Digital Health H1 2024 Reveals Surprising Resilience, but are we out of the woods yet?

The Digital Health ecosystem has shown notable resilience and recovery in the first half of 2024, as detailed in the latest Galen Growth report . This positive performance follows a turbulent 2023, which saw significant consolidation, heightened investor scrutiny, and a notable investment retreat. Amid these challenges, health systems have honed operational efficiency, while major technology companies have strategically invested in AI, Generative AI (GenAI), and ChatGPT technologies.

Stabilisation and Recovery in Q1 2024

The first quarter of 2024 marked a crucial stabilisation period, halting the decline in digital health funding observed throughout the previous year. Q1 2024 recorded $5.3 billion across 383 deals , setting a positive tone for the rest of the year. This recalibration phase was defined by mergers, a strategic shift in investment approaches, and the increased integration of innovative technologies like Generative AI.

Europe, in particular, showcased robust growth, with digital health funding recording a 22% increase compared to the previous period. This regional performance underscores Europe’s expanding role in the global digital health landscape.

H1 2024: A Welcome Upsurge

Contrary to expectations of a prolonged funding winter, the first half of 2024 saw digital health funding defy. $12.4 billion was invested across 719 deals, surpassing the $11.8 billion in H1 2023. This resurgence points to renewed investor confidence and increasing momentum in the sector.

Despite broader venture capital slowdowns, digital health funding has demonstrated remarkable resilience, with the average deal size increasing 1.2 times from Q2 2023 to Q2 2024. This trend highlights the sector’s ability to attract substantial investments despite the challenging financial climate.

Centres of Gravity and Trends

The past 12 months have seen the rise of two key centres of gravity within the digital health ecosystem: TechBio and health systems partnerships.

TechBio , which focuses on digital health solutions for biopharma research, has garnered significant investment and innovation driven by implementing foundation models.

Simultaneously, health systems have intensified their efforts to address pressing challenges by doubling down on partnerships with digital health ventures. These collaborations have increased by 1.2 times year-on-year, reflecting a strategic push to integrate digital solutions into traditional healthcare settings.

Dominant Clusters and AI-Driven Investments: A Closer Look

Research Solutions, also known as TechBio , remained the top cluster for digital health funding in H1 2024, capturing 20% ($2.63 billion) of venture capital across 63 deals. Health Management Solutions followed with $1.76 billion in investments. These substantial investments highlight the surge in AI-driven research and healthcare tools.

AI-focused ventures have steadily attracted increasing investments, constituting 57% of total funding in the first half of 2024. This is significant, given that only 40% of global ventures leverage AI technology. Meanwhile, the proportion of private digital health ventures utilising Generative AI remains at a modest 2%.

VC activity has shown signs of bottoming out, yet it is premature to declare a definitive rebound. Persistent challenges such as inflation and high interest rates continue to plague venture capital, leading to a prolonged slowdown. Fundraising has been particularly hard hit, with several well-known funds failing to meet their targets and raising significantly less than in previous rounds. Exit activity has remained subdued, leaving limited partners (LPs) without significant distributions. LPs are understandably hesitant to commit more capital to venture capital in this high-interest-rate environment, leading to fundraising projections that could hit the lowest levels since 2019.

The Path Forward: Cautious Optimism

While H1 2024 has demonstrated strong performance, the ecosystem is still experiencing the aftershocks of the funding collapse in 2022 and 2023. High-profile ventures continue to shut down due to miscalculated business models, and investors are cautious. Nevertheless, venture capital inflows have regained momentum, and funding stress is gradually easing.

The ongoing IPO drought is a significant factor contributing to this cautious atmosphere. It explains why venture capitalists are coming up against a fundraising wall. The industry has collected capital commitments from limited partners globally this year on pace for a decade-low.

Notably, the proportion of growth-stage ventures securing funding has risen by two percentage points quarter-on-quarter in the US over the past 18 months, aligning with Europe’s 42% at the end of H1. According to Galen Growth’s Alpha Forecaster, ventures with above-average signals are poised to attract strong investor interest in the second half of 2024.

Healthcare providers have emerged as primary drivers of partnerships, holding a 21% share of all collaborations. This trend underscores the growing necessity for digital solutions, particularly those leveraging AI, to enhance patient care and operational efficiency.

Turning the Corner

Is the digital health innovation ecosystem turning a corner after many months of uncertainty? The evidence suggests so.

As investors regain confidence and the investment value chain shows signs of easing, the sector appears poised for continued growth. However, caution is advised in placing too big a bet in the short term on incumbents like big pharma and health systems, which still remain encumbered by vested interests and traditional paradigms.

However, startups and funds focusing on AI have found a unique advantage in today's market. These entities have seemingly sidestepped some of VC's broader issues by aligning closely with the market's enthusiasm for AI. The fear of missing out (FOMO) on this technology has driven investors towards AI-focused startups, resulting in high valuations, increased deal sizes, and the emergence of large AI-specific funds. This trend underscores the significant role AI continues to play in driving investment within the digital health sector and beyond.

With global Digital Health Funding poised to exceed 2023, we should still expect the remainder of 2024 to witness continued consolidation as the digital health ecosystem navigates this complex landscape. Nonetheless, the resilience and recovery observed in the year's first half provide a solid foundation for future developments in this dynamic sector.

Galen Growth Report: A Comprehensive Resource

The Galen Growth bi-annual report, released mid-year and year-end , is an essential resource for anyone invested in the Digital Health sector. Spanning over 80 pages, the report offers unmatched insights and detailed data.

Powered by HealthTech Alpha, the #1 resource for Digital Health data, intel, and insights, this comprehensive report provides a deep dive into the latest trends, investment patterns, and technological advancements shaping the global Digital Health landscape.

About Galen Growth

Galen Growth is a pioneering global think tank advancing Digital Health innovation. With approximately a decade of unparalleled expertise, we consistently deliver cutting-edge research, analytics, and insights to industry leaders and investors. Our commitment to excellence has solidified our reputation as the premier authority in this dynamic field. With a global reach that includes offices in the USA, Europe, and Asia, Galen Growth is uniquely positioned to provide comprehensive and strategic support to the evolving Digital Health ecosystem.