Healthcare IT companies — those that sell software to providers and payers — experienced a bounceback in venture capital deal activity during the first quarter of 2023, according to a report Pitchbook released on Thursday.

In Q1, healthcare IT firms closed 70 venture capital investment rounds, which totaled $1.3 billion. This marks a significant increase from Q4 of last year, when healthcare IT companies’ venture capital deal value was just $451.3 million. However, the field still has some catching up to do to get back to the explosive pace set in 2020 and 2021, the report said.

“Digging a little bit deeper, we can see that a lot of that bounceback was due to a cluster of large deals towards the beginning of the quarter, especially in the staffing and value-based care enablement spaces,” Rebecca Springer, PitchBook’s lead healthcare analyst, said in a recent interview.

One of the deals she is referring to is the $75 million Series B round that Pearl Health closed in January. The startup leverages data science to help independent physician practices participate in value-based care models and focus on patients who are driving expenses and need care the most. Vytalize Health’s $100 million funding round, which was announced in February, is another example. The startup is a value-based care platform for seniors.

Springer noted that venture capital activity cooled off a bit toward the end of Q1 because the collapse of Silicon Valley Bank prompted some investors to be more cautious with their money. But she said her outlook for the rest of the year is optimistic.

“There’s no IPO window yet for the late stage, and that’s particularly difficult in some cases. But you have well-capitalized strategics in many parts of healthcare IT, and you also have health systems beginning to move back into the space in many cases — especially the larger health systems — after over a year of operating margin losses,” Springer declared.

Health systems are an important part of the venture capital environment for healthcare IT startups for a few reasons, she pointed out. Sometimes they develop in-house technology that later leads to the birth of a startup. Other times, hospitals pilot products so that startups can produce case studies and validate their solutions. Health systems are also often healthcare IT companies’ customers and investors.

“As health systems begin to recover financially, which it looks like they started to do over the last quarter, they’ll have a little bit more room to look at investments in the future rather than just being in survival mode,” Springer said.

Staffing is “probably the number one problem” that healthcare providers are looking to address, so any startup that demonstrates its ability to effectively tackle that issue will likely be able to garner partnerships and investments from leading health systems, Springer explained. She also expects companies that focus on value-based care enablement to continue to do well as providers get more serious about shifting away from fee-for-service care.

As for the hottest new category of healthcare technology, generative AI, Springer predicted more activity in the space over the next few quarters. She noted that generative AI startups will have to be “really careful” about things like credibility, transparency and data privacy.

She expects to see generative AI startups emerge to address the “low hanging fruit.” By this, she means companies will start to build generative AI models for use cases like patient communication, summaries of patient records and revenue cycle automation.

“I think those would be the easiest areas to develop solutions and, and then we might move more toward AI-assisted clinical decision making in the more distant future,” Springer said.

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