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Connell C - LB Mar 2022

The state of the health-tech industry

Following an in-depth review of over 200 applications, investor at Spex Capital Filippo Falaschi, shares the team’s key learning’s on today’s health-tech start-up market along with predictions on what’s to come.

Finding value in earlier stage

Although global digital healthcare funding saw a decrease of 36% QoQ between Q4’21 to Q1’22, the statistics mainly reflect a decrease in later stage rounds, as investors backed fewer $100million+ deals.

Part of the general slow-down can of course be attributed to the various macroeconomic factors and exogenous shocks that have defined the start of the year – from post-pandemic rise in inflation to the breakout of the war in Ukraine, which have of course had their impact on investment appetite and venture growth speed.

The reality is that the early-stage rounds are dominating the overall deal share, accounting for 76% of deals in Europe in Q1’22 – a solid 4% increase from 2021.

Our investment call taxonomy matches global trends

What we have found in the last investment call, was that participating companies were, on average, more advanced – with the pool being made up of a wider range of deep-tech solutions.

As expected, we have witnessed an increased focus in digital solutions that cater to pressure points in consumer healthcare needs that had to take a backseat during the cusp of the pandemic.

Particularly, chronic disease management took the stage this year – when it comes to innovations focusing on specific clinical conditions, a quarter of our applicant demographic has been developing solutions aimed at tackling this space.

Personalised medicine, especially in oncology, also stood out, with over a third of the companies delivering condition-specific solutions being focused on developing cancer diagnostic, therapeutic or digital therapeutic solutions

Digital therapeutics was one of the largest macro categories our applicants belonged to, representing approximately 20% of the total applicant pool. This trend we have been seeing towards DTx solutions aimed at chronic disease management agrees with the data from the latest CB insights report, which finds that two thirds of the digital health unicorns born in Q1 ’22 focused on providing chronic disease management offerings.

Interestingly, telehealth, which experienced a massive expansion during the peak of the crisis due to the necessity of remote solutions, still accounted for a fair number of applications, up again from previous years. This is in line with the trend we have seen with investors looking more actively at earlier stage deals. In fact, global funding to the telehealth sector declined 32% QoQ, while deal count increased nearly 12%.

The pandemic has increased the public’s trust in digital solutions. Covid-19 tests delivered at home, for example, paved the way for the development of other at home diagnostic tools. This move towards remote solutions is reflected by the growth of consumer oriented diagnostic tools, but also of the physiotherapy sector, which a small percentage of applicants belonged to.

Of the sectors that showed up less in our latest call is mental health – going from 15% of candidates in our 2018 call to less than 10% in our latest call. Given the increase of stress and anxiety brought on by the health crisis, we had expected for an accelerated demand in mental health digital solutions – however the numbers show this is not the case, and this is further confirmed by a global 60% decline in mental health tech funding in the first quarter of the year.

What’s to come

As we look to the future, we expect the decrease in later stage rounds to continue as larger players adjust to turbulent public market conditions. A repricing of all stages will define 2022 and late-stage players will start venturing into earlier deals looking for value.

The substantial growth experienced in the past two years has resulted in a more competitive market, meaning that today’s new ventures need to step up their game to make the cut. We have indeed noticed a higher quality of applicants coming through our last investment call and expect this trend to continue and companies with weaker product-market fit to find it increasingly harder to raise capital.

In terms of solutions, we predict that fully integrated virtual healthcare service platforms will become a key focus of healthtech development, with remote treatment solutions and telemedicine undergoing further growth. Artificial intelligence will likewise become a key driver in healthcare and projections place market volume of AI to increase more than tenfold in the next five to eight years. New innovative consumer health applications will be introduced, and this trend may indirectly help bring about a shift from a disease-based to a prevention-based approach in healthcare systems. Lastly, health data, and specifically synthetic health data, will become more and more important.

About the author

Filippo Falaschi, investor at Spex Capital

Spex Capital is a digital health and med-tech investment management firm specialised in advancing disruptive early-stage ventures to deliver breakthroughs in healthcare systems globally. At the close of 2021, Spex Capital and its exclusive partner, London’s life sciences cluster organisation MedCity, launched a joint investment call dedicated to identifying and funding the next generation of digital health and medtech innovators.

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