Lloyd Price
- Feb 16

Dual Tracking: The time has come for HealthTech to face the music and reality in 2024

Exec Summary:

As we reach the mid point of Q1 2024, the economic climate presents unique challenges and opportunities for HealthTech companies to consider both fundraising and mergers and acquisitions (M&A) strategies in order to generate returns and maximise shareholder value.

Ian Wijaya, Managing Director at investment bank Lazard shared his thoughts recently saying "Investors today have a “much more discerning approach” when determining which companies they should give capital to..... an increasing number of Digital Health company boards are asking the question ‘We have X months of cash runway left, and it looks like both the M&A and financing markets are starting to improve, so should we explore a sale in parallel with a financing?'

Silicon Valley Bank's State of the Market H1 2024 report reinforced the increasing dual tracking sentiment in the healthcare and technology markets by saying "It’s no secret, investors are hard to come by — even when trying to sell yourself. As the IPO window remains shut, funding continues to be challenging, companies are running out of levers to pull to extend runway.... For companies unable to raise, a good buyer is hard to find. Companies looking for soft landing M&A deals are coming up empty with shutdowns and selloffs mounting. The storm won’t pass overnight .."

So what are your options as a HealthTech founder, owner or investor? Here's an overview of the landscape and some key considerations for delivering a dual tracking strategy:

Fundraising:

Market: Fundraising activity is expected to remain steady in 2024, with investors focusing on companies with strong fundamentals and clear paths to profitability. However, rising interest rates and potential economic slowdown could make investors more cautious.
Advantages: Raising capital can fuel growth, expansion, and acquisitions. It can also provide a financial cushion in uncertain times.
Disadvantages: Dilution of ownership, potential loss of control, and pressure to deliver returns to investors.

M&A:

Market: M&A activity is also expected to be steady in 2024, driven by factors such as consolidation, the pursuit of new technologies, and access to new markets. However, rising valuations and financing challenges could dampen deal activity.
Advantages: M&A can help companies acquire new technologies, talent, and market share quickly. It can also be a way to exit a market or industry.
Disadvantages: Integration challenges, cultural clashes, and potential regulatory hurdles.

Dual Tracking:

Benefits: Provides companies with more options and flexibility in achieving their strategic goals. It can also help companies leverage their fundraising efforts to make more attractive acquisition targets.
Challenges: Requires careful planning and execution to avoid conflicts of interest, confusing investors, and damaging morale. It's crucial to ensure transparency and communication with all stakeholders involved.

Considerations for 2024:

Develop a clear strategic rationale for both fundraising and M&A. What are your specific goals and how do these strategies fit into your overall plan?
Carefully assess the market conditions and your company's specific situation. What are the risks and potential rewards of each strategy?
Communicate effectively with all stakeholders, including investors, employees, and potential acquisition targets. Be transparent about your intentions and manage expectations carefully.
Seek professional advice from experienced investment bankers and M&A advisors. They can help you navigate the complexities of dual tracking and develop a successful strategy.

Corporate Development for Healthcare Technology companies in EMEA

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Lazard's view in 2024 - Digital Health sub sector

Ian Wijaya, managing director at investment bank Lazard, agreed that some digital health startups might need to face the music in 2024. Investors today have a “much more discerning approach” when determining which companies they should give capital to, he said.

“We are already seeing an increasing number of digital health company boards asking the question ‘We have X months of cash runway left, and it looks like both the M&A and financing markets are starting to improve, so should we explore a sale in parallel with a financing?’” Wijaya explained.

That said, he believes “the specific quality of the company and the value it can achieve across its strategic alternatives” will drive the pricing of any individual deal.

In Wijaya’s view, digital health startups must thoroughly explore their strategic alternatives. If they do this, then the board will be turning over cards with maximum insight and clarity on what is actionable versus what is fantasy, he declared.

He also noted that when it comes to M&A, the best outcomes on the sellside tend to come when companies are bought, rather than sold. In other words, companies seeking to sell or divest themselves usually achieve more favorable results when potential buyers actively express interest and initiate the acquisition process.

