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Digital health investment undergoes a health reset, and the future is defined by value

After the dizzying pace of digital health investment in 2021, it’s helpful to assess what’s happened so far this year and what activity the industry is likely to see in the rest of 2022.

according to this 2022 first half report Digital health funding activity from Rock Health has slowed, and the industry is probably well aware of the trend. Rock Health reported that it raised $10.3 billion in the first half of the year and expects to raise $21 billion this year, down significantly from last year’s $29.1 billion.

However, while digital health funding is expected to decline by 27.6%, we should be careful not to read too much into it. Activity in the first half of the year was disappointing, with only direct reference to unprecedented activity levels in 2021. This year’s total is likely to surpass 2020’s total of $14.7 billion, up from 2019’s figure. Looking at long-term trends, digital health funding has been on a strong upward trajectory over the past decade – driven by fundamental improvements in technology, an increasingly favorable regulatory environment, and the actual realized value of digital health innovation. While 2022 is likely to start over with a huge increase in digital health funding in 2021, this is a healthy correction and an opportunity to recalibrate core metrics.

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

macroeconomic trends

While this year’s drop in funding can be attributed at least in part to a return to normalcy, investment in digital health has also been influenced by the macro economy. While healthcare is relatively resilient compared to other industries, it is not immune to larger impacts such as inflation, recession risks, and uncertainty and supply chain disruptions caused by the war in Ukraine.

Some of the most affected companies are those selling to large corporations, including health systems and pharmaceutical companies, who want to prioritize spending plans to those with the strongest value proposition, greatest return on investment (ROI) and time. a few. value. In this environment, it’s even more important for startups to be clear about their ROI – measure and publish this data wherever possible – and emphasize this value to potential clients to ensure their solutions are This turbulent time is on the list of prioritized initiatives.

mental health startup

Research shows that digital health startups that provide mental health care received the highest clinical funding positions in the first half of 2022. However, the field is receiving some scrutiny.

While mental health care startups raised a total of $1.3 billion in the first half of 2022, only $300 million was raised in the second quarter of 2022. While there are a number of reasons for the notable quarter-to-quarter change, one can also look at the public markets, where many companies in this sector have underperformed the broader market and their digital health peers (NASDAQ: PEAR , NASDAQ: LFST, NASDAQ: TALKW). Despite the enormous potential of this field, the fundamental questions of how to effectively transform mental health care services – making them more accessible, personalised and effective at scale – remain to be addressed.

So as we go from 2022 to 2023, I expect the industry to continue to be active; however, as expectations slow and valuations recalibrate, we should also expect to see a pullback from the peaks in 2021 and Q1 2022, It could also lead to a wave of consolidation.

SPACs and M&A

Digital health mergers and acquisitions (M&A) slowed significantly in the first half of the year compared to record activity in 2021. The number of listed companies has also fallen sharply.

One is listing. We have to admit that some recent exits have performed relatively poorly, especially those going public through special purpose acquisition companies (SPACs), which have impacted the digital health industry, in some cases more than others. To be clear, the vast majority of these companies are great businesses. However, in hindsight, the average SPAC company does not have the same performance benchmarking requirements as the average IPO company: namely, attributes such as a strong, proven business model, reliable quarterly forecasts, and well-established comparability. As a result, public investors turned to these companies more quickly as the market fell and cooled on SPACs more broadly.

Companies that go public through the traditional IPO process have not been spared by the public market downturn. One area that has received considerable attention is technology-enabled services, which includes major telehealth and hybrid-mode care providers (NYSE: TDOC, NASDAQ: ONEM, NYSE: AMWL ). At the peak of the market, the market capitalization of many of these businesses reflected the revenue multiples (20-30 times earnings) of high-growth, high-margin tech companies; instead, recent revisions have brought their multiples closer to those of premium service businesses ( 2-4x) to be consistent. Which set of multiples is more appropriate is up for debate, but it’s clear that this reset has changed the way these companies spend and grow, their go-to-market plans, and their M&A thought process.

While we naturally expect a high valuation environment to be a catalyst for M&A—acquisitors can trade with high-value stocks, while acquirees are comfortable with attractive prices—we can also expect to see a higher valuation in lower valuations. There is a wave of consolidation in the environment. In particular, established players with plenty of cash are eager to enter the healthcare space, but have mostly abandoned the earlier wave of acquisitions because of high target prices.Just on Thursday, we saw the first major signs Amazon (NASDAQ: AMZN) Announces Acquisition of One Medical (NASDAQ: ONEM) at $18 per share — a healthy premium to its recent trading price despite being below its trading price for most of 2021. As market prices continue to be attractive over the next 12-18 months, I expect substantial volatility in mergers and acquisitions ranging from large acquisitions to industry consolidation.

Looking forward to new opportunities

Like many investors, GSR Ventures has seen its most active year for digital health investing in 2021. 2022 and beyond will undoubtedly bring changes as the macro environment changes, valuations and multiples are lowered, and the mix of prominent and emerging digital health segments undergoes rapid adjustment.

But most importantly, the need for digital transformation in healthcare has not diminished. If anything, it becomes more obvious. As long as this need exists, there is a great opportunity to invest in companies driving this shift.

Disclaimer: Nothing in this article constitutes investment advice or a recommendation, and under no circumstances should any information provided in this article be used or deemed to be an offer to sell or an offer to buy an interest in any investment fund managed by it. Offer for Jinsha River Ventures (“Jinsha River”). Any investment decision shall be based on its independent discretion, and GSR shall not bear any consequences arising therefrom. The information provided reflects GSR’s views and as such these views are subject to change at any time and GSR undertakes no obligation to provide notice of any changes. The companies mentioned in this article are a representative sample of GSR’s portfolio companies and do not reflect all of GSR’s investments. An alphabetical list of GSR investments is available here. It should not be assumed that the above investments have been or will be profitable. Actual events, results or actual experience may differ materially from those reflected or anticipated in these statements due to various risks and uncertainties. Nothing in this article should be taken as a guarantee or a guarantee of any particular company’s future success. Past performance is not indicative of future results.

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