Digital health funding may have started off at an unremarkable pace in the first quarter of 2017, but halfway through the year, that is clearly no longer the case. According to Rock Health’s midyear report, the record-breaking number of deals and some of the largest investments ever made in digital health saw the second quarter taking the industry into what may end up being the higest-funded year to date.    
    
The seed fund tracked $3.5 billion across 188 deals in the first half of 2017, including seven deals over $100 million. That funding pace picked up from the deceptively mellow first quarter, during which Rock Health tracked $1 billion across 71 deals.

As we’ve noted before, Rock Health tracks funding a little different than Startup Health, which just released its midyear report and put the figure much higher at $6.5 billion for the first two quarters of 2017. Broadly speaking, Rock Health's process is a bit more conservative than most as it only includes funding rounds that are more than $2 million, avoids conflating investment dollars with transactional costs associated with M&A, and has a stricter definition of a digital health company than StartUp Health does. Rock Health also tracks only US deals.

“There were more deals and there were more big deals, making this the biggest quarter we’ve ever had. We were delightfully surprised,” Rock Health’s Founder Emeritus Halle Tecco told MobiHealthNews in an interview.

It was surprising, Tecco said, because the first quarter report reaffirmed what she had been seeing for awhile – the “business-as-usual” nature of stable digital health funding that she was expecting to be about the same in the second quarter.

“Funding activity didn’t feel abnormal until we actually looked at the data,” Tecco said. “And we’ve been hearing for awhile that investors are getting more selective, so we see this as a sign that the digital health space is really maturing and we expect that to continue.”

Nowhere is that more evident than in the sheer size of deals, which Tecco called “unprecedented.”

The two biggest deals just happened in May. With a hefty $500 million in first round financing led by Goldman Sachs, Chicago-based Outcome Health was the largest deal Rock Health (and anyone else) tracked in the first half of the year, followed by digital fitness company Peloton Interactive’s $325 million Series E. Prior to those, the largest digital health deal Rock Health had seen on record was the now-shuttered Jawbone’s $300 million round in 2015.

Where money is going is changing, too, although those biggest deals make it hard to pinpoint what’s going on across digital health categories. Consumer health information, digital gym equipment and healthcare consumer engagement were the top three, followed by EHR/clinical workflow, analytics/big data and digital therapies. To get a more nuanced picture, Rock Health ran the data again without the deals totaling more than $100 million.

“Without the top deals, only half of the categories remain in the top six. For instance, Peloton closed a large deal of $325M, but we’ve only tracked seven other companies in the digital gym equipment category since 2011,” the report states. “The top categories with and without the two top deals illustrate a diversity of focus among investors—there is strong interest in both consumer-facing and enterprise-focused companies.”

Mergers are slowing down a bit, the report showed, with 58 deals closed by the midpoint of the year compared with last year’s 87 at the same time. Acquisitions were at 24, and the report noted that nearly all types of acquirers – digital health, medical device, payer, technology, and providers – have made fewer acquisitions than Rock Health would expect based on total acquisitions of last year.

The seven $100 million-plus rounds were made possible by growth investors like Goldman Sachs and Warburg Pincus, which Tecco said shows indications of some IPOs in the near future. (To date, there have been zero digital health IPOs this year).

“While the dearth of digital health IPOs in H1 2017 is noteworthy, we believe that the pipeline of highly-capitalized digital health companies means more IPOs are on the horizon,” the report states.

And of the 331 distinct investors who completed deals in H1 2017, 42 percent of them are new to digital health. This runs counter to predictions that so-called “tourist” investors would step back from the industry.

“The number of repeat VCs indicates a continued maturation of not only the companies in the space, but also the firms investing in them—moving beyond dabbling and into double-down mode,” the report states. “Institutional venture firms have been the most active, with 12 firms making three or more investments in H1 2017.”

As the industry matures, funding is happening in more places, too. Investments happened across 25 states, with California accounting for a third of total dollars invested. And while the San Francisco Bay Area continues to be the main hub for digital health (the region was home to 64 deals, which is almost as high as the next 10 metro areas combined), Rock Health saw activity outside of the usual hubs increasing.

All of these are factors that lead Rock Health to estimate the momentum to keep going through 2017. The fund expects to see a record-breaking year in terms of total funding, the number of deals and average deal sizes as well as new digital health IPOs, but also envisions a future where digital health as an industry gains a higher profile.

“We also expect digital health to get more attention and definitive guidelines on the regulatory front,” the report states. “Just last month, the FDA’s recently-appointed commissioner Scott Gottlieb announced the impending unveiling of its new “Digital Health Innovation Plan.” The plan seeks to provide further clarity on digital health regulation so entrepreneurs don’t have to seek out the FDA’s position on a case-by-case basis. The announcement was met with initial optimism, and the implications for entrepreneurs will unfold in the coming months.”