Rock Health's 2014 Digital Health Investment Report: Record $4.1 Billion in Funding Signals Industry Transformation

Rock Health, a renowned U.S. digital health incubator, recently released its 2014 Annual Investment Report on Digital Health. VCBeat has translated and compiled the report for our readers. For more information on annual investment reports in digital health, please refer to the VCBeat article: “2010-2014 YTD Report on Investment and Financing in China's Internet Healthcare Sector》。

Although this is already our fourth annual report tracking investments in internet healthcare, we were still genuinely surprised to find that the total venture capital investment in this field exceeded $4 billion this year. This figure is striking from many perspectives—it represents a 125% increase compared to 2013, is four times the amount from three years ago, and nearly surpasses the combined total of investments over the past three years.

We do not believe there is any bubble in these records. We have been fortunate to build outstanding enterprises alongside world-class entrepreneurs in the healthcare sector, witnessing the rapid growth of subsequent investment rounds driven by their early successes, as well as the capital-intensive path that this field will continue to follow in the long term.

As we entered 2015, there was no doubt that, driven by healthcare reform, ourThe entire healthcare system is undergoing a technological transformation.. Entrepreneurs and investors have taken note of this trend. Alongside the growth in venture capital, exit challenges have become increasingly apparent. Over the past year, we tracked approximately $20 billion in mergers and acquisitions activity, while an additional $10 billion in capital was generated through initial public offerings (IPOs). Overall, 2014 saw relatively weak performance in terms of new product launches and exits, prompting venture capitalists who had heavily invested in this sector to seek viable exit strategies. 2015 is likely to be a more dynamic year than 2014, with increased deal flow and more exit opportunities, so please stay tuned.

In 2014, total investment in internet healthcare companies exceeded $4 billion, nearly equivalent to the combined total of the previous three years (2011–2013).

The rapid start in January indicates that venture capital investment in the internet healthcare sector is set to reach new heights. By the end of the second quarter, the total investment amount had already surpassed the sum for the entire year of 2013. After briefly slowing to a year-on-year growth rate of 30% last year, the investment volume surged by 125% this year. The compound annual growth rate (CAGR) from 2011 to 2014 reached 45%. Moreover, each of the four quarters in 2014 set new records for the highest quarterly investment in internet healthcare, with the investment in the second quarter alone exceeding the total for the entire year of 2012.

Venture Capital Investment in Internet Healthcare, 2011–2014

The internet healthcare sector has become a bellwether for venture capital, maturing at a faster pace than both the traditional healthcare and technology sectors.

Undoubtedly, the capital market is currently experiencing a surge, with single-quarter investments surpassing $10 billion for the first time since the advent of the internet era. Against this backdrop, digital health has pursued differentiated development, attracting more investment than both the software sector and traditional healthcare sectors, which primarily encompass biotechnology and medical devices. Data indicates that during the 12 months leading up to the third quarter of 2014, digital health investments accounted for 8% of total capital market activity. Amid ongoing financial pressures faced by medical device companies, investment in digital health has surpassed that in medical devices for the first time.

Growth in Venture Capital: 2013 vs. 2012 and TTM Q3 2014 vs. 2013

In 2014, 258 internet healthcare companies secured investments exceeding $2 million.

Both the average deal size and the total number of transactions increased significantly in 2014, making it a record-breaking year for investment in internet healthcare.

Over the past three years (2011–2013), the average deal size continued to decline, while the number of deals increased rapidly. In 2013, the average deal size dropped to $10 million. This trend reversed sharply in 2014, with the average deal size surging by 43% year-over-year to reach $14 million. The increase in average deal size, coupled with a record 56% growth in the number of deals, drove digital health investment to a new high.

Average Transaction Size and Transaction Volume, 2011–2014

The total amount raised in the six major funding rounds this year exceeded $1 billion, accounting for nearly 25% of the total financing in 2014.

