The digital health sector just wrapped up its largest funding quarter to date, bringing in $6.7 billion during the first three months of 2021, according to Rock Health’s quarterly report.

While the past year’s unprecedented acceleration of digital health is expected to continue throughout the remainder of the year, analysts will be keeping an eye out for signs of an industry slow-down.

“This means closely evaluating untested business models, new investment vehicles, sky-high valuations, and funding trajectories that don’t match the recent past,” the report’s authors wrote.

“These departures from a more tempered market will enable breakthrough winners and impact. But we also anticipate some Icarus-esque endings. In this growing market, exercising judgment will be critical. Stakeholders will need to separate long-term value creation from short-term financial opportunity, and distinguish between individual company hype cycles from overall sector fundamentals and growth.”

WHAT’S THE IMPACT?

Digital health’s record-breaking Q1 was propelled by 25 "mega deals" that each brought in more than $100 million, according to Rock Health. These deals made up two-thirds of the quarter’s total funding and increased the average round size from $31.7 million in 2020 to $45.9 million.

Ro, insitro and Hinge Health’s raises topped the report’s list as the three largest mega-deals so far in 2021.

Not only are these massive funding rounds becoming more common, but they are also taking less time to achieve. The average startup raking in $100 million or more in funding for the first time was 12 years old in 2017. Among the companies that completed mega-deals in Q1 2021, the average age was six years old, according to Rock Health.

Although mega deals contributed the most to the rise in digital health funding, increasing deal sizes across all stages over the past few years have also helped, according to the report. For example, the average Series B round in 2017 was $16 million and in Q1 2021, startups brought home roughly $49 million for the same round.

Investors may be pouring larger sums of money in digital health startups, but they continue to fund the same types of companies, Rock Health found. Startups offering on-demand healthcare services and those for biopharma research and development claimed the top two funding spots for the second year in a row.

Meanwhile, mental health and primary care platforms continued to be the most common clinical focus areas for investor dollars.

Another element of last quarter’s noteworthiness was the different exit strategies – specifically, the rise of special purpose acquisition companies. In total, 10 digital health startups either went public or announced plans to go public through a SPAC deal, according to Rock Health.

"During this uncertain time, exits via SPAC offer private companies a liquidity opportunity that allows them to sidestep a lengthy IPO process and exposure to market volatility," the authors wrote.

"In the short-term, it’s possible the liquidity generated via SPAC exits will create confidence among venture firms to continue investing in digital health, perpetuating the cycle the market is currently in of high investment and valuations. In the long-term, however, SPACs may introduce new risks to the market, and the healthcare SPAC craze will remain tied to broader market sentiment."

Besides teaming up with a SPAC to go public, several startups merged with already-public companies for their exits. Doctor on Demand merged with Grand Rounds Health; Cigna's health services subsidiary Evernorth scooped up MDLive; and UnitedHealth Group’s Optum announced plans to acquire Change Healthcare.

Looking ahead, Rock Health updated its public exit watch list to include 43 digital health startups, each with at least $220 million in total funding.

THE LARGER TREND

Rock Health’s Q1 2021 funding recap comes in just shy of MobiHealthNews' estimated $7.1 billion in digital health funding across 99 rounds. Regardless, both reports note a record-setting first quarter that had more mega-deals than ever before.