Coming off a groundbreaking year in 2021, digital health funding may be finally slowing down as the industry wraps up the first quarter of the new year.

According to Rock Health's Q1 2022 report, U.S. digital health startups raised $6 billion across 183 deals, well behind Q4 2021's $7.3 billion. Though the first quarter of the year usually isn't the brightest spot when it comes to funding, the report's authors suggest there are some signs 2022 won't be easy to predict when it comes to investment.

"It’s worth noting that Q1 isn’t usually a blockbuster period for funding: at $6.7 billion, Q1 2021 was the smallest quarter last year for digital health dollars, and three of the past five years (2017-2021) had Q1 as their lowest funding quarter, possibly signaling a seasonality to funding dips," Rock Health's Adriana Krasniansky and Pavan Shah wrote.

"However, in three of the five past years, Q1’s funding beat its preceding quarter (Q4 of the prior year), which isn’t the case this quarter."

Meanwhile, the public markets are looking even more tumultuous for digital health companies. Rock Health's composite of publicly traded digital-health securities, called the Rock Health Digital Health Index, fell 38% between the beginning of Q3 2021 and the end of Q1 2022.

More recently public companies may be partially to blame for the poor performance. Digital health companies that made their public exits in 2020 and 2021 experienced a 55% drop in stock price, compared with a 17% dip for those that went public before 2020. 

Those that went public via a merger with a special purpose acquisition company may also be contributing to the lackluster public markets, though SPACs haven't done well in other sectors either. Companies that go public through an SPAC deal are usually younger, and incentives between SPAC sponsors and investors may be misaligned. 

"While SPAC popularity boomed over the past two years – 17 of digital health’s 31 public market exits from 2020-2021 were SPAC mergers – digital health’s SPAC exits’ average stock price fell 57% from Q3 2021 open to Q1 2022 close, while IPO exits’ average stock price fell 29% during the same time period," Krasniansky and Shah wrote. 

But late-stage digital health funding is growing, possibly as a result of the inhospitable public markets. The report notes Series D+ rounds brought in an average of around $130 million over the past 15 months, compared with $80 million in 2020. These companies may be delaying their public exit until markets stabilize, or they could be taking the longer IPO route.

Venture capital firms also raised more money following the digital health boom last year, so that cash could be flowing into these digital health darlings. 

Some of the top areas for funding may be changing slightly as well. Companies that aim to improve clinical workflow – like AI-enabled clinical documentation startup DeepScribe or the complex care-focused Memora Health – brought in $888 million and rose eight spots to third place in Rock Health's value proposition ranking. 

However, mental health companies are still claiming the top spot in terms of clinical focus with $1 billion raised. Reproductive and maternal health startups moved into the top six in terms of clinical area for the first time since 2019, scooping up $424 million.

Still, it's early in the year, and the funding amounts in these categories are too small to say if this will continue for the rest of 2022.

"The rise-and-fall of COVID variants, energy shocks and inflation numbers signal choppy waters for digital health investors, and Q1’s somewhat restrained (dare we say rational?) funding numbers may reflect investor caution," the report's authors wrote.