After a year of historic startup funding across every investment phase, from seed to late stage, some market watchers expect VC investment as a whole to moderate in 2022. Digital health could be no exception amid rising interest rates and as startups flush with cash eye next moves, including M&A or exits.
However, some expect funding levels to only continue rising, cheered by factors such as a healthy mix between first-time and existing investors marrying an infusion of new interest with continuing bets from digital health veterans, and moves from outside players — including deep-pocketed tech firms like Amazon and Microsoft — to invest and acquire in digital health.
In addition, the adoption of digital health products and services seems to be stabilizing, with sustained patient demand and no widespread rollbacks in virtual services from providers. That's ameliorating concerns that demand for such solutions would plummet once the brunt of COVID-19 subsides.
Digital health startups capitalizing on the need to manage costly, pervasive conditions, free up physicians and enable care at scale, along with the shift to individualized, high-touch medicine, are expected to bring in the lion's share of funding this year, experts say.
Barely a week into 2022, U.S. venture capital firms raised almost $13 billion, according to PitchBook data — about equal to what the firms raised in an entire year about a decade ago.
That money has got to go somewhere, and it's a good bet the healthcare sector will be a major recipient. The industry raised the second-highest amount of global venture funding in 2021, trailing financial services, according to Crunchbase data.
Health tech grabbed a serious share of the attention.
U.S.-based digital health startups brought in almost $30 billion in 2021, almost doubling the total investment the year prior. Investors and market watchers are wary on making firm forecasts that 2022 will break 2021's record, but most are eyeing the year through rose-colored glasses.
"I expect this positive momentum in deal flow to continue in 2022," said Ravi Kumar, a partner at professional services firm the Connor Group.
Market watchers see digital therapeutics, personalized medicine, provider-focused infrastructure and mental health and chronic condition management as particularly ripe for continued investment as the pandemic moves into its third year.
"It's hard to see what could stop it," said Marc Albanese, senior director of research for healthcare and emerging tech at market intelligence firm CB Insights.
Digital therapeutics and personalized medicine
Digital therapeutics saw significant funding growth in 2021, with startups delivering medical interventions using evidence-based software to manage and treat a broad spectrum of diseases reporting surging investments. It's a continuing trend: Investments in U.S. digital therapeutics companies have increased an average of 40% a year over the past seven years, according to McKinsey.
The goal of digital therapeutics is to treat chronic conditions at scale, alleviating some of the biggest stressors on the medical system right now, such as physician shortages, Albanese said. Digital therapeutics allows care delivery to disconnect, in a way, from the supply side, enabling patients to receive care asynchronously and remotely, without doctors having to constantly monitor the apps.
A number of factors are converging to spur investments in digital therapeutics. Coverage pathways for prescription digital therapeutics widened last year, allowing regulatory approvals to escalate. Startups are growing their body of clinical evidence to back up their technologies. There's also increasing buy-in from healthcare stakeholders, including payers and providers, around integrating digital therapeutics and building payment models around them.
Digital therapeutics were a huge highlight in 2021, but "when we think about the space, I think we're still in the early innings here," said Amanda DiTrolio, a healthcare intelligence analyst at CB Insights. A number of startups are still developing their therapies, and will likely search out additional infusions of cash to do so.
"I think we're still in the early innings here."
CB Insights healthcare analyst
Two salient examples are virtual reality therapeutics and cognitive behavioral therapy apps, according to DiTrolio.
AppliedVR, a VR therapeutic for pain management, received breakthrough designation from the Food and Drug Administration early last year for its flagship product for treating fibromyalgia and chronic intractable lower back pain. It was the first FDA designation for a VR prescription therapeutic, and for many market watchers signals growing regulatory acceptance of the space.
"There's definitely excitement around that," DiTrolio said.
The analyst also noted that as digital therapeutics launch more clinical trials and expand into more indications beyond chronic care, like gastroenterology, IBS, women's health and neurodegenerative diseases, "that's going to require large sums of capital in the coming year."
Growing interest in providing more targeted care also is likely to help startups in the nascent personalized medicine space, according to Pitchbook emerging tech analyst Kaia Colban.
Colban predicts that personalized medicine startups, which use AI- and ML-based data platforms to glean insights into patient care and create personalized treatment plans, will receive a record level of VC investment in 2022.
It's a huge total addressable market with strong market drivers, including a confluence of technologies like remote patient monitoring devices, electronic health records, genetic databases and cloud computing, that are helping advance the state of such applications, according to Colban.
When it comes to clinical indications, mental health is likely to continue raking in the bulk of funding.
Digital health startups offering mental healthcare raised $5.1 billion in 2021, almost double what they brought in the year prior, according to Rock Health. Investors will continue looking to fund tools enabling the delivery of mental healthcare at scale, CB Insights' Albanese said.
COVID-19 stressors on mental health are unfortunately unlikely to abate anytime soon as the virus becomes endemic. The pandemic's exacerbation of conditions like anxiety and depression has interlaced with a shortage of U.S. health professionals to create historic levels of demand for therapy and other treatments. Payments have also never been more generous, as employers and payers increasingly see the downstream value of proactively addressing their members' mental health conditions.
That's all spliced to result in a pandemic wave of new virtual care options for intensive mental and behavioral health needs. Well-funded startups in the space, such as Lyra Health, which raised $387 million last year alone, often pair traditional therapy options with wearables, targeted therapeutics, chatbots and other features to try to meet consumer expectations for preventive care, mental health coaching, therapy and medication.
