Digital health startup landscape will ‘recalibrate’ in 2024, experts project

Digital health startups had a hard 2023, with venture capital funding at its lowest level since 2019.
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New year, new digital health funding landscape?

Startups in the digital health field had a hard 2023, raising a total of just $10.7 billion—the lowest figure since 2019—according to a report from digital health strategy group and venture fund Rock Health.

But experts think 2024 is going to be a transformative year, with Rock Health researchers projecting that some digital health startups will shut their doors while others will flourish.

“2024 will require some startups to face the music (raise at a reduced valuation, seek an acquisition or exit, or shut down),” the researchers wrote in the report. “While hard on teams, investors, and customers alike, these shifts can set the sector up for brighter days ahead—a smaller cohort of stronger players, synergies through consolidated offerings, and a more successful IPO class.”

A look back at 2023

In light of 2023’s tight funding environment, startups got creative to stay in business, increasingly relying on extension rounds, unlabeled rounds, and silent rounds, according to Rock Health.

In extension rounds, startups raise money from investors under the same terms as the company’s previous financing round. Unlabeled rounds are those not marked with a letter like Series A, B, or C rounds. And silent rounds involve startups quietly raising money from existing investors.

Digital health startups including Mantra Health, Keona Health, and CarePredict all raised capital through extension rounds in 2023, mostly at Series A and B stages, according to Rock Health.

“Extension raises, particularly at early stages, can sustain startups that haven’t yet nailed down key maturity markers like product-market fit or go-to-market strategy but need additional cash,” Rock Health researchers wrote in the report.

A record number of unlabeled rounds happened in 2023, making up 44% of all fundraising deals (or roughly $4.7 billion worth of deals). Unlabeled rounds can be useful for startups that haven’t met the benchmarks needed for a labeled raise, i.e., a round with a letter—but the rounds come with risks, according to Rock Health researchers.

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“Unlabeled funding leaves open questions about startups’ future raise timelines, and these companies may need to raise again soon or risk folding,” the researchers wrote.

While it’s impossible to track exactly how many silent rounds took place in 2023 (since startups don’t report them), Rock Health researchers said anecdotal data shows that the year “saw more than its fair share of unannounced, inside-round financings.”

Creating a new landscape in 2024

Looking to the new year, Rock Health researchers projected that labeled fundraising rounds will come back, merger and acquisition activity will pick up, and the public market cohort of digital health startups will “recalibrate.”

The startups that relied on unlabeled rounds in 2023 will “likely need to raise more substantial funding via labeled rounds in 2024,” Rock Health researchers wrote. To do so, the researchers anticipate that some startups will focus on popular innovation areas like obesity care and generative AI.

And with some startups expected to be low on cash in 2024, merging or selling could be an attractive option to stay afloat, according to Rock Health.

The digital health public market may shift as well, as several startups face delisting. At least 17% of the 50+ digital health companies listed on the Nasdaq or NYSE were noncompliant with listing standards—meaning they traded at or below $1 for over 30 consecutive business days—as of December 31, 2023, according to Rock Health. Digital therapeutics company Akili Interactive, as well as several other digital health startups, have received noncompliance notifications from the SEC.

“Though some companies may attempt to avoid delisting by leveraging stock restructuring or cutting down operational expenses, we expect that a few additional digital health companies will leave the public market altogether in 2024,” Rock Health researchers wrote.

Overall, 2024 will be a year of “recalibration and consolidation” for digital health startups, Rock Health researchers projected.

“We expect a coming reset to ultimately create a more efficient, sustainable, and innovative digital health ecosystem,” the researchers wrote.

Navigate the healthcare industry

Healthcare Brew covers pharmaceutical developments, health startups, the latest tech, and how it impacts hospitals and providers to keep administrators and providers informed.