The digital health vertical includes telehealth services, digital health platforms, virtual care coordination, and health- and wellness-focused categories such as nutrition and weight loss.

Healthcare has been slow to adopt digital formats—even as the world becomes increasingly digital—although the COVID-19 pandemic accelerated virtual health trends. The next wave of innovation will be led by technologies that bring healthcare closer to the patient, whether through at-home testing platforms, digital therapeutics, or new ways of delivering health guidance based on data collected from wearables, genetic testing, and biomarker analysis.

Key industry drivers in digital health include growing demand for personalized health programs, greater need for care coordination from an aging population, and an increasing need to recognize that patients are consumers. Despite initiatives to reduce the overall cost of care that go back decades, as well as attempts to decrease the complexity of healthcare and improve access, healthcare has continued to become more costly and complicated. As demand for easier access to care accelerates, digital health is set to benefit from greater demand for personal care navigators and a desire for new ways to find and receive care virtually.

While there are many key areas of opportunity for startups in digital health, risks for companies in the sector include competition and market fragmentation—particularly in primary telehealth and wellness—the necessity of scaling up to achieve profits, and the need to overcome point solution fatigue of payers and employers. In our view, to be successful, digital health companies must provide comprehensive health services with combined telehealth and care coordination, have a clear strategy to reach large populations of members and/or deliver care for currently unmet medical needs.

In 2022, VC activity in digital health totaled $7 billion, 55% lower than the $15.6 billion of funding in 2021, although funding levels were flat compared to 2020. Activity has also been light over the first couple months of 2023, and few market participants expect the funding environment to make a full comeback this year. Still, VCs have plenty of dry powder to invest in high-growth digital health categories, and there is a significant backlog of companies expected to go public once the IPO market recovers. We expect VC funding and exit activity—both M&A and IPOs—to pick up by the end of 2023, although we anticipate it will take until 2024 for investments and exits to return to longer-term trajectories.