NantHealth secured the largest single investment of the year, led by a sovereign wealth fund, the Kuwait Investment Authority. Flatiron Health received the third-largest and most notable investment of the year, raising $130 million in Series B funding (along with an undisclosed amount to acquire Altos Clinical, an oncology HER vendor). Corporate investors were the most active participants in major investments. Five of the top six investment categories this year were significantly influenced by these substantial venture capital inflows. (These five major categories are: personalized medicine, population health management, digital medical devices, telemedicine, and big data analytics.)

The Largest Financing Rounds in 2014

Investment in six major categories accounted for 44% of the total investment in internet healthcare, with software-driven personalized medicine entering the rankings for the first time.

Top Six Categories of Internet Investment in 2014

1. Big Data Analytics—$393 million
Supporting large-scale and remote healthcare through data aggregation and analysis.

2. Healthcare Consumer Engagement – $323 million
A tool provided to consumers for accessing medical services and managing health insurance expenditures.

3. Digital Medical Equipment—$312 million
Hardware and software developed to treat specific diseases and adapt to special scenarios.

4. Telemedicine—$285 million
Providing healthcare services through online channels (e.g., phone, video, text messaging, etc.).

5. Personalized Medicine – $268 Million
Software-enabled customization of personalized medicine based on individual genetic differences.

6. Population Health Management – $225 million
Health Management Platform Based on Risk-Based Payment Model.

Six Major Investment Categories Have Experienced Explosive Growth, Indicating That the Transformation of Healthcare Delivery Models Will Be Better Defined, Delivered, and Managed

Telemedicine experienced its fastest growth in 2014, driven by major investment deals involving both new entrants and established companies. As investors and payers have shown strong interest in this sector, we anticipate that telemedicine will rank first among these major categories. Health insurers continue to face significant pressure from high administrative costs, largely due to constraints imposed by minimum medical loss ratio requirements. Finally, digital therapeutics companies that secured angel investment two to three years ago have demonstrated their efficacy through preliminary studies, enhancing their commercial appeal and attracting further investment. In the future, more traceable disease indications and robust evidence will emerge, with digital therapeutics representing just the beginning.

Fastest-Growing Categories & Total Investment in 2013–2014 and Year-on-Year Growth

The volume of investment transactions in internet healthcare has tripled over the past three years, with these deals concentrated primarily in early-stage rounds such as angel and Series A financing.

Excluding small-scale investment transactions provides a more intuitive understanding of the growth trajectory of early-stage companies. Early-stage investments dominate the internet healthcare sector and are the primary driver behind the increase in transaction volume. In 2014, numerous companies advanced through this funding funnel. Specifically, 12 companies progressed from Series A to Series B, five moved from Series B to Series C, one advanced from Series C to Series D, and two reached stages beyond Series D. Notably, Vivify Health, which secured angel investment in 2013, completed both Series A and Series B financing rounds consecutively within 2014 alone. Furthermore, the scale of each investment round in the early stage has increased significantly, with the average investment amounts for Series A and Series B rounds rising by 38% and 61%, respectively.

Investment Transaction Distribution, 2011–2014: Investment Amount and Growth Percentage by Stage

As the number of investors entering the internet healthcare sector increases, repeat investors are also growing rapidly; in 2014, 35 companies each made three or more investments.

Since 2011, the number of investors entering the digital health sector has increased annually. The number of institutions making only one digital health investment per year (“dabblers”) has nearly tripled, while those making three or more investments annually (“serial investors”) have grown fivefold over the same period. Serial investors tend to demonstrate greater persistence; more than half of them made more than three digital health investments in both 2013 and 2014. On the other hand, “dabblers” have also shown a certain degree of staying power, with 35% of those who were “dabblers” in 2013 making at least one digital health investment in 2014. The rise in “dabblers” has been driven by new entrants into the digital health investment space, with 216 investment firms appearing in our database for the first time in 2014.

Distribution of the Number of Investments by Investors, 2011–2014

The most active investors in internet healthcare come from diverse sectors, including healthcare and technology, with even some funds from emerging or undefined fields participating.

From 2011 to 2014, the most active investors in the internet healthcare sector remained remarkably consistent, with Kleiner Perkins Caufield & Byers (KPCB) and Qualcomm standing out as the most prominent players in recent years. Additionally, 39 independent funds made at least 60 investments during this period, a volume nearly equivalent to that of venture capital firms specializing in healthcare, technology, or those with undefined focus areas. The digital health sector has benefited from a diverse investor base, broad investment scope, and the fact that many active investors did not engage in co-investments.

