Last year was a record year for venture capital investment in digital health startups — the sector raised $29.1 billion across 729 deals, with an average deal size of $39.9 million. This market boom has ended, but the digital health investment space has not come crashing down by any means, according to a recent report from Rock Health. It’s just cooling off after a scorching year.

Digital health startups raised $10.3 billion across 329 deals during the first half of this year, with an average deal size of $31.2 million. This puts the sector on track to rake in $21 billion in 2022, about $8 billion less than the total amount raised last year. 

Though the pace of investments has decreased in the first half of this year compared to 2021, venture capital funding for healthcare companies is still pacing ahead of where it was in 2020, David Blumberg, CEO of venture capital firm Blumberg Capital, pointed out in an interview. He said investment firms are definitely still consistently pouring money in the digital health space, and these startups are still developing technology that is attractive to health systems.

“As health systems continue to generate a tremendous amount of data, funding is flowing towards startups that are deploying AI and machine learning solutions to harness this data for prevention, diagnosis and treatment,” he said.

Health systems are also continuing to adopt technology from startups focusing on telehealth and remote patient monitoring. Blumberg noted that this trend was strengthened by the pandemic, which “accelerated our societal migration toward a more virtualized mode of living and working.”

When choosing which healthcare companies to invest in, Blumberg Capital only considers startups that can prove they leverage data to improve clinical outcomes and lower costs. Blumberg said the firm looks at six T’s when evaluating companies: theme, team, terrain, technology, traction and terms. All companies receiving Blumberg Capital funding must be able to explain these thoroughly.

Ferrum and Theator are examples of two companies that made it into Blumberg Capital’s portfolio in the past two years. The former uses algorithms to automatically and inexpensively scan hospitals’ radiology diagnoses as a “second opinion” for quality assurance, error reduction and training purposes. The latter sells an AI-powered surgical tool that extracts and annotates key moments from real-world procedures to help train surgeons for future operations.

Blumberg Capital is an early-stage investment firm, so Blumberg said it will always be able to choose from a steady flow of healthcare startups promising to harness data in new ways to benefit patients and healthcare professionals. The investment space looks a bit different for later-stage startups. Later-stage digital health startups are using this market moment to reconsider valuations, reduce expenses and design their go-to-market strategies, according to the report. 

Some of these companies may need to adjust their expectations following large Series A or B deals, which could mean selling shares at a lower price than they were sold for in a previous financing round. But this isn’t true for all digital health startups that experienced rapid growth in their early years — Rock Health’s report noted that some of the companies within its own portfolio have exceeded pre-pandemic financial projections by significant margins. 

One thing that is certain is that 2022 won’t see as many startups enter public markets as last year. So far this year, no startups have gone public, compared to 23 exits in 2021.

Photo: aurielaki, Getty Images