Author: Simon Meier, Partner, Healthcare

It is a clear sign a New Year has started when you get to read all the market reports from the past year. It is a great time to reflect how 2022 went so quickly. We  see no need to repeat the global news cycle or the generic takes on how the market went, others are doing this very well. From our perspective we look at a specific segment of the market and would like to share how we look at what 2022 gave us.

Looking to gain a good picture, we have reviewed the high level market overview of pitchbook and the specific insights gleaned from dedicated observers of digital health Rock Health and Galen Growth. Together, they allow a great picture of the market dynamics in our area. VI Partners is focused on Early Stage (Series A and B) Venture investing in the digital Healthcare and Life science in Europe. As such our viewpoint is coloured.

Overall, 2022 saw further progress and maturing of digital Healthcare and Life Science (HC&LS) in Europe. The Reports show clearly the environment has changed and is more turbulent since 2022. In our focus sector, the funding levels are still much higher than five years ago. The early pipeline with seed and early stage is still keeping steady, but the later stage funding and the exit markets have dried up. Founders and Investors will have to master the challenge of this more illiquid environment. Investors with a long track record, like VI Partners, have experienced this before. This period will help mature the young segment of digital HC&LS. In the past, close collaboration between founders and investors built a stronger foundation during such periods.

For the VC community there is also positive news from these reports. The fundraising levels continue to hold steady. There is a consolidation and the funds are getting larger, but the overall volume has not seen a reduction yet. In particular, the funding for the specialist funds (100-500m) remains solid, especially in Europe.

Please find below a few more specific findings and conclusions form the report. Let us know your thoughts or comments. Please also have a look at the acknowledgements at the end of the article for our appreciation to the authors of these reports.

Venture Funding Overall

The obvious is the clear drop in funding levels across all categories from 345 ($B) to 240 in the US and from 110 (€B) to 92 in Europe. Seed and early stage maintained their volumes best while the late and venture growth stages dropped back to 2020 levels in US. Europe dropped mostly in early and venture growth. (PB)

Digital Healthcare and Life Sciences

In the US, funding for the Digital Healthcare and Life Sciences (HC&LS) segment almost halved from 29.3 ($B) to 15.3. (RH). In Europe the reduction was less steep sliding back to 4.9 (€B). We have to remember the peak of 6.2 was achieved from a base of only 2.3 in 2021 (GG). In both regions the late stage receives the large part of the funding volumes, but also corrected the most. The smaller early stage volumes maintained their levels.

What about Europe?

The more detailed look at Europe shows a multiyear shift away from the UK and a gain in relative share of the continental and Nordic areas (PB). On a sector level, Software dominates, but the diversity of sectors receiving funding is increasing. There is a bit of a surprise with the Biotech area remaining stable and not benefiting from the overall increase in funding. The Digital HC&LS segments are gaining attention, in particular on the services and systems level. This is not a big surprise given the virtual clinic successes of Doctorlib, Kry and others across Europe in the years of the pandemic. Overall the digital HC&LS has been established, but still in its maturing phase.

Focus on Germany and Switzerland

For the Digital HC&LS segment, Germany achieved 519 (€M) with a drop of 38% from 2021.

The early stage does get the large share of funding as the late stage does not have a large opportunity set yet in Germany. DIGA reimbursement setting in Germany is continuing to contribute to the tail winds with several startups earning definitive reimbursement decisions. It remains to be seen how solid the DIGA business model works for startup long term success.

Switzerland surprisingly has achieved record funding levels of close to 4 BCHF in 2022 again after the record level of 2021 with over 2.1 The Swiss have a traditional strength in BioPharma and Medtech which performed decent, but cooled off. The digital HC&LS community has grown again to close to 200 MCHF but is still comparatively small. Later stage champions like Mindmaze, Oviva and VI investment Altoida are great pioneers. The pace of early stage funding has been steady indicating a strong pipeline for the future. We look forward to report on the growing successes in that space. 

What about Exits?

Given the development of the public markets in 2021, the exit channel through public listings and SPACs have disappeared. 2021 was a great year for the European digital HC&LS segment with examples like Babylon & Exscientia IPOs. The uncertainty in 2022 did not only reduce the public interest, but also reduced the appetite to conduct M&A transactions.

According to PB the public listing overall dropped back to long term levels while the level of M&A transactions is still up 20-25% compared to 3 years ago. Based on GG the digital HC&LS exits are still very much on the M&A side, but 60-100% higher than prior to 2021. This is indicating a more engaged buyer community in digital HC&LS compared to the pre-pandemic situation. 

And how is the fundraising environment?

Fundraising by VCs stayed stable in $ and € terms in both regions with 162 (B$) in the US and 25.4 (€B) in Europe. The Reports show a clear trend though towards larger funds and more mature GPs. In the US in particular >50% of Funds went to GPs with >1$B in AUM and 80% of commitments were raised by established GPs. In Europe, the dominance of the whale funds is not the case. About half the funds raised are <100 €M while 65% of commitments go to the specialists (100-500 €M funds) and 20% of funding is in the larger segment (>500 €M funds).

Thanks and Acknowledgements

Thanks to rockhealth.com (“RH”) (2022 funding report), galengrowth.com (“GG”) (2022 Report) for your great overviews of the digital HC&LS industry. Thanks also to brainwave-hub.de for the special attention to Germany. Startupticker.ch and venturelab.swiss for the specific Swiss angle. And obviously pitchbook.com (PB) for their excellent market overviews (European Venture Report &amp; Q4 NVCA Venture Monitor).

To avoid the general confusion of what is the new early and that nobody wants to be late anymore reference to stage is based on Pitchbook terminology. Seed are all rounds prior to A. Early is A and B, Late is C and D and Venture Growth is E and later.