The Buzz This Week
Rock Health released its quarterly digital health funding report this month: Despite a strong January and February, it predicts a bleak immediate future for digital health investing following a series of unfavorable events in March—including the Silicon Valley Bank (SVB) failure, the Signature Bank failure, Moody’s downgrading of bank credit ratings, and a Federal Reserve Board rate hike.
Rock Health reported 132 deals closed with funding of $3.4 billion in Q1 2023, exceeding the total funding for both Q3 and Q4 of 2022. Transactions included 6 “mega deals” (those with over $100 million in funding), matching the total number of mega deals from last year’s Q3 and Q4 combined. Monogram Health, ShiftKey, Paradigm, ShiftMed, Gravie, and Vytalize Health account for 40% of the quarter’s total funding in the digital health sector. Compared to the highs of 2021, funding has slowed down significantly, with Q4 of 2022 having the lowest quarterly funding total in 5 years. While Q1 saw an increase in the proportion of Series D+ investments relative to other deal stages compared to 2022, the average deal size dropped over $25 million. According to Rock Health, private funders are being more restrictive with their deal terms, including valuation adjustments and operational revamps to protect themselves.
In March, SVB, used by more than three quarters of healthcare venture-capital backed IPOs since 2020, collapsed in the biggest bank failure since 2008 and the second-largest bank failure in U.S. history, drastically slowing down the funding momentum from the preceding months. Some of its healthcare clients included Dispatch Health, Oak Street Health, and Privia Health. 12% of the bank’s deposits came from life sciences and healthcare, according to its Q4 reports. SVB was the 16th largest bank in the country, with $173 billion in deposits and investments and $341 billion in client funds, according to STAT. Since the crash, First Citizens BancShares, based in North Carolina, has acquired SVB and taken over all operations.
Why It Matters
The Rock Health report paints a discouraging picture, with the SVB collapse having potentially significant implications for the future of digital health fundraising. SVB was the go-to choice for the start-up community, often because traditional banks were not an option. SVB offered loans during high-growth periods and worked with nascent companies that had yet to settle into the market. Without SVB in the picture, these same companies may struggle to find lenders and be left with fewer, more restrictive, and more expensive options. For digital health and biotech, the sudden disappearance of a key lender could exacerbate what is an already difficult environment for raising money, given the annual failure rate of 90% for these start-ups.
In addition, macroeconomic conditions are creating an environment in which companies are hesitant to go public, forcing reliance on all private investment. Digital health stocks started 50% lower in 2023 than 2021. With inflation and rising interest rates, profitability has been difficult to achieve, making these companies less-appealing investments to venture firms. Though limiting, these conditions will not halt all movement in the market. Firms with reserves stockpiled over the last several years may still be asserting themselves and deploying those reserves strategically, as was the case with some of the mega deals in Q1. But this smaller pool of venture firms will make for greater competition among companies and increase the threshold for organizations’ quality and value of work in order to garner their investments.
Industry leaders say the SVB failure gives investors another reason to be cautious. It is expected that the bank failure will not only impact health start-ups but also health systems looking to plan their innovation strategies, potentially setting innovation back a decade.
Researchers at Rock Health suggest that the economic conditions of 2023 have and will continue to have significant impacts on start-ups of all sizes. With the uncertainty of their financials future, experts anticipate some companies may look for buyers, while others will be pressured to fundraise due to inflation concerns and cash flow. As the dust settles and organizations attempt to stabilize during these tumultuous times, established leaders are emphasizing the importance of a quality CFO and recommending diversifying financial portfolios with money in more than one bank moving forward.
Healthcare Leaders Media:
SVB Collapse May Set Healthcare Innovation Back More Than a Decade
Editorial advisor: Roger Ray, MD, Chief Physician Executive.