Dive Brief:

• The digital health sector appears to be cooling down, with startups in the once-hot industry raising less money and undergoing fewer mergers and acquisitions in the first half of the year. Digital health public exits also ground to a halt, with zero startups entering the public markets.
• According to a new Rock Health report, the digital health sector raised $10.3 billion in the first half of 2022. That’s compared to $15 billion in the first six months of last year.
• That means 2022’s overall funding is on track to land somewhere around $21 billion, down significantly from last year’s record tally of $29.1 billion (but outpacing 2020’s $14.7 billion), according to the venture fund.

Dive Insight:

The digital health sector was hot off a record year for funding in 2021, stoked by coronavirus tailwinds. The frenetic pace of activity caused some investors to warn of a potential bubble, or at least a market correction.

This year’s trajectory so far suggests overall funding will fall significantly short of last year’s, as investor confidence is shaken by global conflict and inflation concerns.

Digital health funding started flagging in the first quarter, which included fewer megaround deals and a dearth of public exits signaled a market cooldown. It continued to stall in the second quarter, which was the lowest funding quarter since the second quarter of 2020.

Overall, in the first half of 2022, U.S. digital health startups raised $10.3 billion across 329 deals, according to Rock Health.

Despite the pullback, Rock Health projects funding this year will still outstrip all previous years besides 2021, suggesting last year’s spike may have been an anomaly.

2021 was also the top year for digital health M&A with an average of almost 23 exits via M&A each month. By comparison, there were only 16 M&A deals per month in the first half of 2022. That could reflect buyers’ nervousness, along with potential mismatches between startup’s valuations and actual performance and profitability, Rock Health said.

But there are positive signs for the rest of 2022 and beyond.

Venture investors raised record funds last year, meaning they have hefty tranches of capital to deploy. In addition, startups that are reconsidering valuations, recalibrating operations and lowering costs, in some cases through layoffs, could result in stronger companies. These adjustments could also lead to additional M&A in the back half of the year, as complementary digital health companies pair off, Rock Health said.

Investors made familiar bets in the first half of the year, with the majority of funding flowing into therapeutic areas including digital mental health and support for biopharma research and development.

Mental health was once again the top-funded clinical spot, while funding for administrative and clinical workflow solutions increased. That’s a priority for enterprise buyers, particularly health systems struggling with labor costs and staff burnout, Rock Health said.