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Q1 2024 digital health funding: Great (reset) expectations

Q1 2024 moved us from times of transition to full entrenchment in a new digital health funding cycle. The quarter’s $2.7B across 133 digital health deals demonstrated higher deal volume at lower check sizes. In the private markets, creative financing measures were the name of the game, while AI drove investment energy and attention refocused on startups’ abilities to demonstrate outcomes. In the public markets, stock delistings continued to change the makeup of digital health’s publicly-traded cohort, impacting how digital health players and investors think about exit potential.

Expectations are resetting for digital health players both private and public, pushing them to align to different paradigms of success (strong outcomes and healthy margins instead of high projected growth rates) and change their practices (structuring deals differently, forecasting conservatively). Read on for a breakdown of Q1’s digital health funding landscape, and how startups, investors, and innovation leaders are orienting for the year ahead.

Clipping along in a smaller funding market

In Q1 2024, U.S. digital health funding closed with $2.7B across 133 deals, with an average deal size of $20.6M.

Q1 2024 was the lowest first quarter by sector funding since 2019, noteworthy given that Q1 was the top-funded quarter of the entire year in 2022 and 2023. However, the pace of deal making is strong, even with lower overall funding dollars. Q1 2024 logged 133 fundraises for digital health companies, beating out each of the past six quarters though just edging out Q1 2023’s 132. Investors and founders are finding their stride and closing deals at more measured check sizes than in previous quarters.

Continued creative fundraising Even with more pep in dealmakers’ steps, some of 2023’s transitory funding measures have stuck around in early 2024—one of which is creative deal structuring. Creative deal structures, like the unlabeled rounds we talked about a lot in 2023 , can be used to extend capital to companies that aren’t ready to raise a new round. This trend has continued into Q1; 48% of the Q1’s deals were unlabeled, compared to 44% of all digital health funding deals in 2023.

Founders are also exploring creative deal structures to lock in investor participation. Medication management player DecisionRx secured $100M as a debt facility from investment firm Carlyle; as part of the investment, Carlyle received the option to acquire 25% of the outstanding equity of DecisionRx. Meanwhile, late-stage player Transcarent is structuring terms of their $125M Series D to offer funders 2.5x their investment should the company M&A or IPO. Each approach is designed to entice investors—one with potential upside and the other with protection from downside risk.

AI investment trends upward Beyond deal structure, Q1’s investments signaled digital health’s priority areas, with AI naturally rising to the top. 40% of Q1’s funding total went to AI-enabled companies ($1.1B across 45 deals), rising from 33% of 2023 digital health funding, and 29% of 2022’s funding pot. AI-enabled clinician scribe software Abridge raised a $150M Series C in February, just four months after raising their Series B, and AI precision health company Zephyr AI announced a $111M Series A in March. They led the cohort of AI-enabled digital health startups that raised in Q1, including Ambience Healthcare ( $70M ), Fabric Labs ( $60M ), Codametrix ( $40M ), Limbic ( $14M ), and Milu Health ( $5M ).

AI is a bright light in today’s funding environment, with multiple fundraises, partnerships , and acquisitions attracting investors to the space and energizing startup teams. Model evolutions , large scale rollouts , and new coalitions remind us that we’re building the infrastructure of AI-enabled healthcare in real time.

Real conversations about outcomes Historically, outcomes reporting practices have not been consistent across digital health players, and we’ve previously noted that strong outcomes data would become more important to startup success. In Q1, significant energy was aimed at assessing the outcomes of digital health solutions. From these conversations came some important takeaways. Testing digital health solutions and comparing outcomes between solutions remains hard, especially when those solutions serve patients with multiple conditions and equity considerations. This makes it even more important to recognize players 1 that continue to lead with evidence-based outcomes research. Crowded digital solution spaces are pushing enterprise buyers to seek out outcomes data as a way to differentiate players in the market and evaluate value-for-investment. As outcomes data becomes a moat and a customer draw-in, investors are seeking out companies that can demonstrate efficacy early. This makes outcomes data more central to fundraising conversations—and at earlier stages.

“There will soon be a time where the question sequence [to digital health companies] is, ‘What is your solution?’ and ‘Is there evidence showing it works?’ instead of, ‘How many customers do you have?’” – Jared Dashevsky, Co-Founder, Healthcare Huddle

Creative deal structuring, AI excitement, and attention to outcomes are features we expect to see in this digital health funding cycle for quite a while longer. The stakes are rising for technology innovation in service of better care, and the pressure’s on digital health companies to demonstrate their contributions and validate their path forward each time they seek out new customers, users, and investment from funders.

