The State of European Digital Health Investments
Article I/II in our Series on Digital Health
The European healthcare industry has faced numerous challenges in recent years. Healthcare costs are expected to increase from 6% of the European GDP in 2015 to 9% in 2030 (Oecd.org). This increase has various reasons: an aging population, increasingly unhealthy lifestyle choices, as well as more advanced and expensive treatment methods. Furthermore, both patients and providers are getting increasingly dissatisfied with their customer experience in the health space; they tend to transfer user experience expectations from other domains onto healthcare, often facing pen-and-paper solutions or Windows98-like systems.
At both Earlybird Digital West and Earlybird Health, we believe that innovative technology should provide a solution to all these challenges — and the broader market environment seems to agree. Covid-19 already significantly increased the use of virtual care and accelerated the implementation of government regulations, such as the German Digital Care Act, enabling the use of technology in healthcare. Additionally, investments in digital health have significantly accelerated over the past years.
This article is the first part of my overview of the current digital health space. It should provide an overview of investments in digital health across Europe.
VC Activity in Digital Health
A look at venture capital investments in digital health provides an optimistic picture. In Q1–3 2021 alone, 40 bn USD went into digital health worldwide, spanning across more than two thousand deals and 33 new digital health companies who received unicorn valuation (CB Insights Healthcare Report Q3 2021). The development of digital health investments was, in fact, above the overall market environment (overall market development from Crunchbase Global VC Report 2020). Digital health investments increased by 3x from 2015 to 2020, whereas overall venture capital investments grew by 2x.
An analysis of Crunchbase data for investments in European health companies shows a similar trend with 5 bn USD going to the EU and Switzerland in 2021, and 4 bn USD going to the UK alone, constituting a 5x increase in the EU incl. Switzerland and a 9x increase in the UK since 2015 (see figure 1).
Distribution Across Stages and Countries
When diving into the investments in more detail, we observe another promising trend. The European market seems to mature over time. The percentage of seed deals decreased from 74% in 2015 to 65% in 2021, while the percentage of late stage venture deals increased from 4% to 6% over the same time period. Additionally, there is an increasing delta between the median and average round sizes indicating that round sizes increased over time (see figure 2).
These findings indicate that later stage financing is increasingly available for European companies in the digital health space, which is arguably a positive development. It shows that companies not only convince investors to help them get off the ground, but that also an increasing number of companies make it to later stages, where their concept is proven and they reach significant scale. It further shows that European companies are attractive assets for international investors e.g., from the US or Asia, who tend to invest in later stages. Given the current macroeconomic environment, it remains to be seen whether this trend can continue. As public markets are in a downturn, we expect to see a trickle down effect into venture rounds, which could change the dynamics in the market. We expect round sizes and valuations to decrease and have the hypothesis that there will be a stricter selection in what companies get funded across all stages. Additionally, since most companies will still have to prove their business models and internationalization possibilities, we expect some consolidation in the market.
When looking into the distribution across European countries, the largest share of investment value in 2021 went to the UK (41%), France (18%), Switzerland (9%) and Germany (9%).
This geographic distribution has not changed much over the past seven years with countries such as the UK or Switzerland as traditional champions in the health space. However, we do expect three changes going forward:
- We expect Germany to catch up to the forerunners in this space. Germany has received only about 25% of the investment value compared to the UK in 2021, even though Germany’s GDP was ca. 36% larger than that of the UK. We believe that the regulatory environment has hindered digital health innovation in the past and that novel regulations such as the German Digital Care Act are starting to open up the chance for change. While Germany is definitely not at the end of this journey, we believe that we’re going in the right direction.
- We expect the Nordics to increase in their relative importance. The investments in digital health in countries such as Sweden or Finland grew significantly faster (e.g., Sweden 33x and Finland 13x compared to 2015) and their investment value per capita is significantly higher than the European average. We expect this trend to continue as we see strong founding teams from the Nordic countries, often with previous experience at the companies pioneering digital health in the region such as Kry or Oura, working on new business opportunities. As a fund with a strong faible for the Nordic countries (e.g. read about our investment in Aiven from principal Paul Klemm here), we are very much excited about what’s to come from the region in the area of digital health.
- We expect more and more investments going into Southern European countries. While currently only 5% of digital health investments go into Spain, Italy and Portugal, we see an increased interest in the region from international investors. Funds such as Five Elms or Mustard Seed are opening up offices in the region and companies such as Savana from Madrid or KoaHealth from Barcelona are receiving significant funding from international VCs.
Our next article in this series outlines some digital health trends that we at Earlybird Digital West are excited about. Reach out to me via LinkedIn or to Chris of Earlybird Health if you are innovating on this topic as well.
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Note: the analysis was performed using Crunchbase data with industry filters for health excl. Biopharma, Clinical Trials, Cannabis, Pharmaceutical. Headquarters region was filtered for EU, CH and UK. Funding stage was filtered for seed, early stage venture, late stage venture and only equity fundings were included. Announced date was filtered to reflect the time period after 12/31/2014.
