By Jake Hare, founder and CEO, Launchpeer.
The year 2021 experienced a global deceleration of the venture capital market that impacted the broader startup ecosystem, regardless of company size and stage of growth.
In the first quarter of 2022, CB Insights found that the $10.4 billion that was invested in global health tech startups was down 36% compared to the $16.2 billion that was put into the global market from Q4 of 2021. Experts predicted this drop and don’t believe a rebound as drastic as the one seen during the pandemic will be happening any time soon.
This not to say, of course, that the health tech industry will be seeing its end. There is still an obvious need for innovation and development in the area. Rather, the funding frenzy of 2020 and 2021 has come to a halt, and the explanation as to why is rather simple.
The cool-off in health tech investing has much to do with the normalization of COVID-19. It follows a larger trend of investors pulling back from backing startups after a year of all-time-high cash flow for the businesses.
The stagnation in funding for health tech in particular followed a massive jolt of investment in response to the COVID-19 pandemic. It makes sense – the perceived value of the industry in the short-term shot up exponentially. But now that the immediate need for health tech innovation has receded, VCs are exploring what other industries may be the next to explode. And why wouldn’t they? Compared to other ventures, the health tech industry has slower ROIs due to its longer and expensive cycles of R&D, not to mention the bureaucratic hoops. It’s likely that investors are looking to shift their ventures towards markets with a clearer path to returns.
Additionally, while startups of various industries that went public via special purpose acquisition companies (SPAC) have surged over the past two years, recent popularity has declined sharply. Digital health alone saw SPAC exits’ average stock price fall 57% from the third quarter open in 2021 to the close of the first quarter in 2022. A possible explanation is that SPAC targets simply may not be ready for the public markets, being on average three years younger than their fellow IPOs.
It will be difficult to predict health tech investment in the coming months. Supply chain and energy disruptions as a result of and in addition to the Russian invasion of Ukraine are cause for market corrections and new variables entering public and private funding equations. But there is no doubt that, in terms of health tech, the fall in funding occurred long before the latest geopolitical conflict.
COVID-19 was cause for a rush to scale global health technology. Countries and companies raced to achieve the fastest possible production and distribution efforts – and that required a significant amount of capital. Last year saw $7.3 billion poured into the industry in aid of those efforts. And even though companies in the field are still seeing dollars come in – the $6 billion raised in Q1 of 2022 is no small number – it seems that the nuanced complexities of the field are now outweighing the pace of investment.
However, the health tech industry still has an opportunity to grow in new ways after such a slowdown in funding. Regardless of the drawbacks, young and talented individuals will be drawn to mission-oriented startups that proved to be vital during the pandemic. There are also plenty of ongoing discussions surrounding ways to make global healthcare more accessible and affordable – and plenty of opportunities for startups to innovate and grow in that space. Only time will tell which health tech ventures will secure funding for what, in the last year, has become a more competitive market.