The market hasn’t been kind to digital health companies this year. The stock charts of most of these companies look like red lines in a race to the bottom-right corner, and at this point it’s safe to say that many founders are buckling down for a bumpy second half of the year.
The public market struggles are quickly carrying over to the private markets. Woodside Capital Partners counted 44 health tech funding rounds above $10M in Q1 2022, nearly half the total recorded during Q4 2021 (86). The investment bank’s latest market report calls out several main drivers for the slowdown, but the biggest one probably sounds familiar:
- Investors are looking for companies generating a profit, and staying far away from those piling on losses to reach meaningful scale.
On the flip side of the coin, the same public market volatility that’s hammering many high-flyers is creating bargains for M&A teams.
- The first quarter saw 63 health tech M&A transactions combine for a total value of $48B (an increase over the $41B seen in Q4 2021), which seems to indicate that the declining valuations have already begun translating to more M&A activity.
- Many public companies have become solid M&A targets due to declines in their shares (Vera Whole Health’s acquisition of Castlight, Oracle’s acquisition of Cerner), while private companies have started rounding out their services by acquiring the missing pieces (Aledade’s acquisition of Iris Telehealth, Lightbeam’s acquisition of Jvion).
The companies most poised for consolidation are those offering point solutions or catering to a specific end market.
- So many of these have popped up since the beginning of the pandemic that it’s made funding scarce at a time when other exit options are drying up.
- This likely makes an acquisition look like one of the best paths forward, particularly as larger companies look to capitalize on the moment by expanding their platforms and pushing into new markets.
It’s usually easier to acquire an established solution than to build one from scratch, and the ongoing market selloff has narrowed the exit options for many startups while also making their valuations more attractive to potential acquirers. These same conditions have made other startups begin looking for ways to bolster their strategies by merging into more comprehensive solutions, which could mean that the real consolidation is just getting started.