Digital health investment undergoes a healthy reset, the future will be defined by value

After the dizzying pace of investment in digital health in 2021, it is worth assessing what has happened so far this year and what activity this sector is likely to see for the rest of 2022.

According to this H1 2022 report from Rock Health, digital health financing activity has slowed, a trend the industry is likely well aware of. Rock Health reports $10.3 billion was raised in the first half, equating to $21 billion for the year, down sharply from last year’s total of $29.1 billion.

However, while a projected 27.6% drop in digital health funding is significant, we should be careful not to read too much into it. Activity in the first half of this year is disappointing only in direct reference to the unprecedented level of activity in 2021. This year’s total is most likely expected to exceed 2020’s $14.7 billion total, which was higher than in 2019. Looking at the longer-term trend, digital health financing has been on a strong growth trajectory over the past decade, driven by fundamental technological improvements, an improved regulatory environment increasingly favorable and the real value realized by innovations in digital health. While 2022 will likely be a reset from the tremendous growth in digital health financing in 2021, this is a healthy correction and an opportunity to realign with baseline metrics.

With that in mind, it’s worth looking at some of Rock Health’s findings.

Macroeconomic trends

While the drop in funding this year can be at least partially attributed to a return to normalcy, investments in digital health have also been affected by the macro economy. Although healthcare is relatively resilient compared to other sectors, it is not immune to the larger forces at play, such as inflation, the risk of recession, uncertainty and disruptions in the supply chain caused by the war in Ukraine.

Some of the hardest hit companies are those selling to large enterprises – including healthcare systems and pharmaceutical companies – looking to prioritize their spending initiatives to only the first few with the strongest value proposition, best return on investment (ROI) and time to evaluate. In this environment, it’s even more important for startups to be clear about their return on investment – measuring and publishing this data when possible – and emphasizing this value for potential customers in order to s ensure that their solutions fit into this list of priority initiatives during this turbulent time.

Mental health start-up

Digital health startups offering mental health care secured the top clinical funding spot in the first half of 2022, according to the research. However, this area is under intense scrutiny.

While mental health startups raised a total of $1.3 billion in the first half of 2022, only $300 million closed in the second quarter of 2022. Although there are many reasons for the significant variability quarter over quarter, one can also look to the public markets where a number of companies in this underperformed both the broader markets and their digital health counterparts (NASDAQ: PEAR, NASDAQ: LFST, NASDAQ: TALKW). While this sector holds enormous potential, the fundamental question of how to effectively transform the delivery of mental health care – making it more accessible, personalized and efficient at scale – has yet to be answered.

As a result, as we move through 2022 and 2023, I expect continued activity in this sector; however, we should also anticipate a decline from the highs of 2021 and the first quarter of 2022, as expectations moderate and valuations recalibrate, which could also lead to a wave of consolidation.

PSPC and M&A

The first half of the year was marked by a significant slowdown in mergers and acquisitions (M&A) in the digital health space, compared to the record activity of 2021. There was also a sharp drop in the number of companies that have gone public.

First, make it public. We have to acknowledge the relatively poor performance of some recent exits, especially companies going public through Special Purpose Acquisition Companies (SPACs) which have affected the digital health sector, in some cases more severely than others. other sectors. To be clear, the vast majority of these companies are large corporations; however, in hindsight, we did not see the same performance benchmark requirements for the average SPAC company as compared to the average IPO company: namely, a strong and proven business model, reliable quarterly forecasts and well-established comparables , among other attributes. As a result, public investors were quicker to turn to these companies as markets fell and cooled more broadly on SPACs.

The public market slowdown has also not spared companies that have gone public through the traditional IPO process. One area that has received a lot of attention has been the area of ​​technology-enabled services, which includes leading providers of telehealth care and hybrid models (NYSE:TDOC, NASDAQ:ONEM, NYSE:AMWL). During the market peak, many of these companies saw market caps reflecting the revenue multiples of high-growth, high-margin tech companies (20-30x P/S ratios); the recent correction has instead brought their multiples closer to alignment with the premium services business (2-4x). Which set of multiples is most appropriate can be debated, but what is clear is that this reset has changed the way these companies are expected to spend and grow, their IPO plans, as well as the process of consideration of mergers and acquisitions.

While we would naturally expect a high valuation environment to be a catalyst for mergers and acquisitions – acquirers can leverage high-value stocks to close a deal and acquired companies are happy with attractive pricing – we can also expect a wave of consolidation in the low valuation environment. In particular, there are a large number of established companies with big money and eager to enter the healthcare sector, but who have mostly ignored previous acquisition waves due to high target prices. Only on Thursday we saw the first major sign of this as Amazon (NASDAQ:AMZN) announced a deal to acquire One Medical (NASDAQ:ONEM) for $18/share – a healthy premium to its trading price. recent, although below where it was trading. for much of 2021. As market prices remain attractive over the next 12-18 months, I expect to see significant waves of mergers and acquisitions ranging from large acquisitions to industry consolidations.

Looking forward to new opportunities

As with many investors, GSR Ventures had its most active digital health investing year in 2021. 2022 and beyond will undoubtedly bring changes as the macro environment shifts, valuations and multiples shift are resetting lower, and that the mix of large and emerging digital health sectors is undergoing rapid adjustment. .

Importantly, the need for digital healthcare transformation has not diminished; if anything, it has become more pronounced. As long as this need exists, there will be great opportunities to invest in the companies driving this change.

Disclaimer: Nothing in this article is intended to constitute investment advice or recommendation, and in no way should the information provided herein be used or considered as an offer to sell or solicitation of an offer to purchase an equity interest in an investment fund managed by GSR Ventures (“GSR”). Any investment decision will be made solely on the basis of its independent discretion and GSR will not be liable for the consequences thereof. The information provided reflects the views of GSR at any given time, such views may be changed at any time and GSR shall not be obligated to provide notice of any change. The companies mentioned in this article are a representative sample of the portfolio companies in which GSR has invested, which do not reflect all of the investments made by GSR. An alphabetical listing of GSR’s investments is available here. It should not be assumed that the investments listed above have been or will be profitable. Due to various risks and uncertainties, actual events, results or experience may differ materially from those reflected or contemplated in these statements. Nothing contained in this article should be taken as a guarantee or assurance as to the future success of any particular business. Past performance does not represent future results.

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