Over the past few months, it’s become clear that the startling boom in health tech funding that coincided with COVID-19 is starting to fade.
In the last year, the global venture capital market has experienced a decline that has affected startups in most fields and stages of growth. Healthcare companies may have experienced a strong bump in demand as a result of the pandemic, but circumstances—or rather, the perception of the industry’s value in the short term—have changed.
In a study performed by Venrock, it was discovered that 90% of the more than 250 industry experts surveyed expected health tech investing to decrease in 2022—and the drop isn’t expected to be minor. Half of these experts predict a decrease in funding by at least 30%. This response works directly against the industry’s growth and success in previous years, which has seen investment interest in health tech startups triple since 2019, reaching $29.1 billion in 2021. The drop-off in funding alludes to a broader emerging trend of VCs retreating from financing startups after a year defined by an all-time high in investments.
So why is the health tech funding frenzy ending? Simple. Investment dollars are moving to other sectors, specifically those depressed by the coronavirus, and there are several explanations as to why this shift is happening now.
A Shift in Investment Strategy
The pandemic changed the average investor’s perspective on the healthcare sector. It caused a lot of uncertainty in terms of where the healthcare innovation space was moving, both within the medical field and in the broader VC ecosystem. People started asking more questions and taking a harder look at what technologies will become a priority now after observing the global devastation of a virus like COVID-19.
More generally, investors are prioritizing short cycles for obtaining returns on their investments, but health tech typically has long and costly cycles of R&D and government approval well before they can even begin the process of moving products to market. With that in mind, it is very possible that investors want to shift their money toward industries and technologies that don’t face as many challenges and roadblocks.
It is also important to remember that in 2021, interest rates were low and a strong stock market constantly welcomed new initial public offerings (IPOs) and special purpose acquisition companies (SPACs). Investing in unproven health tech ventures seemed no riskier than the billions being poured into newer crypto commodities such as Ethereum or non-fungible tokens (NFTs).
But the rush to scale global health tech—defined by extensive and rapid research, production, and distribution efforts—is over. Now that the Fed is running a tighter ship, the rate of health tech funding is declining in tandem. High-risk, high-reward ventures are being sacked in favor of safe havens such as banks and energy stocks.
The State of Health Tech Investment in 2022
Make no mistake, health tech investment is not facing an outright depression, but rather a natural correction. According to Rock Health, a venture fund dedicated to digital health, startups in the industry raised $6 billion in the first quarter of 2022—those are still big bucks compared to what was rolling into the bank just a few years prior. There should be no fear of collapse—it’s clear that deals in health tech are still going through—however, the tone of the market seems to have shifted.
The year-to-date industry investment falls short compared to the $7.3 billion raised in the final quarter of 2021, as well as the same year’s quarterly average of $7.1 billion. Investors who poured large sums of cash into the health tech space over the last few years are likely waiting for those investments to come to some conclusion, with a return on investment or an exit, before shelling out another cent.
If the pandemic has proven anything, it is that the belief technology can make modern healthcare more effective, more affordable, or both is still alive and well. The digital doctor ecosystem that has come about as a result of the pandemic is expected to continue driving investment and revenue for the industry. But the complexity of the industry has long been understood to lead seemingly star-bound startups to crash, giving investors pause in today’s uncertain economy. In the coming years, we’ll certainly see which investments take off and whether this trend downward will continue or reverse.