“That requires bespoke engagement with key decision makers at the right subset of potential buyers, identification of synergy sources, highlighting the true scarcity value of the asset, creating credible competitive tension and ensuring the company has sufficient time/runway to explore its alternatives,” Wijaya remarked.

Source: https://medcitynews.com/2024/02/digital-health-investment-fundraising-2/

SVB's view in 2024 - Technology sector

Here are some of the key trends highlighted in Silicon Valley Bank's State of the Market H1 2024 report:

Overall:

Shifting Investor Landscape: Investors are becoming more selective and cautious, favoring companies with strong fundamentals, intellectual property, and clear paths to profitability.
Funding Consolidation: Fewer funds are expected to return to market, leading to consolidation among established players and potential closures for smaller firms.
Emphasis on Unit Economics: Investors are paying closer attention to unit economics, focusing on metrics like customer acquisition costs, lifetime value, and burn rate.

By Stage:

Series A: A rebound in Series A deals is expected in the latter half of 2024, driven by a return of inactive investors and a robust cohort of seed companies seeking funding.
Down Rounds: Down rounds are becoming more common (13% of all US VC deals in 2023), but they don't necessarily spell doom for companies. 60% of companies that went through down rounds managed to raise another equity round subsequently.
Later Stages: Later-stage deals are expected to remain somewhat subdued compared to the peak of 2021, with a focus on companies with proven traction and clear paths to profitability.

Industry Specifics:

AI: Innovation in AI remains a bright spot, attracting a significant portion of VC funding in 2023.
Healthcare: Healthcare tech companies with strong intellectual property and clear value propositions are likely to see continued investor interest.
Fintech: The fintech landscape is expected to see consolidation, with larger players acquiring smaller startups to gain market share.

Additional Points:

Talent Acquisition: The tech talent market remains competitive, with companies needing to offer attractive compensation packages and benefits to attract and retain top talent.
Remote Work: Remote and hybrid work models are becoming increasingly common, with implications for company culture, collaboration, and productivity.
Cybersecurity: Cybersecurity concerns remain a top priority for tech companies, with increased investment in security solutions expected.

Overall, the report paints a picture of a cautious but optimistic market in 2024. While there are challenges to navigate, there are also opportunities for companies that adapt and innovate.

It’s no secret, investors are hard to come by — even when trying to sell yourself. As the IPO window remains shut, funding continues to be challenging, companies are running out of levers to pull to extend runway. They’re increasingly being forced into unattractive acquisitions.

"For companies that exited following a down round, a soft-landing acquisition is the most common outcome with M&A accounting for 74% of these companies. Public exits are rare, accounting for roughly 8%."

"For companies unable to raise, a good buyer is hard to find. Companies looking for soft landing M&A deals are coming up empty with shutdowns and selloffs mounting. The storm won’t pass overnight .."

HealthTech Fundraising in 2024:

Healthtech fundraising in 2024 is expected to be a dynamic landscape with some key trends emerging:

Macro View:

Transitional year: While potentially more active than 2023 in terms of deal volume, it may not reach the peak fundraising levels of previous years.
Shift towards profitability: Investors are placing greater emphasis on a clear path to profitability and sustainable unit economics.
Focus on innovation: Investments are expected to prioritise companies with cutting-edge technology and solutions addressing critical healthcare challenges.

Specific areas of interest:

AI in healthcare: Applications of AI in diagnostics, drug discovery, personalized medicine, and clinical decision support are attracting significant investments.
Proactive care: Solutions that promote preventative care and early intervention are gaining traction.
Interdisciplinary care: Models that integrate care teams with community health workers and leverage technology to reach underserved populations are attracting interest.
Senior care: Technologies that support aging in place and innovative senior living facilities are expected to see investment.
B2B SaaS: Platforms that address healthcare provider challenges like staffing shortages, administrative burdens, and clinical workflows are likely to secure funding.
Mergers and acquisitions (M&A): An uptick in M&A activity is expected, with established companies acquiring smaller players for strategic growth.

Challenges:

Tightening capital markets: Rising interest rates and economic uncertainty may make investors more cautious.
Regulatory hurdles: Navigation of complex healthcare regulations can be a challenge for startups.
Data privacy and security: Ensuring compliance with data privacy regulations is crucial for securing funding.