U.S.-based digital health startups ended 2023 with a fundraising total of $10.7 billion across 492 deals, which is the lowest annual fundraising amount the sector has seen since 2019, according to a report released this week by Rock Health. The fourth quarter of last year closed with just $1.9 billion raised, representing the lowest funding quarter in the digital health sector since the third quarter of 2019.
However, Rock Health’s report noted that last year’s low funding total doesn’t quite tell the whole story. In 2023, digital health fundraising took on a bit of a different shape, with startups trying out some creative ways to keep their businesses afloat — including series extension rounds, unlabeled fundraises and silent deals from existing investors.
Venture-backed companies tend to raise capital every 12-18 months. Amid the financial pressures surrounding startups in the past year or so, this timeline hasn’t remained steadfast. Rock Health found that 81% of active U.S.-based digital health startups that completed a labeled fundraising round in 2021 or earlier did not raise another labeled round by the end of 2023.
While some startups may have cut back o staff or paused ambitious growth plans to make the most out of the capital they already raised, there are also a significant number of startups that employed alternative funding measures, the report stated.
For example, there was a wave of extended Series A and B rounds in the digital health sector last year. Some of these include Mantra Health’s Series A extension in March, Heard Technologies’ Series A extension in June, CarePredict’s Series A extension in July, Keona Health’s Series A extension in August and Genome Insight’s Series B extension in November.
These extension rounds help sustain startups that haven’t fully established essential milestones such as product-market fit or a go-to-market strategy, the report explained. In some cases, these extension rounds can boost a company’s competitive edge by enabling it to produce outcomes data or seek guidance from strategic investors before pursuing the next round of fundraising.
Extension rounds aren’t without risk, though. These rounds are typically dilutive, so they have the potential to decrease the ownership stakes of founders and early investors proportionally to the additional capital raised. Following an extension, startups usually face the challenge of formulating effective strategies within a time constraint, given the impending cycle for the next round of fundraising, the report pointed out.
In addition to the influx of extended rounds, a lot of digital health startups completed unlabeled rounds in 2023, meaning the round didn’t have a designated letter like “Series B” or “Series C.” In fact, a new annual record was set — 44% of last year’s digital health fundraising deals were unlabeled.
Similar to series extensions, unlabeled rounds provide capital to startups that haven’t yet reached important maturity milestones. But unlabeled fundraises leave unanswered questions about companies’ subsequent funding round timelines, and these startups might need to raise more capital quickly in order to stay afloat, according to the report.
Silent rounds were another trend in 2023. These rounds occur when a startup quietly seeks capital from its existing investors.
“There is no way to systematically track rounds that aren’t reported, but we surmise from the anecdata we have that 2023 saw more than its fair share of unannounced, inside-round financings,” Rock Health wrote in its report.
This type of fundraising can be convenient, but startups that raise silent rounds can miss out on feedback and independent pricing from the border venture capital environment, the report noted. In other words, these rounds could end up simply postponing or intensifying the risks and challenging discussions that they are sometimes designed to evade.
Photo: drogatnev, Getty Images
