There is no surprise in the fact that there is a lot of M&A activity in healthcare. Startups can address gaps that most established players are unable to fill on their own.
As one of few digital health entrepreneurs who has had an exit, I’ve received several urgent calls from entrepreneurs who have received unsolicited acquisition offers (that’s how the WebMD deal came to Avado). Now that I’m also an advisor to the healthcare practice of one of the leading mid-market investment banks (sub $500 million acquisitions typically) as well as a VC, it’s natural that I’m a resource for fellow entrepreneurs and it’s something I greatly enjoy. Even highly successful serial entrepreneurs see a limited number of transactions over their lifetime. The benefit I’ve received from working with an investment bank is it gives you a broader perspective than just your own transactions. I will share some of the considerations as you face this exciting, but daunting, experience.
Acquirers actively seeking innovation fuel
There has never been a more dynamic time in healthcare than today. It begins with the $1 trillion disruption due to a transition from volume to value—i.e., $1 trillion of the $3 trillion spend on healthcare will shift to new players and business models. At the same time, healthcare is going through multiple platform shifts—client-server to cloud-based enterprise systems, analog health tracking to mobile devices and wearables/sensors, not to mention the explosion of data from genomics, the microbiome and more. The range of acquirers can be dizzying. Despite knowing the market quite well, one of the recent transactions I've been involved with at Cascadia had three finalists I'd literally never heard of. Of the final nine companies, I only knew half of them previously.
Traditionally, GE, Pfizer and Medtronic have been one of most active acquirers. As the health plan business has gotten commoditized, Aetna, UnitedHealth and other health plans have gotten active. More recently, non-obvious companies such as Under Armour have gotten very active. I’m also seeing a big uptick in health IT players cranking up their M&A engines. Less visible to most are private equity companies many of us haven't heard of unless we're in the investment banking business.
Every situation is unique to what an individual and her shareholders want; however, I thought I’d share some general rules of thumb and how I look at the situation. It’s always a very exciting moment for the entrepreneur. Even if there is zero intent to be acquired, I believe strongly in savoring these moments of validation. It’s a nice salve for the excruciating effort to make a digital health company survive, let alone thrive. I worked at Microsoft during its heyday and the most intense years that made it famous, yet that pales in comparison to the intensity of creating a successful healthcare startup.
[Disclosure: As mentioned earlier, I’m an advisor to Cascadia Capital’s healthcare practice. We co-created The Future Health Ecosystem Today report together. Cascadia advised my company, Avado, on the acquisition by WebMD. I'm also Managing Partner of Healthfundr.]
The tips below are a blend of my perspective and the head of Cascadia Capital’s healthcare practice, Kevin Cable, who is also a former entrepreneur. First, be thankful someone thinks your baby is cute and treat them with respect. It’s a small industry. Regardless of what you end up doing, handling the process professionally is paramount. With this in mind, there are some good questions to ponder. Prior to a potential unsolicited offering coming in, bear in mind that a financing/exit strategy is just as important as a product and market strategy and many entrepreneurs treat it as an afterthought.
Questions to ask yourself
Understand the market dynamics and what it means for your choices:
- Is there evidence the market is consolidating?
- Is the offer a viable alternative to raising equity capital?Do I understand how those economics work and what the structure would look like in either transaction in addition to the price? There is a lot of potential complexity in deal terms, whether it’s with a VC or a potential acquirer.
- Are there other buyers out there I should talk to? How do I make sure my company is included in other conversations where buyers are considering getting into the space? Naturally, having competition makes a big difference in the ultimate outcome. It also has a way of encouraging the potential buyers to “behave.” That is, avoid putting onerous terms in the deal or they will drag you through a protracted process.
- What does a process look like that would deliver choices for both a buyer and an equity sponsor? Timing? Cost? Distraction to the team and customers? It’s not without precedent that certain companies do fishing expeditions with limited intent/ability to complete a transaction. Hopefully a board member or an advisor knows the players in the industry and their reputations.
- Once you’ve analyzed your potential next steps, approach your board/investors to present your logic. Remember that entrepreneurs almost never directly control exit timing. It is about market consolidation.
- Oftentimes, the initial offer represents good synergy. There are ways to structure those transaction so that you keep a reasonable level of upside and diminish the overall risk.
- How you’ve raised money will impact who is involved in your decision process. The more control over the company you have, the more intensely personal the situation is. It’s important to have self-reflection time and trusted, seasoned resources who can be more objective about the process.
I’ll never forget receiving the call from the ultimate acquirer of my company. It can catch you off guard, so it’s important to get your footing as soon as possible to ensure the best outcome.
This article was also published in Forbes
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