Investments in health IT: Why the IPO market ‘is dead’ and what metrics matter
The health IT market has exploded in the last five to 10 years, but since 2015, the market has shifted from initial public offerings (IPOs) to larger mergers and acquisitions as well as robust interest from venture capital—which means health IT firms need to know what will impress or turn away investors.
In a presentation at HIMSS18 in Las Vegas, Goldman Sachs vice president Jason Kreuziger, MBA, who focuses on the health IT, said while the sector has seen incredible growth, publicly-traded health IT companies have largely underperformed the S&P 500 over the past few years. Hospital and physician office-focused IT stocks have even lost valuation over the last three years.
That’s part of the reason why Kreuziger said the “IPO market for healthcare IT is dead.”
“The rest of the thesis goes there’s a lot of strategic and investor interest in these healthcare IT businesses, therefore they don’t need to go public in order to get liquidity,” he said.
Some of the private equity transactions in health IT in the last few years have been worth than $1 billion, while technology giants like IBM, Amazon and Alphabet have also gotten involved in the space. Most of them have decided to acquire healthcare-related businesses rather than build those capabilities from within, Kreuziger said.
There’s also been significant interest from venture capital. Despite a few “quarters of fatigue,” as Kreuziger called them, it’s hovered over $1.5 billion in funding for health IT per quarter—hitting nearly $1.7 billion in 192 venture capital deals in the final quarter of 2017.
So with all the interest and money floating around, companies want to know what metrics matter to attract investors. Kreuziger said that will vary from investor to investor and be based on the size of the company. For him, focusing on companies with $10 million to $100 million in annual revenue and growing 30 percent year-over-year, he said he’d be focused primarily on revenue and growth. For mature companies, investors will focus on different metrics.
“One of the challenges you should be thinking about is where is your company—are you a growth company or are you a profit-oriented company?” Kreuziger said. “Everybody says “I’m both!” Of course you want to be both, that would be ideal, but you can’t do that and not trade one for the other. So it’s really important to get your confidence around what your strategy is. Are you going for growth? Are you going for profitability? Which one of these metrics would like to be valued on?”
One of Kreuziger’s investments is software company Credible Behavioral Health, which has grown to $3.75 billion in annual billings since being founded by Matt Dorman, MBA, in 2000. What was crucial in his company’s valuation was knowing its revenue growth—and not just leaving that data to the chief financial officer—while being honest about the market penetration in a regulation-heavy sector like healthcare and a company’s total addressable market.
What will also matter to investors looking to value your company, Dorman said, is who’s leading it.
“Whether it’s a one-person group, two or three people doing development or a bunch of new doctors who come up with a new system, your investors are going to want to know that if you get hit by the beer truck, their investment isn’t heading south,” Dorman said.
The leadership factored into several of the “do’s and don’ts” Dorman and Kreuziger offered to wrap up their session. They advised health IT companies looking for investors to be prepared before heading into the process, not take such a major decision lightly and disclose issues with potential investors. What companies shouldn’t do is “solve strictly for valuation,” have a leader try to do everything on their own or procrastinate on major decisions.
It’s also important to know, Dorman said, that at some point investors will want to see their investment pay off.
“We’ve got a great relationship with Goldman and everything is great, but at some point in time, we’re going to break up because they’re going to need to give a return to their investors,” Dorman said.
“I need the money back,” Kreuziger joked.
John joined TriMed in 2016, focusing on healthcare policy and regulation. After graduating from Columbia College Chicago, he worked at FM News Chicago and Rivet News Radio, and worked on the state government and politics beat for the Illinois Radio Network. Outside of work, you may find him adding to his never-ending graphic novel collection.