Dive Brief:

• U.S. digital health companies raised a record $6.7 billion in the first quarter of 2021, putting the industry on track to easily top the $14 billion in investment last year.

• Rock Health, which compiled the data, said the bumper quarter was driven by investments in providers of on-demand healthcare services, such as the $500 million committed to Ro, and population health management startups, such as Color. 

• The proliferation of Special Purpose Acquisition Companies (SPACs) could support further investment by providing an alternative exit to M&A and traditional IPOs. However, the share prices of many SPACs have fallen, intensifying concerns about the viability of the model.

Dive Insight:

Rock Health tracked $1.1 billion of digital health funding in 2011, the first year in which it released an annual report on the sector. Over the second half of March 2021, digital health companies raised $1 billion a week. The huge increase in funding during that 10-year period is a result of both a steady rise in the pre-pandemic years and a sharp surge after the COVID-19 crisis shook up healthcare.

Increased interest in telehealth contributed to record digital health funding in 2020, when companies raised almost twice as much as in the prior year, but there are now signs that investment in 2021 will go higher still. It took the industry six months to raise $6 billion in 2020. This year, the industry passed that milestone within three months.

The $6.7 billion in digital health funding tracked by Rock Health covers investments in a wide range of companies, with tech-enabled drug development groups sitting alongside providers of on-demand healthcare services on the list of the biggest deals in the quarter.

Those big deals were a key factor in the record-breaking first quarter. Over the first three months of the year, 25 digital health companies raised $100 million or more. Only 40 companies raised $100 million or more across all of last year. 

Investors in privately-owned digital health companies need to know there are exit options that can give them a return on their outlays. IPOs and acquisitions by larger companies are the two established exit routes but in the first quarter of 2021 SPACs emerged as a popular alternative. The vehicles enable companies to join public stock markets without going through the IPO process.

Rock Health tracked the announcement or closure of 10 digital health SPAC deals in the first quarter. That could be a positive development. "It's possible the liquidity generated via SPAC exits will create confidence among venture firms to continue investing in digital health, perpetuating the cycle the market is currently in of high investment and valuations," the Rock Health team wrote.

However, Rock Health also sees potential downsides to the trend, noting that SPACs may create new risks and that sentiment toward the approach could sour quickly. Ivana Naumovska, an academic who studies financial markets, has already warned SPACs may be subject to the same boom-and-bust cycle that led to use of reverse mergers, a similar way of accessing public markets, to briefly surge before falling away a decade ago.