Funding for digital health startups is continuing to grow at a steady pace, but is beginning to stabilize.

Health accelerator Rock Health’s midyear report, released today, found that digital health funding for the first half of 2013 represents 11 percent growth in investment and 24 percent growth in deals year over year. In short, it’s still growing, but not as fast as in previous years.

This hints at some potential hurdles for traditional health and later-stage health startups. Venture funding is down 6 percent since the first quarter of this year. In addition, investment for medical devices is down 29 percent and biotech is down by 2 percent, according to Pricewaterhouse Coopers MoneyTree.

The problem is that venture and angel investors are dabbling in health care but aren’t fully committed.

“The traditional venture firms are fascinated by digital health, but it’s still so early that they don’t want to overextend themselves,” said Halle Tecco, the cofounder of Rock Health. Tecco also pointed out that few venture firms have dedicated digital health teams.

The report also found that while wealthy individuals — often friends or family — are putting their mind behind health and wellness startups, experienced angel investors are in short supply.

The Rock Health team have discussed the dearth of angel investors at length. They determined that it is likely due to the fact that digital health does not have a billion dollar success story, its own Facebook or Google. Early employees at these companies made their millions and invested in the next generation of tech entrepreneurs in related markets, like payments and social networking.

When one of the fastest-growing digital health companies goes public (I’d keep my eye on Castlight, ZocDoc, and Practice Fusion), it will create a new generation of angel investors, knowledgable about the industry and willing to give back.

As an alternative to traditional investment, many early stage startups turned to crowdfunding sites. Rock Health found that 38 digital health campaigns were started on Indiegogo, Kickstarter, Medstartr and Fundable, and pulled in an impressive $4.5 million. One of the most high-profile was Scanadu, which raised $1 million on IndieGoGo for its medical diagnostic tools.

However, about 40 percent of these campaigns failed to meet their fundraising goals.

For those that opted to raise traditional venture capital, Social+Capital emerged on top with five digital health investments, closely followed by Norwest Venture Partners.

Given the proximity to these venture firms, California startups truly dominated this year. Of the 89 digital health companies that raised more than $2 million in the first half of 2013, 32 percent are based in California. 9 percent are in Massachusetts, and 8 percent are based in New York.

Some of the most interesting figures from the report include:

Venture funding

  • Four venture investors made three or more digital health investments in the first half of 2013.
  • Funding totaled $839 million in the first half of 2013.
  • 145 identified investors participated in one or two deals each.

Biggest deals

  • Proteus Digital Health: $45 million
  • Health Catalyst: $41 million
  • Watermark Medical: $32 million
  • Nant Health: $31 million
  • HealthTap: $24 million

Major digital health themes: 

  • Remote patient monitoring (Intuitive Health, Preventice)
  • Analytics and big data (Ayasdi, eHealthMe)
  • Electronic health records (CareCloud, Practice Fusion)
  • Wellness and personal health tools and tracking (Jawbone, FitBit)

Curious about digital health? Read about Rock Health’s report on the state of med-tech startups in the first quarter of 2013 here

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