Resets in public cohorts and exit mindsets

If expectations and practices feel like they’re resetting in the startup market, life on the public markets feels like a whole new ballgame . The most notable change is the shakeup in digital health’s publicly-traded class. Q1 2024 saw three digital health companies, Science 37 , Better Therapeutics , and Veradigm , delist from the NASDAQ or NYSE—joining nine companies that did so since 2022 and bringing digital health’s publicly-traded cohort to 43, down from its 2021 peak of 54. 2 With six other digital health stocks ending the quarter at risk of delisting, it’s possible we’ll see the sector’s publicly-traded cohort change even further in the near future. 3

While some digital health companies shut down and sell their assets after delisting, going private could lead to longer-term stability for others. Development and growth planning are easier without the pressure of reporting quarterly to shareholders and market analysts, and the process of going private can be a good reset point in itself—offering a chance to restructure, shuffle assets, and make other operational changes that ultimately set an organization up for long-term success. This dynamic helps explain why companies like Veradigm might navigate delisting from the Nasdaq and acquiring another company simultaneously.

Delistings offer another important value—they recalibrate expectations for startups on the path to public exit. Startup valuations stem from expected investor returns at exit, and funders often use comps from publicly-traded players’ market capitalizations to triangulate company potential. In this way, public market delistings have a direct relationship to downshifts in startup valuations, which we see as an important reset in this market cycle. The publicly-traded players that remain, especially those that model margin management and revenue visibility , set a clear path toward success for others to follow in their footsteps.

Come on in, the water’s warm(ing up) For digital health companies eyeing the thawing IPO market—and even those who just have a public exit on their roadmap—expectations for exit have probably never felt as real…or harrowing. As a result, some companies that previously had eyes set on Wall Street may embark on dual-track processes, pursuing IPO and M&A exit pathways concurrently to keep options open. But fear can be combated with preparation. We expect that more late-stage digital health startups will build habits of budgeting and forecasting their finances as if they were publicly-traded, even if an IPO isn’t on the immediate horizon. Shifting from growth-minded forecasting, common in venture capital, to more conservative market guidance can help to iron out kinks and set a company up for public or private exit success.

“Late-stage digital health companies are evolving from growth-oriented forecast mindsets (what if everything goes right?) to more conservative mindsets (what if some things go wrong?). This shift can strengthen a company’s financial position and increase optionality down the road, including opportunities for a potential exit.” – Sasha Kelemen, Director of Healthcare Investment Banking, Leerink Partners

Writing new chapters

It’s a tougher, more scrutinizing climate for digital health companies on the private and public markets. Expectations around company and solution performance are rising—but great expectations are healthy for the sector to mature and evolve, and the necessary pressure will make diamonds of companies and leaders.

“Innovating in healthcare is hard, but hard can be your moat” – Halle Tecco, Startup Founder and Investor, Founder of Rock Health

Tap into insights and strategic guidance for enterprise companies with Rock Health Advisory . Get in touch with the venture team at Rock Health Capital . Join us in building a more equitable future at RockHealth.org . And last but not least, stay plugged into the Rock Health community and all things digital health with the Rock Weekly .

• Virta Health and Omada are Rock Health portfolio companies.
• Rock Health’s Public Company Index tracks companies that meet our definition of digital health and trade on the NASDAQ or NYSE.
• If a company’s stock trades under $1.00 for a certain consecutive period, the security may become noncompliant with exchange requirements and be required to delist; publicly traded digital health companies that ended Q1 2024 trading under $1.00 include Streamline Health Solutions, American Well Corporation (Amwell), Movano Inc., 23andMe, ShareCare Inc., and Vicarious Surgical.

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Artificial intelligence (AI) has incredible potential to transform the economy, improve the way we work, and enhance our way of life. The global race to scale up and adopt AI is on, and Canada is at the forefront of this technology. To make sure we can seize every opportunity in the economy of the future, and set every generation up for success, we need to scale up our innovation ambitions. And do it in a way that brings everyone along. For Millennials and Gen Z, who feel their hard work isn’t paying off like it did for previous generations, we must invest in good-paying opportunities that help them get ahead. That’s why we’re focused on creating more good jobs, including in innovation and technology, which are among the highest paying of all industries.

AI is already unlocking massive growth in industries across the economy. Many Canadians are already feeling the benefits of using AI to work smarter and faster. The rapid advance of generative AI today will unlock immense economic potential for Canada, significantly improving productivity and reducing the time workers have to spend on repetitive tasks. Researchers and companies in Canada are also using AI to create incredible new innovations and job opportunities across all facets of the Canadian economy, from drug discovery to energy efficiency to housing innovation. In the past year, job growth in AI increased by nearly one third in Canada – among the highest growth of any sector. And most AI jobs pay well above the average income.

