Digital health startups began 2025 with strengthened investment momentum as venture capital funding increased notably in the first quarter, according to a new report from Rock Health. The analysis reveals that funding for digital health companies rose substantially while maintaining a similar number of transactions compared to previous periods. This resulted in average deal size climbing to $24.4 million, up from $15.5 million in the fourth quarter of 2024.

While first-quarter funding typically outperforms the preceding period, Rock Health identified a particularly noteworthy trend: the return of significant late-stage investment. The median deal size for Series D rounds and later reached $105 million, marking the first time this metric has exceeded $100 million since the sector's peak funding period in 2021.

Overall, U.S. digital health startups secured $3 billion across 122 deals in Q1, compared to $1.8 billion through 118 deals in 2024's final quarter. The report shows early-stage investments, including seed, Series A, and Series B rounds, represented more than 80% of all labeled deals, maintaining their position as the numerical majority of transactions. However, the quarter featured five Series D funding rounds, including three "mega-deals" exceeding $100 million each. These substantial investments drove the significant increase in median late-stage deal size to nearly double the $55 million median seen throughout 2024.

This resurgence in later-stage funding occurs against a backdrop of increasing market uncertainty as President Donald Trump begins his second term, affecting both healthcare and broader financial markets.

Rock Health suggests digital health startups will need to "leapfrog" - strategically using market shifts to improve their competitive positions. The report outlines several approaches companies are taking to navigate the current landscape. One prominent strategy involves mergers and acquisitions, particularly strategic purchases aimed at expanding capabilities. The report found that 67% of M&A activity in Q1 involved one digital health startup acquiring another, up from 53% throughout 2024. "That dynamic persists today: some digital health companies are still navigating the fundraising fallout from the peaks of 2020-2021, making them prime acquisition targets, while others have managed their balance sheets or raised enough capital to 'buy' assets rather than build internally," the report authors explained.

Another approach gaining traction involves modular technology infrastructure, allowing companies to more easily update components within their systems, particularly important given the rapid evolution of artificial intelligence capabilities.

The report also highlights increasing collaborative partnerships within the sector. It cites Amazon's Benefits Connector program, designed to streamline user enrollment in digital health programs covered by their health plans or employers, as an example of this trend. Additionally, established companies are increasingly engaging directly with potential disruptors, as demonstrated by pharmaceutical giant Eli Lilly's partnership with telehealth provider Ro to distribute the weight loss medication Zepbound. "Instead of viewing innovators as outright competitors, these engagements position larger enterprises as partners, investors, or future acquirers of potential rivals," the report noted.

This funding environment follows a period of significant fluctuation for digital health investment, which reached unprecedented heights in 2021 before contracting substantially. Funding stabilized throughout 2023 and 2024, with last year's investment totals approximately matching 2019 levels when adjusted for inflation.

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