In the third quarter, digital health companies garnered the lowest quarterly funding total in the past 11 quarters, according to a recent report from CB Insights. The sector’s funding fell 36% quarter-over-quarter and 72% from its all-time high set in the second quarter of 2021. 

While this decline in funding is not entirely insignificant, it should be noted that the drop is reflective of a sharp decrease in global funding across all sectors. In fact, CB Insights reported a 34% quarter-over-quarter decline in global venture funding for Q3. 

This means that the primary driver of the reduction in digital health fundraising is macro market trends, according to Sunny Kumar, a partner at GSR Ventures, and not as much an inherent problem with the digital health sector. He said these trends include increased interest rates, a limited market for initial public offerings, lower public market multiples, slower enterprise purchasing and preparation for the risk of a recession.

These macro market trends have made investors behave more conservatively, particularly when it comes to later stage financings, Kumar pointed out.

Michael Yang, a managing partner at OMERS Ventures, agreed. With increasing inflation, rising interest rates and a declining stock market, he said that many investors are making decisions with the knowledge that a recession may be approaching. 

It’s important to understand that investors are in “price discovery mode,” Yang pointed out. Because no one knew how to price a deal in a downward market during Q3, most investors chose to simply wait until the market stabilized, he said.

“No one wants to catch a falling knife or answer the ‘why now?’ question, so that’s why things slowed down,” Yang declared.

Another critical reason that digital health’s Q3 funding numbers were so low is because venture capitalists are dealing with more bloated digital health portfolios than they’ve ever had, according to Marissa Moore, an investor with OMERS. This is because there was an record-breaking flurry of investments in the space during 2020 and 2021.

With much bigger digital health portfolios than they’ve been used to in the past, many investors are putting less of a focus on new deals. They’re shifting their resources away from new deals and more toward portfolio management, Moore said.

“In this market environment, that shift has been even more pronounced because the bar for portfolio companies to meet milestones and raise subsequent financing has risen higher,” she said. “As an aside, insider rounds can be a byproduct of heightened focus on portfolio management, and we suspect there’s been far more of those than have been publicly reported.”

On a positive note, Kumar believes there’s still a massive opportunity for startups to demonstrate their impact and clinical value, given the nation’s healthcare challenges aren’t likely going away anytime soon.

But for digital health startups to be successful in the current economic landscape, they need to put an increased emphasis on showing how they deliver value to organizations. He said it is no longer sufficient to tout statistics on usage or engagement — instead, companies need to give investors a clear picture of the ROI.

“As an example, telemedicine is still one of the most exciting areas of innovation for healthcare technology, but some of the significant drop in funding (and reduction in public market multiples) for this sector is attributable to the fact that while these companies may improve access and convenience, many do not yet deliver significant cost savings or efficiency gains. This limits the value for insurers, employers and health systems to promote them,” Kumar said.

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