Canada has a world-leading AI ecosystem – from development, to commercialization, to safety. We have an advantage that can make sure Canadian values and Canadian ideas help shape this globally in-demand technology. Canada was the first country in the world to introduce a national AI strategy and has invested over $2 billion since 2017 to support AI and digital research and innovation. Since then, countries around the world have begun investing significant funding and efforts into AI to advance their economies, particularly in computing infrastructure. In order to maintain Canada’s competitive edge, and secure good paying jobs and job security for generations of young Canadians, we must raise the bar.

The Prime Minister, Justin Trudeau, today announced a $2.4 billion package of measures from the upcoming Budget 2024 to secure Canada’s AI advantage. These investments will accelerate job growth in Canada’s AI sector and beyond, boost productivity by helping researchers and businesses develop and adopt AI, and ensure this is done responsibly.

These measures include:

• Investing $2 billion to build and provide access to computing capabilities and technological infrastructure for Canada’s world-leading AI researchers, start-ups, and scale-ups. As part of this investment, we will soon be consulting with AI stakeholders to inform the launch of a new AI Compute Access Fund to provide near-term support to researchers and industry. We will also develop a new Canadian AI Sovereign Compute Strategy to catalyze the development of Canadian-owned and located AI infrastructure. Ensuring access to cutting-edge computing infrastructure will attract more global AI investment to Canada, develop and recruit the best talent, and help Canadian businesses compete and succeed on the world stage.
• Boosting AI start-ups to bring new technologies to market, and accelerating AI adoption in critical sectors , such as agriculture, clean technology, health care, and manufacturing, with $200 million in support through Canada’s Regional Development Agencies.
• Investing $100 million in the NRC IRAP AI Assist Program to help small and medium-sized businesses scale up and increase productivity by building and deploying new AI solutions. This will help companies incorporate AI into their businesses and take on research, product development, testing, and validation work for new AI-based solutions.
• Supporting workers who may be impacted by AI, such as creative industries, with $50 million for the Sectoral Workforce Solutions Program, which will provide new skills training for workers in potentially disrupted sectors and communities.
• Creating a new Canadian AI Safety Institute, with $50 million to further the safe development and deployment of AI. The Institute, which will leverage input from stakeholders and work in coordination with international partners, will help Canada better understand and protect against the risks of advanced or nefarious AI systems, including to specific communities.
• Strengthening enforcement of the Artificial Intelligence and Data Act, with $5.1 million for the Office of the AI and Data Commissioner. The proposed Act aims to guide AI innovation in a positive direction to help ensure Canadians are protected from potential risks by ensuring the responsible adoption of AI by Canadian businesses.

Today’s announcement is about investing in innovation and economic growth to secure Canada’s world-leading AI advantage today and for generations to come. This will create good-paying opportunities for every generation, boost innovation across the economy, raise productivity, and accelerate economic growth – and it’s just one of the things that we are going to be doing in Budget 2024. Alongside these measures, we’re building more homes faster, ensuring every kid has the food they need, investing in health care, making life more affordable, and creating good jobs to make sure every generation can get ahead.

“AI has the potential to transform the economy. And our potential lies in capitalizing on the undeniable Canadian advantage. These investments in Budget 2024 will help harness the full potential of AI so Canadians, and especially young Canadians, can get good-paying jobs while raising our productivity, and growing our economy. This announcement is a major investment in our future, in the future of workers, in making sure that every industry, and every generation, has the tools to succeed and prosper in the economy of tomorrow.” The Rt. Hon. Justin Trudeau, Prime Minister of Canada

“Today, we are making a significant investment to boost our economic growth. This will keep Canada a global leader in AI and ensure we are at the very cutting-edge of new technologies. And most importantly, this will mean more high-paying careers for Canadians who are leading the charge in AI.” The Hon. Chrystia Freeland, Deputy Prime Minister and Minister of Finance

