Digital health investment is not a bubble, but it is frothy

Digital health is not in an investment bubble, though innovators may want to prepare for tighter capital markets in the future, according to a Rock Health report released May 2.

Investment bubbles occur when company valuations increase far beyond what is justified. To assess whether digital health investment lives in a bubble, Rock Health analyzed six attributes of past investment bubbles: hype supplanting business fundamentals, high cash burn rates, rapid increase in valuations, surge of cash from new investors, unclear exit pathways, and fraud or funding misuse.

The report determined the digital health investment space is seeing a rapid increase in company valuations, and trends in recent funding amounts reveal investors are valuing digital health startups higher than in the recent past. The average funding round size was $39.5 million in 2021, up 82 percent from 2018.

The digital health investment space may have a problem with high cash burn rates, as 64 startups raised funds twice in 2021. This marks a 36 percent increase from 2021 and a 113 percent increase from 2018. The space is also experiencing a surge in capital from new investors but not a dramatic one, according to the report.

The exit pathways for digital health startups are unclear, the report said. There has yet to be an initial public offering or special-purpose acquisition company in 2022, but that slowdown comes amid major macroeconomic changes, such as geopolitical conflict and rising interest rates.

The report concluded hype does not supersede business fundamentals in the digital health investment sphere. Sustainable business models such as value-based care, software as a service and direct-to-consumer models have been demonstrated in the space, and the pandemic has accelerated these models' adoption as well as created a better regulatory environment for approval and reimbursement. The report also found no evidence of a fraud or funding misuse problem in the digital health investment space.

Read the report's complete findings here.

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