It’s no secret investors have been pouring billions of dollars into digital health companies, and it seems the life sciences sector has taken notice.
Today at BIO 2018 in Boston, a panel of investors sat down to take the pulse of the digital health industry and give their thoughts on the booming (and potentially crowded) market.
“The bottom line is that an immense amount of money has gone into this sector over the last five to seven years — well over 20 billion dollars,” Wainwright Fishburn, founding partner at Cooley LLP and chair of the firm's digital health group, said at the conference. “In the first quarter of this year we hit the all time high. … Investors in general have gotten more comfortable with large $100 and $200 million rounds.”
In the first quarter of 2018, digital health companies raised a record $1.62 billion, Fishburn said while citing RockHealth's latest analysis.
The amount of funding that digital health companies are raking in with each funding round is also trending up, he continued. For example, only eight digital health companies landed more than $100 million in funding in 2012. As of May 2018, over 50 companies have reached $100 million in funding, and dozens more have been acquired and gone public.
“When Rock health started collecting the data there were only about 100 investors in digital health in 2011 and there were over 500 last year,” Andrew Hedin, vice president at Bessemer Ventures, said at the panel on Tuesday. “There has just been an influx of investors and there has been a lot more capital. With that additional capital the valuations have gotten really insanely high for companies that have proven … real ROI and [measurable] outcomes. For quality companies, valuations have gotten insanely high. It’s hard to make a venture return when you are a financial investor and you see those types of valuations at the stages your companies are looking at. As a result, over the last three years we have moved to earlier and earlier-stage companies.”
But with the increase in interest and money being invested into the industry, the space is at risk of becoming cramped, Fishburn said.
He illustrated this point with the example of telemedicine companies, noting that the large number of telemedicine startups seen in the past has since dwindled in recent years. Some investors are also pointing out that while there have been successes in the last few years, many of these companies aren’t differentiated enough.
Michael Greeley, cofounder and partner at Flare Capital, expanded on this point, noting that he and others now "see a couple hundred companies that are really undifferentiated, narrow solutions."
When it comes to succeeding, knowing your market and getting the timing right is paramount, A.G. Breitenstein, a partner at Optum Ventures, said during the session. Still, the quality of a young company is always an important concern, and venture capitalists are increasingly viewed FDA as a quality control measure for their future digital health investments.
“We are starting to see the notion of FDA as a definable moat around our companies, and what is really good and what is really crappy,” Breitenstein said in reference to 510(k) clearance and the agency's Pre-Cert program. “Looking at FDA approval is a way of building differentiation in the market place.”