Quick Facts

• The Government of Canada’s Budget 2024 will be tabled in the House of Commons by the Deputy Prime Minister and Minister of Finance on Tuesday, April 16, 2024.
• In 2017, Canada was the first country to establish a national AI strategy. The Pan-Canadian Artificial Intelligence Strategy is helping Canada maintain its position as a world leader in AI, businesses be more competitive, and Canadians benefit from growth in the digital economy. Phase 2 of the strategy was announced in 2022 with funding of more than $443 million.
• The federal research granting agencies – the Canadian Institutes of Health Research (CIHR), the Natural Sciences and Engineering Research Council (NSERC), and the Social Sciences and Humanities Research Council (SSHRC) – together have awarded $936.8 million in funding for AI-related research since 2017-18.
• Since 2017, the National Research Council of Canada Industrial Research Assistance Program (NRC IRAP) provided $705.8 million in contributions to AI-related firms. This funding supported 1,111 firms and 3,837 projects in the AI and Big Data Technology space.
• In addition, the NRC Digital Technologies Research Centre has invested over $27 million both directly to firms and on collaborative AI projects related to natural language processing, Indigenous languages, and high-performance computing for AI.
• In 2023, Canada announced renewed funding for the Global Innovation Clusters , including Scale AI , bringing total funding for the company to up to $284 million. Scale AI is dedicated to promoting collaboration in AI and supply chain management research and innovation by strengthening linkages between researchers in industry, academia, and research institutes in Canada and abroad, and providing financial support for AI and supply chain management projects.
• Canada has also made significant investments in fast-scaling AI-related companies through the Strategic Innovation Fund , including Sanctuary AI and semiconductor firm Ranovus .
• Canada was recently ranked number 1 among 80 countries, tied with South Korea and Japan, in the Center for AI and Digital Policy’s 2024 global report on Artificial Intelligence and Democratic Values .
• The Artificial Intelligence and Data Act (AIDA) was introduced in Parliament as part of Bill C-27 in June 2022. It is designed to promote the responsible design, development, and use of AI systems in Canada’s private sector, with a focus on systems with the greatest impact on health, safety, and human rights. Since the introduction of the bill, the government has engaged extensively with stakeholders on the novel challenges posed by generative AI. Canada is one of the first countries in the world to propose a law to regulate AI. Learn more .
• The Voluntary Code of Conduct on the Responsible Development and Management of Advanced Generative AI Systems – announced in September 2023 and signed by major tech firms including Cohere, Ada, Coveo, BlackBerry, TELUS, OpenText, and IBM – enables companies to demonstrate that they are developing and using generative AI systems responsibly and strengthen Canadians’ confidence in the technology.
• The Public Awareness Working Group on AI was launched in 2020 under Canada’s Advisory Council on Artificial Intelligence with a mandate to examine avenues to boost public awareness and foster trust in AI. Its objective is to help Canadians have a more grounded conversation around AI, and help citizens better understand the technology, its potential uses, and its associated risks. The Working Group published a report on its public engagement activities in February 2023. A further public report is upcoming specifically on the Working Group’s engagement with First Nations, Inuit, and Métis communities to better understand their needs, interests, and priorities for AI development and use.
• Since the 1990s, Canada has been a leader in AI and deep learning, made possible by the research and innovations of the “Godfathers of AI”, Canadians Yoshua Bengio and Geoffrey Hinton. In the decades since, Canada has built up a robust and growing AI industry across Canada, anchored by our three national AI institutes in Montréal, Toronto, and Edmonton.
• In 2022-23, there were over 140,000 actively engaged AI professionals in Canada, an increase of 29 per cent compared to the previous year.
• Canada has 10 per cent of the world’s top-tier AI researchers, the second most in the world.
• Canada ranks first globally for year-over-year growth of women in AI (67 per cent growth in 2022-23 alone), first in the G7 for year-over-year growth of AI talent, and since 2019, has ranked first in the G7 for the number of AI-related papers published per capita.
• The number of AI patents filed by Canadian investors increased by 57 per cent in 2022-23 compared to the previous year – nearly three times the G7 average of just 23 per cent over the same period.
• In 2022, the Canadian AI sector attracted over $8.6 billion in venture capital, accounting for nearly 30 per cent of all venture capital activity in Canada.
• Canada ranks third in the G7 in total funding per capita raised for AI companies, with more than 670 Canadian AI start-ups and 30 Canadian generative AI companies receiving at least one investment deal valued at more than $1 million USD since 2019.
• Restore generational fairness for renters, particularly Millennials and Gen Z, by taking new action to protect renters’ rights and unlock pathways for them to become homeowners. Learn more .
• Save more young families money and help more moms return to their careers by building more affordable child care spaces and training more early childhood educators across Canada. Learn more .
• Create a National School Food Program to provide meals to about 400,000 kids every year and help ensure every child has the best start in life, no matter their circumstances. Learn more .
• Launch a new $6 billion Canada Housing Infrastructure Fund to accelerate the construction or upgrade of essential infrastructure across the country and get more homes built for Canadians. Learn more .
• Top-up the Apartment Construction Loan Program with $15 billion, make new reforms so it is easier to access, and launch Canada Builds to call on all provinces and territories to join a Team Canada effort to build more homes, faster. Learn more .
• Support renters by launching a new $1.5 billion Canada Rental Protection Fund to preserve more rental homes and make sure they stay affordable. Learn more .
• Change the way we build homes in Canada by announcing over $600 million to make it easier and cheaper to build more homes, faster, including through a new Homebuilding Technology and Innovation Fund and a new Housing Design Catalogue. Learn more .

Associated Links

• Responsible use of artificial intelligence (AI)
• Sectoral Workforce Solutions Program