Since my company, Rock Health, began researching and tracking funding into the digital health space in 2011, we've reported steady growth nearly every year. 2018 was no different, with a massive $7.9 billion in venture filling start-ups' coffers. But the signals we're seeing — large, late-stage rounds at high valuations and shorter periods between early rounds — are those of an investment cycle nearing its peak.
Does this peak signal a "bubble?" The so-called b-word has been sneaking into conversations with our fellow investors, so we dedicated our year-end number crunching to measuring the froth.
In our view, digital health is not in a bubble. But we've heard opposing views on that from other investors, and so we welcome a healthy debate as this cycle unfolds.
Future venture capital funding for digital health largely rests on two factors: the health of the economy as a whole, and the dynamics driving investment in health care innovation.
First, where the broader venture capital market goes, digital health will go. Digital health's growth over the past five years mirrors venture investment growth overall: Both hit decade-high deal values in 2018.
But of course, the ongoing public market pullback could trigger investor wariness that spills into venture capital.
For the second factor, we validated a simple framework with fellow investors to assess the current "bubbliness" of digital health against six attributes. We hope this approach moves the bubble discussion to a more data-driven place and helps entrepreneurs identify strategies to weather a potentially tighter capital market.
While the future is not yet written, it seems unlikely that capital will continue to flow at the current rate. We anticipate a possible pullback in VC funding for digital health in future periods—not a bubble pop. The next stage will be shaped by how entrepreneurs and investors reset for a tighter market in 2019. Doing so will safeguard against future market corrections—and allow the digital health community to continue making healthcare massively better for every human being.
Rock Health's year-end report, available on January 7, will cover this topic and more on digital health venture funding. Sign up for the Rock Weekly to be the first to know when the report is released.