After last quarter’s record-breaking amount of funding, Rock Health called digital health "all grown up." Yet if the first half of 2021’s investments indicate anything, it’s that the market is still very much accelerating.

Halfway through the year, digital health has received $14.7 billion in funding – already more than 2020’s full-year amount of $14.6 billion – across 372 U.S. investment rounds with a $39.6 million average deal size, according to Rock Health’s latest report. Of that, 59% came from 48 deals worth over $100 million, what Rock Health calls “mega deals.”

Not only are digital health investments skyrocketing, but also public exits and mergers and acquisitions. In H1 2021 there were 11 digital health companies that hit the public markets with at least 11 more set to close later this year, compared to seven in all of 2020. Additionally, there were 131 digital health M&As with an average of 22 deals each month, compared to last year’s monthly average of 12.

“We’re seeing an increase in round sizes, new investors, and the pace at which funding is happening in digital health,” said Michael Pimental, partner and cofounder of CVS Health Ventures, in the report. “There’s an acceleration of exits, as well as the emergence of combined companies that can address health care more broadly. It is exciting to see how quickly everything is happening this year.”

WHAT’S THE IMPACT?

Although the amount of funding that investors are pouring into digital health is increasing, the areas where they’re placing their bets remains relatively unchanged in recent years, according to the report.

The top value-propositions in both 2020 and H1 2021 were research and development, on-demand healthcare, and fitness-and-wellness. Mental health continues to be the number one clinical focus for investments, raking in $1.5 billion so far this year. Other top clinical indications from H1 2021 include cardiovascular disease ($1.1 billion) and diabetes ($957 million), with substance use disorder startups rising in the ranks ($706 million).

“We’ve seen continued investor interest in on-demand models, comprehensive primary care, behavioral health, fitness, and prevention,” William Greineisen, director of strategy and corporate development for Cox Enterprises, said in the report. “But what’s most refreshing to us is the sheer number of deals happening. It’s a great sign for the industry at large.”

Of all the investors that contributed to digital health’s massive first half of 2021, one firm stands out for its blitz-style funding: Tiger Global. The growth firm deploys a strategy of rapidly deploying capital in the hopes that returns on investments will be realized sooner, according to Rock Health. Across the first half of the year, Tiger Global participated in 14 funding rounds for U.S. digital health startups worth $1.8 billion, making up 12% of all investments in digital health so far.

While enterprise-facing digital health companies continued to be the dominant business model in H1 2021, direct-to-consumer startups are beginning to hold a more prominent role, the report finds. In fact, more than a quarter of all digital health companies funded in this half were D2C startups, representing the largest share in Rock Health’s 10-year reporting history.

Prominent D2C players that closed mega deals so far this year include Noom ($540 million), Ro ($500 million) and Capsule ($300 million).

“It’s powerful to see D2C digital health companies serve specialized communities and provide some of the missing pieces to consumer healthcare,” Christina Farr, a principal investor at OMERS Ventures, said in the report. “However, in some cases consumers would find it easier to engage with a few consolidated platforms rather than flipping between brands.”

Consolidation within digital health is already well underway as 2021 is on pace to set a 1.8x year-over-year increase in M&A deals compared to 2020, according to the report. The majority of these M&A’s involve one digital health company acquiring another, signaling the move towards end-to-end services and products.

But big-tech is also getting in on the action with companies like Microsoft, Amazon and Google scooping up startups to add digital health functions to their software solutions.

As digital health continues to mature, more companies are making public exits. Of the exits that have happened and that are expected to close this year, special purpose acquisition companies (SPACs) continue to steal the spotlight. They accounted for five of the 11 digital health public exits in H1 2021 and are slated to make up all of the currently expected public exits for the remainder of this year.

Rock Health forecasts even more SPAC deals coming down the pipe because it’s tracking 37 SPACs targeting healthcare or digital health. Based on Rock Health’s estimates of which startups are ready for the public market, there are only 47 potential candidates.

In addition to increased competition among SPACs, this could mean they target earlier-stage companies in order to close an acquisition within their two-year window, as well as larger later-stage funding rounds to serve as an alternative to startups’ public market considerations, according to the report.

THE LARGER TREND

As much excitement as this half generates for the space, Rock Health is balancing its enthusiasm with vigilance for the implications that this momentum will have.

“We know today’s environment presents as much opportunity for entrepreneurs and investors as it does risk, and it’s important that neither party gets caught flat-footed once digital health settles into a new funding stride,” the authors said in the report.

“The fundamentals – new solutions to big problems, high-quality teams, laser focus and strong investment syndicates – will endure as the driving forces of digital health’s maturation and impact on the entire healthcare sector. As we look forward, we know that digital health’s journey to impact is a marathon, not a sprint.”