Health tech start-ups struggle to attract venture capital
By Chris Wheal
February 14, 2024
The Covid pandemic produced a flood of investment in digital health, which has since fallen off
Health tech innovation has taken a hit since Covid pandemic highs, with venture capital funding for digital health initiatives halving for the second year running. Digital health has seen a bigger fall in venture capital backing than the rest of the market. These are the findings of the State of Digital Health 2023 Report from CB Insights.
Globally, the number of digital health funding deals dropped by more than a third in 2023. Just $13.2bn was raised across 1,397 deals in 2023, compared with $52.7bn in 2021. That meant funding fell to its lowest levels since 2016 and the number of deal fell to the lowest level since 2014. The US held its leadership position, attracting more than half of all deals.
The median deal size remained at $4m – the highest on record. While median digital health deal size has grown for more than a decade, venture capital deal sizes more broadly have fallen since 2021.
Mega-deals and unicorns
Mega-rounds of funding have all but disappeared from the digital health realm, CB Insights said. There were just three $100m+ rounds in Q4 2023 – that’s the lowest count since 2016. On an annual basis, mega-round count hit 20 for all of 2023, falling well below even the quarterly average for 2021 (37 deals per quarter).
CB Insights said: “The digital health unicorn herd started to shrink in 2023.” A unicorn is generally considered a privately owned start-up with a valuation of $1bn. CB Insights warned: “Unicorn loss is outpacing unicorn births.” It said this was driven by a mix of start-up exits, down rounds, and shutdowns.
Despite four new unicorns in 2023, digital health’s total unicorn count dropped from 97 to 94 over the course of the year.
But the report suggested M&A activity was replacing investment. Digital health M&A nearly doubled in Q4 2023, it said. “If funding remains sparse and IPOs remain largely out of reach, M&A will become an increasingly attractive option for cash-strapped digital health start-ups.
The VC health backers
The biggest venture capital backers in the digital health sector were Andreessen Horowitz – known as a16z – and Plug and Play, which both backed five start-ups. Thanks to its digital health investment in Q4 2023, a16z added another unicorn to its portfolio.
Backer a16z has a separate bio and health portfolio that includes companies in food as well as medicine and medical practice alongside biotech and pharmaceutical start-ups.
Plug and Play Ventures describes itself as building an innovation ecosystem not just directly investing in start-ups but getting existing firms to partner with start-ups to benefit from new ideas. It cites pharma giant Roche as having run co-creation pilots with more than 30 start-ups and extended collaborations with more than half of them to improve digital diagnostics.
Within digital health, care delivery and navigation was the best funded subsector, raising $837m in Q4 2023. It was followed by monitoring, imaging and diagnostics tech with $501m.
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