Boom, Bust, Caution: Venture Capital investment in Digital Health in the last 5 years

Lloyd Price
Apr 30
5 min read

Boom, Bust, Caution: Venture Capital investment in Digital Health in the last 5 years

Venture capital (VC) investments in digital health have experienced significant fluctuations over the past five years (2020–2024), driven by technological advancements, market dynamics, and global events like the COVID-19 pandemic. The sector, which includes telemedicine, AI-driven diagnostics, mental health platforms, and health data infrastructure, has seen both explosive growth and subsequent recalibration.

Below is an analysis of the trends, key players, and realities of VC investments in digital health, grounded in data and tempered by a critical perspective on hype versus substance.

Funding Trends (2020–2024)

2020: Surge Amid the Pandemic

Total Funding: $14.1–$21.6 billion globally, with the U.S. leading at ~$14.3 billion across ~400 deals.

Context: The COVID-19 pandemic accelerated adoption of digital health solutions, particularly telemedicine and remote monitoring, as in-person care became untenable. Investors poured capital into telehealth (e.g., Teladoc’s $18.5 billion merger with Livongo) and AI-driven platforms.

Key Areas: Telehealth, mental health apps, and data analytics saw record funding. For example, Color raised $278 million for genomic testing and vaccine distribution infrastructure.

Reality Check: The frenzy was partly fuelled by speculative optimism. Many startups received inflated valuations with unproven business models, setting the stage for later corrections.

2021: Peak of the Bubble

Total Funding: $29.2 billion in the U.S. alone, a record high across 738 deals, nearly doubling 2020’s figures.

Context: Low interest rates, post-COVID optimism, and a rush to digitise healthcare drove mega-rounds. Companies like Ro ($500 million, valued at $5 billion) and Hinge Health ($300 million) exemplified the trend.

Key Areas: AI, Telehealth, and value-based care dominated. Mental health startups like Lyra Health and musculoskeletal platforms like Hinge Health attracted significant capital.

Reality Check: The “grow at all costs” mentality led to overfunding of companies with unsustainable unit economics. High valuations often outpaced traction, as seen in later failures like Olive and Forward.

2022: Market Correction

Total Funding: $15.7 billion in the U.S., a 46% drop from 2021.

Context: Rising interest rates, inflation, and a cooling VC market shifted focus to profitability. Investors became cautious, prioritising capital efficiency over speculative bets.

Key Areas: Early-stage deals (Seed, Series A) remained resilient, but later-stage rounds saw smaller check sizes. AI and health management solutions continued to attract funding.

Reality Check: Many overhyped startups struggled to scale or prove ROI, leading to closures (e.g., Olive) or acquisitions at reduced valuations. M&A activity increased as struggling firms consolidated.

2023: Stabilisation and Selectivity

Total Funding: $10.8 billion in the U.S. across 503 deals, down 43% from 2022.

Context: Investors focused on early-stage startups (86% of labeled deals were Seed to Series B) with lower capital needs and less “valuation baggage” from the 2020–2021 boom.

Key Areas: AI-driven startups, particularly in drug discovery and clinical documentation, captured 41% of funding. Women’s health and mental health also gained traction.

Reality Check: The focus on profitability exposed weaknesses in Telehealth and digital therapeutics, with closures like Walmart’s MeMD and Optum’s virtual care service. Investors began scrutinizing ROI and sustainability.

2024: Resurgence with AI Dominance

Total Funding: $10.1 billion in the U.S. across 497 deals, slightly down from 2023 but above 2019’s inflation-adjusted $8.2 billion.

Context: A rebound in Q1 2025 ($5.3 billion) signalled renewed optimism, driven by AI and early-stage deals.

Key Areas: AI startups captured 37–60% of funding, with $3.2 billion in Q1 2025 alone, focusing on drug discovery, diagnostics, and provider workflows. Mental health, cardiovascular, and reproductive health also saw investment.

Reality Check: “AI-washing” became a concern, with some startups exaggerating AI capabilities to attract capital. High-profile failures (e.g., Forward) highlighted risks of overcapitalization without proven models.

Key Venture Capital Players and Strategies

Leading Investors:

Andreessen Horowitz (a16z): Active in early-stage digital health, backing companies like Omada Health and Komodo Health. Known for large check sizes and influence in AI and techbio.

General Catalyst: Invested in 30+ health tech deals since 2021, including Infrosa Health for $485 million. Emphasizes “Health Assurance” to transform healthcare.

Rock Health: A dedicated digital health fund, investing in software and data-driven startups like Omada and Collective Health.

Lux Capital: Invests in deep tech, including 23andMe and Everly Health, with a long-term vision.

Health systems (eg. Mount Sinai Ventures): Made 184 investments in 105 companies (2011–2019), focusing on workflow and interoperability.

Investment Focus:

Early-Stage Preference: In 2024, 86% of labeled deals targeted Seed to Series B, reflecting caution around late-stage valuations.

AI and Data: AI startups, especially in drug discovery and clinical documentation, dominated, raising $3.2 billion in Q1 2025.

M&A and Consolidation: Struggling late-stage startups drove M&A activity, with acquisitions like Fabric’s purchase of Walmart’s MeMD.

Critical Insights and Truths

Hype vs. Reality:

The 2020–2021 funding surge was driven by pandemic-induced urgency and low interest rates, but many startups (e.g., Olive, Forward) failed due to unproven models or overhyped promises.

AI is a funding magnet, but “AI-washing” risks misallocating capital to companies with superficial tech claims.

Telehealth and digital therapeutics face sustainability challenges, with closures signaling investor skepticism about long-term viability.

Investor Selectivity:

Post-2022, VCs prioritised capital-efficient startups with clear paths to profitability, moving away from “grow at all costs.”

Heavyweight funds like a16z and General Catalyst dominate, controlling 75% of 2024’s VC capital with just 30 of 391 U.S. firms.

Health systems as investors bring clinical expertise but focus narrowly on solutions aligning with their operational needs.

Regional Dominance:

The U.S. leads globally, raising $117.6 billion from 2019–Q1 2024, dwarfing Europe ($7.11 billion) and Asia ($4.73 billion).

Europe’s digital health funding grew 19% year-over-year to $3.5 billion in 2024, driven by AI and diagnostics.

Long-Term Challenges:

Digital health’s regulatory and reimbursement hurdles extend timelines to profitability, deterring some VCs who prefer quicker exits (5–10 years vs. 2 years in other sectors).

Failures like Olive highlight the risk of scaling human-intensive models (e.g., telehealth) without sustainable margins.

Emerging Opportunities:

Women’s health, historically underfunded (3% of 2011–2020 digital health funding), is gaining traction beyond reproductive care.

Mental health and value-based care remain resilient, with startups like Devoted Health ($2.256 billion raised) leading.

AI’s transformative potential in diagnostics and workflows is undeniable, but only firms with proven outcomes will survive scrutiny.

The truth about digital health VC investments from 2020–2024 is a story of boom, bust, and cautious recovery. The pandemic-fueled surge of 2020–2021 gave way to a 2022–2023 correction as investors prioritized profitability and early-stage bets. AI has emerged as a dominant force, but risks of overhype persist. While the US leads globally, Europe is catching up, and areas like women’s health and mental health are gaining ground. Failures like Olive and Forward underscore the need for sustainable models, and the dominance of mega-funds like a16z and General Catalyst signals a concentrated, competitive landscape. For startups, success hinges on proving ROI, navigating regulatory hurdles, and avoiding the pitfalls of “AI-washing” or premature scaling.

Nelson Advisors > HealthTech M&A

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