Venture Investors Continue Love Affair with Digital Health Startups

7/3/13Follow @wroush

It’s been a slow year for startup fundraising—the investments doled out by venture firms in the first quarter dropped 6 percent compared with the same period of 2012. But at least a couple of sectors have been defying that trend. One is software, where funding for the first half of 2012 was up 38 percent over 2012 levels, and another is digital health, up 12 percent.

In a report issued yesterday (slides embedded below), San Francisco-based digital health accelerator Rock Health delved into the details behind that 12 percent number.

Here are some of the highlights from the report:

—Investors put $849 million into 94 digital health deals across 90 companies in the first half of 2013. That represented a 12 percent growth in investment and a 25 percent growth in the number of deals over the same period a year ago. At the halfway point of 2012, the comparable investment figure was $757 million; in 2011 it was $343 million.

—Five of the deals exceeded $20 million. Proteus Digital Health raised $45 million, HealthCatalyst took in $41 million, Watermark Medical pulled together $32 million, NantHealth collected $31 million, and HealthTap got $24 million.

—Roughly half of the funding went toward companies in five specific areas: remote patient monitoring ($102 million, 12 deals), hospital administration ($79 million, eight deals), analytics and big data ($78 million, seven deals) electronic health records ($69 million, eight deals), and individual or employee wellness programs ($62 million, six deals).

—Nearly a third of the deals (31 percent) involved California companies. Massachusetts companies accounted for 9 percent of the deals and New York companies accounted for 8 percent.

—The most active venture firm in digital health in the first half of 2013, with five deals to its name, was the Social+Capital Partnership, led by ex-Facebooker Chamath Palihapitiya (see our recent interview). Norwest was in second place with four deals. Other active firms—with two or three deals apiece—included Catamount Ventures, Khosla Ventures, Google Ventures, Highland Capital Partners, Intel Capital, NEA, Psilos Group, Sequoia Capital, and Venrock.

—The digital health sector hasn’t yet developed a large community of angel investors and seed funds, so digital health entrepreneurs are turning to crowdfunding platforms in increasing numbers. In the first half of the year, Rock Health counted 38 digital health fundraising campaigns across four of the largest platforms—Kickstarter, Indiegogo, Medstartr, and Fundable—for a total of $4.5 million raised. But just six campaigns accounted for 75 percent of that fundraising, and 40 percent of campaigns begun in the first half of 2013 failed to hit their fundraising targets.

With the exception of the crowdfunding statistics, Rock Health only counted deals over $2 million in value. For the purposes of the report, the accelerator defines “digital health” companies as those that build and sell actual technologies—”sometimes paired with a service, but only when the technology is, in and of itself, the service.” That excludes companies that make implantable medical devices, and those built around services, such as San Francisco-based concierge care provider One Medical Group.

A 12 percent rise in overall health-IT investing may not sound too earthshaking, but Malay Gandhi, chief strategy officer at Rock Health, says any amount of growth in digital-health investing is welcome. “I’m very encouraged that it’s growing in an environment where everything else is shrinking except software and new media,” he says. “I’m glad that digital health is in with the kinds of companies where there is a lot of optimism.”

But to reassure investors that the digital health isn’t merely the latest bubble, Gandhi says, more companies need to achieve liquid returns for their investors, either through acquisitions or IPOs. “More money will go in when it is very clear that there are returns to be had in this sector,” he says.

Here’s the full Rock Health slide deck:

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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