Digital health funding took a tumble in 2022, with U.S.-based startups raising $15.3 billion across 572 deals.

Rock Health's report found the year's funding total was a little over half of 2021's $29.3 billion, and just beat out 2020's $14.7 billion. Average deal size was $26.7 million, which didn't surpass either of the previous two years. 

"With recession concerns looming, H2 2022’s quarterly average of $2.4 billion may be a bellwether for the next several quarters – which means that 2023 could be digital health's first $10 billion or lower year in venture funding since 2019," authors Kyle Bryant, Madelyn Knowles and Adriana Krasniansky wrote. "However, there are signals that funding could start to inch back up again: investors have dry powder stockpiled, and difficult exit climates are likely to draw late-stage digital health companies back to the fundraising table."

One contributor to the slowdown was the relatively few mega-deals, or rounds worth $100 million or more, raised last year. The report tracked only 35 mega-deals in 2022, a large drop off compared with 2021's 88. Even 2020 boasted more mega-rounds at 43.

Some companies avoided raising money in the more challenging market to avert a down round, where startups offer shares at a lower price compared with their previous financing rounds. Investors also may have been less willing to take risks on startups with hefty valuations, favoring slower growth with more established outcomes. 

"For growth-stage startups that didn’t raise in 2022, limited cash reserves may push once-crowned digital health unicorns back to the fundraising table (possibly at lower valuations) or toward M&A territory. 2023 will likely see some 'fallen' unicorns accept acquisition bids if cash reserves are short. For those that choose to pursue investment instead of M&A, grounded approaches will be the most successful," the report's authors wrote. 

However, 2022 saw steady interest for early-stage digital health companies. The report found median deal size for Series A rounds reached a high of $15 million last year, while check sizes declined for B, C and D raises.

But many startups shifted strategies in 2022. Only 37% of the companies that raised funds this year sold directly to consumers compared with 43% in 2021, as inflationary concerns hit pocketbooks and app privacy updates made it more expensive to get users to sign up. 

So where did all that money go? As health systems faced negative margins and staffing woes, companies touting nonclinical workflow tools raised $2.2 billion in 2022. The report ranked the segment as the third highest-funded value proposition, jumping up from seventh place in 2021. Clinical workflow software rose to eighth place from eleventh in 2021. On-demand healthcare was first, raising $2.4 billion.

In terms of clinical indications, startups offering mental health tools continued to hold the top spot, raising $2.1 billion. 

Big tech continued its push into healthcare, but the report noted a more conservative focus in areas where these companies are already successful. For instance, Google honed in on search tools for both patients and clinicians, while Amazon launched its virtual clinic for common conditions. 

As companies look ahead at 2023, the report argues, declining funding isn't the death of digital health. 

"2022 was a necessary reminder that investment is cyclical, and that strong players build resilience in weathering funding climate changes," the authors wrote. "We expect that 2023 will be built up on slow, steady, and maybe even boring strategies for healthcare startups and enterprises alike: managing cash, re-structuring to accommodate revenue volatility and investing in technology infrastructure."