One early-stage startup in the space to watch is Woebot, according to Pitchbook's Colban, a company that develops AI-based chatbot technology delivering mental healthcare through a digital therapeutic. Woebot has raised almost $130 million in venture funding to date.
Additionally, DiTrolio expects more funding to flow to startups targeting specific underserved demographics, including Folx Health, which offers virtual care for the LGBTQ community; Equip Health, which treats people with eating disorders; and Eleanor Health, a value-based startup targeting opioid abuse.
"The theme of targeting underserved populations really took hold in 2021, and there's plenty of room for more investment there," DiTrolio said.
Chronic condition management
Investors also are likely to continue boosting funding for chronic condition management startups that look to prevent downstream health complications, while recouping a share of any savings.
Rock Health has called out diabetes and musculoskeletal care as key funding arenas, as they're high-spend conditions that increasingly are managed virtually. Growth in startups managing such conditions could help lift some weight off the overtaxed physical health delivery infrastructure, as January COVID-19 hospitalizations break all-time records.
MSK funding, for example, grew sixfold between 2020 and 2021, when it reached $1.4 billion. Virtual MSK clinics like Hinge Health and Sword Health each completed multiple raises throughout the year, and that pace is unlikely to let up, analysts said.
Hinge alone has seen its valuation double in the past 12 months, making it the top-valued VC-backed retail healthtech startup — and a likely IPO candidate for 2022, according to Colban.
The focus on specialty care in general is also going to increase because of growing risk assumption, predicted Jacob Effron, a principal at VC firm Redpoint Ventures. As more healthcare companies take on risk, they'll need partners to help manage patients with more niche and high-cost conditions, according to the investor.
"I feel like I meet a different entrepreneur every week that's building in a different specialty area," Effron said.
Behind the scenes: Infrastructure plays
Investment in back-end infrastructure and interoperability startups has been consistently strong in past years, but appears to be accelerating. Such provider operations companies raked in more than a third of total seed and series A funding in the U.S. and Europe last year, up from a fifth in 2021, according to Silicon Valley Bank data.
VCs are likely to continue investing heavily in companies that help providers modernize processes like billing, coordinated care and research, following rising pressure to make systems more user friendly. That will benefit startups that can weave their tools into existing IT systems to streamline the experience of administrators, doctors and patients, reducing friction and cost, experts say.
"We're continuing to see strong, strong funding there. I would not expect that to go down," Albanese said.
Investments will increasingly be spurred by federal regulations mandating free electronic information sharing between disparate software systems and increased regulatory pressure for price transparency. The resulting emphasis on data interoperability and portability will cause more growth in digital health startups in that arena, Connor Group's Kumar said.
Other macro trends galvanizing investment include the emergence of more direct-to-consumer healthcare delivery options, putting health systems at risk of losing their most lucrative patients — the commercially insured. That trend incentivizes them to digitize their platforms and provide a better consumer experience across the board, whether it's scheduling, patient intake, communication or billing.
Growing interest in risk assumption is also causing providers to look increasingly for digital health solutions to help them take on and manage risk, which will cause funding to startups in that area to increase as well, according to Redpoint Venture's Effron.
"I think the shift to risk is probably the biggest macro trend overall. And I think the opportunity to build supporting tech and services around that to help physicians succeed in that new environment is probably the top area I'd expect provider tech investment in 2022," Effron said.
"The shift to risk is probably the biggest macro trend ... The opportunity to build supporting tech and services around that to help physicians succeed in that new environment is probably the top area I'd expect provider tech investment in 2022."
Investor, Redpoint Ventures
In addition, COVID-19 has exacerbated labor shortages and provider burnout, sending hospitals and health systems scrambling to improve workflow stressors on their employees, experts say.
It's a big opportunity for startups that received funding last year, including companies that integrate data streams into unified API ecosystems like Innovaccer, Redox and Ribbon Health; enable cross-company data analysis like TripleBlind and Truveta; streamline data structure and labeling like ScienceIO and Centaur Labs; provide building blocks to help others implement digital health tools like Commure, TruePill and Wheel; and offer healthcare-focused robotic process automation technologies like Olive.
Billing also is an area to watch, as unsustainably increasing prices for healthcare services have dented the pocketbooks of many Americans even before the coronavirus. Hospitals already were running more financial assistance transactions before the pandemic, but COVID-19 accelerated the trend, boosting the financial pressure on providers and patients struggling with higher costs, according to credit bureau TransUnion.
Financial services was the leading sector for venture investment last year. Such startups operating in the healthcare space are likely to continue enjoying investor interest as consumers look for ways to pay for needed healthcare services without breaking the bank.
Startups offering technology to smooth filing and billing processes, as well as those attempting to ease the burden of payment on cash-strapped consumers, have reported breakneck growth in adoption and funding.
Buy now, pay later platforms, for example, allow consumers to make purchases on payment plans. San Francisco-based PayZen is one such startup operating in the healthcare space. PayZen, which raised $15 million in a Series A round in 2021 to expand its model, uses artificial intelligence to assess patient's ability to pay fees after insurance, then automatically creates a tailored payment plan for the patient and an automated system for the hospital to manage billing.
That leads to hospitals recouping a higher proportion of costs, without having to send patients to collections, PayZen says.
But whether you're a fledgling company combating pain points in medical billing or any other sort of digital health player, "there's never been a better time to start a digital health company," Effron said. "I think there will be a lot of interesting opportunities for investors in 2022."
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