for the direct primary care community. This market, where general practice doctors take care of communities of patients in a value-based care model, has been dominated by smaller players in the past. For more context on this sub-market, we reached out to Sharud Agarwal, CEO and founder of Akute Health, a patient record platform selling to DPC offices.
“This Everside funding round shows that not only is DPC a viable small business model, but it’s one that’s exploding and can sustain enterprise scale as well,” says Agarwal. “I believe this is only the very start of DPCs growth. A primary care-centric model where patients get long-term health maintenance (rather than only short-term sickness healing) is proving to have better outcomes at lower costs to patients and, crucially, less burnout for physicians. DPC, combined with value-based payments, will lead to fundamental shifts in the healthcare market over the next 10 years.”
Alma’s $130M raise could help to build a stronger infrastructure for virtual mental health. This has been a rapidly growing — read: crowded — sector, so it’s natural to see a company streamlining workflows and knitting the players together.
Finally, Incredible Health, with its $80M raise, is now the highest-valued healthcare employment marketplace. This raise puts a spotlight on issues of burnout and stress in the healthcare industry. According to the US Bureau of Labor Statistics, nearly 1.7M people quit their healthcare jobs this year and a recent survey of 1,000 healthcare professionals showed that 28% had quit a job because of burnout. Tools like Incredible Health, when combined with credentialing startups like Mocingbird and HPEC, have the potential of putting power — and job satisfaction — back into providers hands.
Hubs of Innovation
In the United States, health innovation funding is still concentrated in San Francisco, with New York City, and Boston rounding out the top three. More interesting, perhaps, is to see which cities are growing into hubs of health innovation. Topping that list is Los Angeles, with $95M raised across eight deals in Q3. Internationally, London has emerged as the runaway favorite for health innovators, clocking 17 deals this quarter and $573M in funds raised. Toronto continues to generate significant deal activity with eight deals this quarter and more than $113M raised.
Conclusion
According to investment data firm CB Insights, global venture funding took a major hit in Q3 of 2022. The 34% quarter-over-quarter drop was the largest decrease in a decade. Not surprisingly, the health innovation funding market, which we’ve been tracking for a decade, took a similar downturn this quarter. Invested capital is down, deal count is down, and acquisitions are down.
Where CB Insights characterizes this drop as “doom and gloom,” however, we at StartUp Health see a different story line. Yes, health innovation funding is recalibrating to pre-pandemic levels, but that’s in part because COVID fueled two years of exuberant investing as firms tripled down on virtual health. Those chips fell and companies were capitalized, and now we believe we’re seeing a natural contraction and consolidation.
Think we’re being overly optimistic? Maybe that would be true if we were only looking at the investment numbers. But with more than 435 companies in our portfolio and nearly 1,000 founders from 29 countries, we have the benefit of seeing the market from multiple angles. And what we’ve seen is that in spite of this investment dip, global health challenges are as pressing as ever, health entrepreneurs are making breakthroughs daily, and the world is demanding answers about how to live a longer, healthier life. In fact, we think the market is as ripe for a tech revolution now as it was 10 years ago when we started writing these reports.
Many of the best, most innovative companies in the world were built during down markets as founders were forced to get creative about building lean companies and irresistible products. Let’s take advantage of this moment and build the future of health, together.
This report was written and designed by Logan Plaster based on data collected and managed by Tara Salamone, Jennifer Hankin, and Nicole Kinsey. Additional analysis by Priya Reddy, Padma Rao, and Josh Cherry-Seto. Download the graphs here.
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