Digital health startups raised $2.2 billion across 125 deals in the third quarter this year, marking the lowest-funded quarter since Q4 2019. 

The report by Rock Health found digital health funding has reached $12.6 billion across 458 deals so far this year, far below 2021's booming investment landscape. Funding also fell 48% between Q2 and Q3 this year, while the number of deals only dipped 14%. 

Though it seems like dire news for the sector, Rock Health researcher Mihir Somaiya wrote that the number of small and earlier-stage deals stayed fairly steady. Plus, there was plenty of big digital health news this quarter.

"Given the year’s choppy venture waters and public market correction, investors are holding back from the market, waiting to strike once things stabilize. Q3’s low funding numbers – the lowest quarterly funding total in the past 11 quarters – reflect that sentiment," he wrote. Rock Health's Adriana Krasniansky, Megan Zweig and Bill Evans also contributed to the report. 

"Yet, even though the market isn’t the same as it was, this quarter has featured some standout digital health activity, including major acquisitions by Amazon and CVS, and Akili’s SPAC close, this year’s first digital health public exit."

So why were there so few later-stage deals this quarter? The report noted only six raises at Series C or higher, compared with 19 in Q2 and 32 in Q1. There were also only two mega rounds, or rounds worth $100 million or more. 

The authors suggest three potential explanations behind the slowing late-stage funding. Deals may have been pushed ahead to 2021 to take advantage of the booming funding environment, others may be happening quietly through round extensions or venture debt, and there are some rounds that just aren't happening. 

The quarter also saw some shift in which value propositions are scooping up venture dollars. Companies touting nonclinical workflow tools have raised $1.8 billion so far this year, taking the top funded value proposition compared with seventh place in 2021. That could reflect a continued focus on improving clinician burnout and managing staff shortages.

Digital mental health companies continue to lead in the top-funded therapeutic area, bringing in $1.7 billion so far in 2022. The report also noted a shift to more complex mental illness management. 

Somaiya wrote that, while Q1 and Q2 may have seemed like an adjustment coming off the blockbuster funding of 2021, this quarter has demonstrated a move away from the pandemic-fueled digital health market.

"Rational prices promote long-term market health and, if anything, diminish near-term worries," he said. "Nonetheless, we’ll be watching Q4 closely to see which of these trends take hold to shape the market going into 2023. Small ripples can lead to big waves – and we’re curious to see where these directional turns lead."