Digital health startup funding on pace for 5-year low

U.S. digital health startups raised $6.1 billion from 244 deals in the first half, compared with $10.3 billion across 329 in H1 2022, per a recent Rock Health report.

Why it matters: If the sluggish pace continues, 2023 will be the lowest funding year for the sector in the last five years.

Zoom in: While the signs of an evolving investing landscape are apparent, the report reflects how digital health startups continue to navigate a shift from the prior funding environment to the present day — while avoiding the dreaded down-round.

• "For most founders, the challenge is how to bring in new capital without 1) severely crunching previously-established valuations, and 2) incurring bad PR associated with a down round or a smaller-than-expected lettered raise (e.g., Series B, Series C)," Rock Health researchers Mihir Somaiya and Madelyn Knowles write.

By the numbers: The first quarter saw $3.5 billion of funding over 131 deals and Q2 clocked in at $2.5 billion across 113 deals, joining the last two quarters of 2022 as recent sub-$3 billion quarters.

• The average deal size in the first half of 2023 was $24.8 million.
• As funding ticked downward, so too did the number of investors participating — 555 investors in the first half, down from 775 a year earlier and 832 in the first half of 2021.
• Additionally, 71% of H1 2023’s dealmakers were repeat investors.
• The first half averaged just over 12 acquisitions of digital health startups monthly, down from more than 15 M&A deals per month in 2022 and 14 per month over the past five years.

What's next: Difficulty accessing capital and a still-frozen IPO market create prime conditions for startups to consider acquisition offers, the authors write.

Yes, but: Founders aren't quite ready to accept the new reality.

• "It’s likely that, similar to H1 2023’s valuation crunch, startup teams are holding out on accepting acquisition offer bids that they see as lower than they might have received just a few quarters ago or even lower than the sum of their previous raises," the authors say.

The intrigue: Another reason for the low deal count? Some acquisitions may not be publicly disclosed, especially if terms were less than ideal for the startup purchased, the authors write.