The Longevity

2016 Saw Record Funding Levels in Digital Health, Shift Toward Early-Stage Deals

In an article summary last month, we covered a story about long-time investors breaking into the digital health sector for the first time in 2016. A recent piece by CBInsights covers the story from another angle: total dollars invested in digital health startups.

The story, at first blush, is that the influx of capital is continuing to soar. But there are also some important caveats buried in the details, including that the spike is in early-stage deals only and that the total number of deals actually fell compared with 2015.

In 2016 investors continued to ramp up their deals to companies aiming to use digital solutions to remedy pain points in the healthcare system. Global equity funding to private digital health startups grew for the 7th straight year in 2016, hitting a high of $6.1B. While the large majority of rounds went to early-stage, seed and Series A companies, a few more mature companies also raised notable mega-rounds.

As mentioned above, the funding trends from 2009-2016 deserve a closer look, because while yearly total spending has been consistently climbing for these 8 years, quarterly data reveals that 2016 saw a 9.6% drop in total deals compared with 2015, with the sharp drop coming in Q3 and recovering slightly in Q4.

In 2016, equity funding to digital health companies saw a 3.2% increase from $5.9B in 2015 to nearly $6.1B in 2016. Deals, however, dropped 9.6% from a high of 1016 in 2015 to 918 in 2016.

On a quarterly basis, funding saw a 7.7% increase from $944M in Q3’16 to $1.02B in Q4’16. Deal flow, which fell from Q1-Q3’16, picked back up at the end of the year, hitting 250.

Although more and more investors are entering the digital health sector, many for the first time in 2016, the influx of capital seems focused exclusively on early-stage deals with a record 58% of global deal share going to them in 2016. (For an interesting perspective on how this bias is failing to produce successful startups, see this piece about Matthew Karls from Echo Health Ventures, who argues that digital health funding is broken).

Digital health is becoming an increasingly competitive sector, with a greater percentage of deals going to early-stage, seed and Series A rounds. Prior to 2011, early-stage funding occupied just under 50% of total deal share. But following the approval of the Affordable Care Act in 2010, funding to early-stage digital health companies in every following year has not dipped below 56% of total deal share.

Meanwhile, mid-stage deals (Series B and C) have been trending downwards from a high of 22% in 2009 to 12% in 2016. Since hitting a high of 11% in 2010, late-stage rounds (Series D and E+) have also trended down, settling at 4% in 2016.

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