United States: The Most-Funded Year Ever For Digital Health Startups – New Trends, Opportunities Emerge In Q3

At the end of Q3, aggregate funding raised by digital health startups in 2021 surpassed $20 billion. Although 2021 continues to be a record-breaking year for digital health startups, investors gently tapped the breaks in Q3.

This is not a sign that the sector is cooling off. In fact, it's quite the opposite. Even with fewer "megadeals" than the two that preceded it, the activity in Q3 shows the digital health sector continues to be in a period of remarkable growth and maturity.

By the Numbers

When compared to Q2, our friends at Rock Health noted a slight dip in digital health financing rounds in Q3, with a total of 169 reported, down from 223, and the total amount raised in Q3 was about $6.7 billion, down from $8.2 billion in Q2.

Megadeals-funding rounds larger than $100 million-contributed about $3.1 billion to Q3's fundraising total. In comparison, such deals added more than $4 billion to each of the totals for Q1 and Q2 2021.

PitchBook, which focused exclusively on enterprise, or B2B, digital health deals in Q3, noted there were 83 deals, the lowest number since 2015. But the value of deals continues to increase, analysts noted, a sign of a maturing industry.

The slower deal pace may continue into 2022, analysts at Silicon Valley Bank said, as investors may scale back new investments in favor of follow-on rounds for their existing portfolios.

By the Sectors

While the numbers tell one story, sectors within digital health attracting the capital tell another.

Mental health has been a top focus for founders and investors since the beginning of the pandemic. In a clear instance of going where the need is greatest, investors have put $3 billion into startups with digital mental health solutions this year, $2 billion of which went to telemedicine providers and other "alternative care" technology companies, according to Silicon Valley Bank analysts.

Funding for FemTech, health technologies designed specifically for women, hit an all-time record of $1 billion for the first three quarters of 2021, analysts at Silicon Valley Bank said, up from 2020's full-year record by more than 50%.

Alternative care-a sector that includes all technologies that deliver primary and secondary care outside a doctor's office or clinic-remains among the top funded digital health sectors, with $11 billion invested in 2021 so far, according to Silicon Valley Bank.

Opportunities Ahead

Alternative care platforms served admirably when the pandemic temporarily prevented in-person medical visits. As the sector's success continues to attract investors, a new trend will likely shape the future direction of these technologies.

An analysis by PitchBook showed that 76% of U.S. employers increased their investments in alternative care in 2020, and the figure is expected to be even higher when all of 2021 is analyzed. This means startups in this space will likely be partnering more with employers and health insurers in 2022 and beyond.

PitchBook analysts expect telemedicine companies that offer both physical and mental health services will likely pursue direct partnerships with employers, whereas companies that do one or the other will be more likely to partner with payers.

Another area of growing opportunity for digital health startups is in clinical trials for new pharmaceuticals. The biotech industry has been under pressure for years to make trials more diverse, and the pandemic added a new pressure to move some trials to a remote or hybrid model. These pressures represent opportunities for digital health startups to offer new technologies to enable "decentralized" clinical trials. Supply-chain technologies, data transfer and compliance solutions are among the technological needs for making decentralized trials a reality, according to PitchBook analysts.

Something to Celebrate

As if there wasn't already enough to celebrate in the digital health sector, women CEOs have raised around $3 billion in 103 deals so far this year. Rock Health analysts note women CEOs closed 19% of all digital health deals thus far in 2021, compared to 11% in all of 2017.

Looking at all of 2021 so far, women CEOs have raised twice the amount they raised from investors last year, Silicon Valley Bank said, with 20% of all deals thus far closed by women. You can expect funding by women-led companies to only increase in the coming years, as companies in developing digital health sectors are frequently women-led. Notably, in the emerging FemTech sector, more than 70% of the companies are led by women CEOs or founders, according to Silicon Valley Bank analysts.

With the end of 2021 in sight, analysts at Silicon Valley Bank are projecting that U.S.-based digital health startups will raise $32 billion before the year is through-more than double the $14.1 billion raised in 2020. The bank projects that IPOs of digital health companies this year will generate more than $4 billion.

It's clear the digital health sector is growing more economically powerful with new opportunities continuing to arise as it evolves.