Investors are understandably cautious this year as the Federal Reserve tightens monetary policies and financial markets have erased the gains of the past 12 months. Public company investors in attractive upside sectors, such as digital health, are waiting for headwinds to subside before returning, and investment in venture-backed companies has slowed significantly.
The figures for the first quarter of 2022 reflect this caution. After a records 2021 For the hot digital health sector, where the number and size of funding rounds have reached new highs, the first quarter saw a slowdown in digital health transactions and the IPO market cooled significantly.
The slowdown, of course, is not limited to digital health. Challenges such as inflation, rising interest rates, war in Ukraine and ongoing supply chain issues have led to capital preservation and belt tightening, postponement of IPO plans on the stock market and valuation declines in the startup landscape. Public companies in almost all sectors are equally affected, with technology being particularly affected.
But the whole story of 2022 is yet to be written, and for digital health, at least in the private market, it’s more of a downturn than a crash. Deals are still in the works, and digital health companies offering products and services that improve patient health and quality of care still have reason to be optimistic. But there is no doubt that so far the bar for raising private capital or accessing public markets has been raised in the digital health sector.
Funding numbers reflect the new reality
Our Friends at Rock Health report that there were 183 venture capital funding rounds for US-based digital health startups in the first quarter of this year, with a total value of around $6 billion. This represents a significant drop from the fourth quarter of last year, when $7.3 billion was invested. The first quarter of 2021 — which was the smallest quarter of last year in terms of dollars invested — saw $6.7 billion flow to digital health startups, the researchers said. Globally, digital health startups have experienced a 36% decrease financing from the fourth quarter of 2021.
Our analysis of data from PitchBook, which looks not only at funding rounds but also buyouts, grants, acquisitions, IPOs and other leveraged deals, shows that globally there were 390 total deals in the first quarter, a decrease of 26% compared to the first quarter. of 2021, when 525 transactions were closed.
Investments in digital health start-ups have followed the same trajectory that high-value growth stocks have charted on Wall Street: down. While there were 103 funding rounds for digital health startups in the first quarter of 2021, there were 82 in the same period this year, according to Pitchbook. But for later-stage deals, the gap was noticeably smaller. While there were 121 later-stage deals in the first quarter of 2021, there were 115 in the first quarter of 2022.
This could be a sign that late-stage companies are delaying entry into a public market that has been extremely volatile so far this year. These companies may also hold back as they rewrite their roadmaps away from SPAC deals — which have not held up well in recent market turmoil — and toward the traditional IPO route.
As the number and size of deals plummeted in the first quarter, PitchBook research found 11 US-based digital health startups, all later-stage, raised ‘mega-rounds’ of more than 100 millions of dollars. Fenwick represented Lyra Health in its Funding of $235 millionBrightline in its $105 million Series C seed round and Freenome in his Investment of $290 million from Roche Diagnostics.
Quieter exit markets
Last year seen an average of 23 digital health startup mergers or acquisitions each month, and an annual total of 23 IPOs through SPACs or traditional IPO transactions. Our research shows that there was only one digital health IPO in the first quarter of this year, compared to three in the same period last year.
The number of mergers and acquisitions, however, remained unchanged between the first quarter of last year and the first quarter of this year, at 31 deals for both periods. A few of the transactions Fenwick advised on in the first quarter included representing Nurx in its merger with Thirty Madison and Calm in his acquisition from Ripple Health.
In the health sector in general, the negotiation of mergers and acquisitions is so far This year. But acquirers are still keen on cloud-based healthcare platforms and new digital tools. Hospitals and health systems – whose bottom lines are under pressure due to supply constraints, staffing shortages and a sharp drop in elective procedures – must accomplish more with less during the current recession and consider the solutions digital health as a lifeline.
The hospitals are should undergo fundamental changes this year, with planned consolidations, restructurings and bankruptcies. These trends could mean that the acquisition of digital health tools and platforms will continue full steam ahead this year, as chaos often equals opportunity for new entrants.
At a time, significant changes are underway and will likely have a measurable impact on the hottest digital health sector of the past two years: telemedicine. As the federal government decides how many Medicare patients are eligible for digital remote care, states will iron out their licensing rules for healthcare professionals who use these platforms. Major insurers will also refine their reimbursement rules for telehealth. If decisions in all of these areas allow the further expansion of telemedicine, it could accelerate mergers and acquisitions and funding opportunities for startups in this area.
Signs of resilience
The economic downturn has hit all asset classes, from growth stocks and bonds to cryptocurrencies and commodities. Analysts disagree on whether the market is approaching its bottom or if there is more volatility and downside.
Private markets have followed the same path and investors are advise startups tighten their belts and make their money last, because the recovery could take time.
Digital health, however, is showing signs of resilience. Six new digital health unicorns — or startups valued at over $1 billion —appeared in the first trimester of this year, which has been a period of historic write-downs across a range of industries.
Mergers and acquisitions remain dynamic, and changes are on the horizon that could help digital health rebound.
As always, it will be interesting to see what the rest of this year has in store. I’m optimistic. As we have seen in previous recessions, times of upheaval and uncertainty will give way to exciting new growth opportunities, and new companies will be formed and become the leaders of tomorrow.