- Investment in digital health startups hit a new high in 2018, totaling $8.1 billion across 368 deals, according to venture fund Rock Health's latest report. The record haul beat 2017's total of $5.7 billion by 42% — despite completing just eight more deals.
- Deal size also continued its upward trajectory, with the average deal garnering $21.9 million. Half of all deals were seed and Series A rounds, signaling confidence in the role of new entrants, as well as more mature companies. The year saw 110 digital health exits and, for the second straight year, no IPOs.
- Despite a surge deal volume and size, several factors lead Rock Health to conclude that digital health is not in a bubble — at least not yet.
Since 2011, digital health has raised $30 billion in venture capital, according to the report. If investors realize four times return over 10 years, that implies a $120 billion market by 2025. That's not unthinkable given an overall healthcare market of roughly $3.5 trillion.
Still, with the stock market's recent volatility, Rock Health says investment in digital health could level out over the next few years.
Among digital health's strengths are significant value creation and the trend to find new and sustainable means to revenue and scale. "On the whole, we see highly-capitalized companies that are consistently meeting validation and reimbursement milestones," the report says.
Those same signs — more frequent and highly valued late-stage rounds — suggest digital health funding could be starting to crest. High cash burn rates, unclear exit pathways and high valuations divorced from fundamentals all point to a moderate bubble, according to the report.
Rock Health predicts more consolidation in the digital health space over the next few years, from talent acquisitions to fire sales and digital health companies gobbling up other digital health companies to expand their portfolios. Recent examples include Livongo's acquisition of Retrofit, Welltok's purchase of WellPass and ResMed's bid for Propeller Health.
But consolidation is not likely to crimp the field of potential buyers. Vertical integrations like CVS-Aetna and the growing role of tech giants in healthcare will fuel more demand for digital advances, according to the report.
Rock Health does raise concerns about high valuations, with the market now fielding seven digital health unicorns — companies valued over $1 billion. They are Peloton, Tempus, 23andMe, Zocdoc, HeartFlow, proteus and Butterfly. Cancer research platform Tempus raised $260 million in two rounds last year. The other six each completed rounds averaging $231 million.
Whether those valuations portend a bubble or smart investment is still anyone's guess. "If the future of US healthcare is digital, then the digital health sector may be fully valued and priced for success," according to the report.