Most Active Investors in 2014 & Cumulative Investment Deals from 2011 to 2014

Internet healthcare companies from more than 30 states secured investment in 2014, with firms in coastal regions accounting for 25% of the total investment amount that year.

In 2014, internet healthcare companies in California secured a total of $1.8 billion in investment, nearly matching the entire investment volume of the national internet healthcare market in 2013. Since 2011, the Boston and New York regions have experienced sustained growth, with annual growth rates of 303% and 136%, respectively. Over the past four years, the three states with the fastest growth in investment were Illinois, Pennsylvania, and Tennessee.

Investment Geography from 2011 to 2014

Although the number of companies on crowdfunding platforms has increased by 60%, both the number of successful crowdfunding campaigns and the amount of funds raised are declining.

On the three major crowdfunding platforms, 187 crowdfunding campaigns from 2014 can be found. Although the number of campaigns is increasing, the success rate across all platforms is declining. In June, Kickstarter announced policy changes to lower the barriers for crowdfunding medical and health products. Since then, 33 crowdfunding campaigns have concluded, with only half of them achieving success. Notably, Hello’s Sense campaign accounted for 53% of the total funds raised on the Kickstarter platform.

Crowdfunding Platforms: 2013 vs. 2014

We tracked 95 mergers and acquisitions throughout 2014, with total disclosed transaction values exceeding $20 billion.

Mergers and Acquisitions in the Internet Healthcare Sector in 2014

Five Internet Healthcare Companies Listed in 2014, with Current Stock Prices All Below Their Peaks

Among these five companies, three saw their share prices decline from the first day of listing, with Castlight Health experiencing a precipitous drop that erased nearly 75% of its market capitalization from its peak. In contrast, IMS Health, which had been delisted in 2010, recorded its largest post-listing gain following its renewed IPO in 2014. As no internet healthcare companies went public in the second half of 2014, exit demand within the internet healthcare sector was deferred to 2015; accordingly, we have also projected the companies most likely to list in 2015.

2014 IPO Performance & 2015 IPO Survey

Despite the strong performance of the broader public markets, listed internet healthcare companies have delivered underwhelming results.

Earlier this year, the Internet Healthcare Public Company Index was launched, comprising a total of 19 publicly listed companies with a combined market capitalization of $53 billion. (BenefitFocus was excluded because its focus has expanded into general human resources management software.)

Performance of Listed Internet Healthcare Companies

19 Listed Companies

Summary of Conclusions

Investment Amount and Transaction Volume:In 2014, total venture capital investment in the internet healthcare sector exceeded $4.1 billion, nearly equivalent to the combined total of the previous three years (2011–2013). This represents a 124% increase compared to 2013. These investments involved 258 companies, totaling 293 deals, with an average investment amount of $14 million per deal.

Subject:In 2014, the six major investment categories accounted for 44% of the total investment in internet healthcare. These six primary categories were: big data analytics, consumer health engagement, digital medical devices, telemedicine, personalized medicine, and population health management. Notably, personalized medicine made its debut among these top categories.

To Numerous Investors:In 2014 alone, 379 distinct investment institutions participated in internet healthcare investments. Among them, 35 were repeat investors with more than three deals, while 216 made their first-ever investment in the sector since we began tracking internet healthcare. The most active investors have maintained consistent stability over the past four years.

Exit Event:In 2014, there were also numerous exit activities, with 95 disclosed M&A transactions totaling over $20 billion. Health tech companies remained the most active acquirers. In addition to private exits, the public markets saw the IPOs of five internet healthcare companies, whose combined market capitalization reached $10.6 billion.

Categories of Growth:Three major categories have seen significant growth in financing: telemedicine, payment management, and digital therapeutics. Telemedicine and digital therapeutics represent new approaches to delivering better healthcare services and reducing medical costs. As uncertainties and changes in healthcare reform persist, payment management tools will become increasingly important and will help guide the development of the entire healthcare industry.

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