Venture Capital Pouring Into Digital Health Startups

October 1, 2014

Venture capital firms are seeing opportunities in start-up companies that develop specialized software to collect, analyze and manage healthcare data. This universe of companies, commonly referred to as digital health companies, are witnessing an impressive growth in venture capital funding. According to data published by research firm Rock Health, venture capital funding for digital health start-ups in the first half of the year has already exceeded last year’s full year figure. The ongoing shift towards electronic record keeping of healthcare data, as well as consumer acceptance of personal health tracking devices, are major catalysts for venture capital firms to commit large capital to digital health companies.

Digital Health Investments Viewed as Less Risky

Unlike investments in biotechnology firms which are often hit or miss based on the success of drugs under development, digital health firms are viewed favorably from a risk perspective. Digital health firms usually sell data and services to groups such as insurance companies, doctors and hospitals and have a clearly defined, reliable path to making money.

According to the Rock Health report, venture capital funding for digital health start-ups in the first six months of 2014 totaled $2.3 billion among 143 companies, representing a jump of 176 percent over the same period last year. The funding also far exceeds the $1.5 billion raised in all of 2013. The more traditional healthcare categories such as biotech and medical devices are not witnessing such an explosive growth. Venture capital funding to biotech companies rose 28 percent in the first half while investments in medical device makers rose 5 percent.

Funding by Subcategory

Among subcategories, payer administration was a big winner. The category netted $211 million in VC funding which is nearly four times the $47 million it received in the first half of last year. Other strong subcategories include digital medical devices which attracted $206 million and analytics and big data which received $196 million.  In addition, healthcare consumer engagement as a category received $193 million in venture capital funding followed by population health management with $162 million and personalized medicine with $150 million.

The average deal size also got a boost and increased to $15.6 million per deal in the first half of 2014 from $10 million per deal in 2013.

Among individual companies, California-based NantHealth took the largest funding of $135 million for its interoperability and health IT platform. It was followed by data analytics and software company Flatiron, which raised $130 million ahead of population health company Alignment Healthcare which attracted $125 million.

Commenting on the sharp increase in venture capital funding to digital health start-ups, Kevin Spain, a general partner at venture capital firm Emergence Capital Partners, says healthcare is a massive market and adds that he expects more start-ups to focus on health technology because of the potential to disrupt established companies. His firm has invested about $40 million in health tech start-ups including in San Francisco start-up Augemedix whose app allows a doctor wearing Google Glass to access a patient’s health record.

Relevance to Job Market

It is evident from the Rock Health report that digital health is among the hottest categories to fund for venture capital firms. A separate survey of global venture firms by Deloitte & Touche and the National Venture Capital Association also found that high investor confidence in healthcare IT and Services. While there has been some resurgence in overall venture capital fundraising and investment recently, it is clear that sectors such as digital health are attracting disproportionately large amounts of investment. Digital health sector professionals, especially medical technology executives skilled in sensor technology, are likely to see good career prospects as a result.

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