If there’s any doubt that digital health funding, especially in the U.S., is rocketing straight into the stratosphere, CBInsights’ latest funding report leaves them out. Are we in a bubble? Is there irrational exuberance?Before we get to what investors are saying, let’s start with The state of digital health in 2021 Report:
- Global digital health investment was $57.2 billion, up 79% from 2020. make a record.
- Compared to 2020, the 154 mega-deals (over $100 million in funding) nearly doubled. This is also a record.
- The U.S. set a record for funding at $37.9 billion, 75% above 2020 levels.
- The median late-stage deal valuation has jumped to 3x 2020 to $73 million.
- The time between rounds C and D was reduced to 15 months. In the more laid-back pre-pandemic world of 2017, it took 22 months.
- There are now 84 unicorns, 13 of which will be born in 2021. This is a 49% increase from 2020. Yes, a record.
- There were 574 M&A transactions in the market, a record high. (Are you still tired?)
As usual, the US accounted for the largest share of investor funds – almost half of the global total in the fourth quarter of last year, followed by Asia and Europe. However, Latin America set new funding records in 2021. It raised $341 million through 57 deals.
Investor interest is not shared equally among startups, as late-stage companies can raise capital faster than early-stage companies. The report said it took 15 months between Series C and D — faster than in previous years — while between B and C, the time remained the same at 17 months.
Late-stage companies feel the love of investors from all walks of life. In fact, angels, corporate VCs, private equity firms, asset managers, corporates and traditional VCs saw median spending on late-stage deals across the board.
Now let’s talk about valuation. The fact that valuations are insanely high seems like an understatement — even a casual observer who didn’t read the CBInsights report might have recorded how many companies proudly announced funding rounds and proudly flaunted their unicorn status . CBInsights found that the median late-stage deal valuation in 2021 is $1.5 billion, 195% higher than the $508 million in 2020.
So, the burning question is, are we in a bubble, is there irrational exuberance? MedCity News reached out to some investors for comment on the thorny issue. Here’s how everyone responded via email.
Michael Greeley, Partner and Co-Founder, Flare Capital Partners
Greeley said firmly “no” to the question of whether he was in a bubble.
The categories are huge, and I think we’re in the “winners” phase of the growth and maturation of the industry. We continue to see tremendous innovation in virtual care solutions (many of which are developing new approaches to risk taking), solutions sold to pharmaceutical companies, infrastructure and analytics.
From an investment perspective, he added, neither category in digital health can be considered a higher priority area because “the health care system must simultaneously become virtual, on-demand, real-time, smart, informed Desirable, accessible. Time, so these developments need to be done in parallel.”
However, Greeley acknowledged that valuation was an issue.
Clearly, despite the volatility in the public markets of the industry over the past few months, valuations are now quite high, which may start to be reflected in early valuations. My suspicion is that we may start to see more investor-friendly terms while maintaining high valuations before we see a substantial reset in valuations.
Christina Jenkins, Venture Partner, Phoenix Ventures
Unlike Greeley, Jenkins was watching a giant fat bubble.
Yes, I do believe we are in a bubble when it comes to digital health, although I understand the excitement as Covid accelerates consumer driven and home care and our historical failure to improve infrastructure, policy in the US , and the behaviors needed to provide and achieve health.
Digital health is a key enabler of health at scale, and there will be some big, lasting winners. That said, there’s a lot of rubbish out there, and more nuanced conversations about areas that are about to face corrections in digital health (I’m looking at you, RPM). [Remote Patient Monitoring]
The pace of innovation will only accelerate, and we think there will be selective opportunities, especially in the fusion of sensors, data and artificial intelligence.
Michael Young, Managing Partner, Ommers Insurance Investment Company
Yang saw dark clouds ahead.
I’m currently a bit pessimistic that many digital health companies won’t be in a good position by the end of the year. The market is over-hyped, capital flows too freely, and revenue growth expectations are unsustainable.
I am concerned about the lack of operational discipline. I don’t think everyone can hire as fast or as much as they want, and I also expect greater workforce mobility (big resignations or whatever). The funding reports for these annual reviews are all rear-view mirrors, and I think we should have more discussion about the looming speed bump. Trust me, in some boardrooms, management teams are already re-planning their 2022 budgets because their boards are sounding the Defcon alarm.
Justin Norden, Partner, Jinsha River Ventures
Unlike Jenkins and Yang, Norden believes that the market is not in a bubble and that digital health has plenty of room to grow.
Digital health investment soars in 2021 – fortunately, much of this is driven by strong underlying business growth and the belief that more healthcare will move to digital in the future
He did admit, however, that “there is a growing gap between private market valuations and public market digital health performance.”
“I wouldn’t be surprised in 2022 if there’s more discipline around private market valuations and funding sizes.”
Chris Garabedian, Chairman and Chief Executive Officer, heterogeneity; Portfolio Manager, Venture Capital, keen advisor
Garabedian expects a slowdown in 2022, blaming astronomical valuations on novice investors inexperienced in healthcare and life sciences.
Innovations in therapeutics, combined with an equally exciting convergence of digital technologies and computing power (AI/ML/Quantum), are unlocking new targets, screening methods, and more predictive diagnostics. This trend has brought great enthusiasm for changing the way we think about healthcare and the application of digital technologies in discovering opportunities for research, treatments, diagnostics and devices, which has led to an equal level of investment and value performance in these industries Enthusiasm for the appreciation of the entire industry.
As often happens, this boom usually invites generalist investors and new investors with less experience. This can create market dynamics that move away from advancing these technologies and building proof-of-concept fundamentals, but start attracting investment and ultra-high valuations based on compelling narratives. The group of investors who stick to the fundamentals and focus on bringing these technologies to commercialization will be able to weather any volatility the industry may encounter in the near term. “
Garheng Kong, Founder and Managing Partner, HealthQuest Capital
Kong seems to be hedging the question of whether we are in a bubble.
We are aware of the momentum in the market and certainly increasing capital flows to support innovation in healthcare is positive. We try to be disciplined in our approach to investing – I would say we are more conservative than most when it comes to assessing entry valuations, and we have a business plan that aims to be self-sufficient in a few years rather than relying on the public market result. Our goal is to support healthcare transformers who are increasing the value of healthcare, and there is a huge unmet need. Yes, they will perform well in booming markets (like the one we are currently in), but we believe they will also demonstrate strong fundamental growth if/when capital market dynamics change.
What conclusions would you draw from the above, who knows this time next year, we might still be talking about another record-breaking year, but at some point these unicorns and other notable startups may need to perform and Demonstrate ROI. It can’t always be hats and no cows, can it?
Photo: Jikaboom, Getty Images
