Healthtech Industries Not Immune to Economic Hardship — 7Startup
Industry speculation is hot in the run-up to what appears to be an economic downturn. Whether or not now is a good time to invest, and whether or not certain industries can turn the other cheek with confidence of immunity, remain hotly debated topics. In that debate, the healthtech industry is said to be well-positioned to withstand an economic downturn.
But is healthtech really as immune from this downturn as people say, and how long will it be able to withstand the storm?
Craig Oates is the UK managing director of Doctrin, a patient engagement platform that offers remote consultations to primary care patients in the UK midlands. In a recent interview, he stated that he doesn’t think medtech will be immune to a recession, and that people will not be able to “invest their way out of difficulties,” as some did during the previous global crash. The cost-of-living crisis will exacerbate this, and will increase the brain drain that is already affecting digital innovation in healthcare.
As NHS staff shortages worsen, it will become more difficult to reduce long waiting lists accumulated during the pandemic. “Digital xnology is now more needed than ever to help maintain recovery in the NHS, but NHS budgets are likely to be diverted away from technology so money can be directed to alleviate larger budget pinch points, such as staffing” says Oates.
This is counterintuitive however, given the role that tech plays in many of the challenges NHS faces, including workforce related ones. Because it is not a quick fix, funding is often rerouted during periods of economic difficulty.
Not Immune to a Recession
When discussing challenges that medtech may face in a recession, Paul Landau, CEO and Founder of Careology, stated that “no sector can be complacent” about impending financial difficulties. “MedTech is such a broad term, made up of many different areas,” he explained, “but none are immune to an economic downturn.”
He went on to explain that healthcare, like other industries, will face very real operational and financial challenges. “However, the financial pressures of a recession presents digital opportunities like digital care to drive efficiencies,” continued Landau. “There is greater opportunity during a recession where digital has the power to drive massive efficiencies, but that doesn’t mean we are immune or complacent.”
Not everybody in the industry seems to agree on healthtech & medtech’s immunity to a recession. Chairman of Sweetch, Dr. Yossi Bahagon says that things like surgery, medications/therapies, and cancer treatment will never “wait for a recession to end.” He then however, goes on to say that as a result of healthcare systems becoming more sensitive about their spending during these times, that they’ll “look for additional channels of revenue and become stricter when it comes to spending.”
As budgets tighten, systems actively seek new technologies designed to save money, create new revenue channels, or increase revenue from existing channels. Depending on their financial positioning, healthcare companies could use a recession as an opportunity to stand out via new technologies. However, even if a company has a positive financial situation during a recession, it will need to employ a much tighter set of decision-making criteria.
According to Ranjan Singh, he receives an email almost every day from a digital health startup looking to exit. He is the co-founder of HealthHero, a telehealth company that has built a business by acquiring various healthtech since its inception in 2019. He says that when they first started, they’d get maybe 2–3 emails a month about acquisitions, but that these numbers have skyrocketed over the past 3–4 months.
And he’s not the only one fighting off healthtech startups looking to exit. Ed Radkiewicz, CEO of Marcol’s healthcare division, has seen the number of introductions from potential founders more than double since the end of March.
33 digital health startups have exited or been bought out this year, and with four months left in the year, that figure will almost certainly surpass the 2021 total of 35. The number of acquisitions in 2022 could easily surpass the previous record of 44 set in 2017 and 2018.
So, why are so many of Europe’s healthtech startups more eager to exit than ever before?
Shifting Priorities in Healthtech
Despite growing investor jitters, funding into digital health startups in Europe has remained stable since June, but VCs’ expectations of a startup have shifted.
According to Ed Radkiewicz, investors emphasised growth in the heady days of 2021, but profitability is now the primary concern.
“Last year VCs were slightly blinded, but now they’re saying ‘shit, we’ve got to have a viable business’,” said Radkiewicz in an interview. “Every single investor in healthcare is talking about a path to profitability, and they now expect a company which would have been profitable in three to four years to get there in 18 months.”
According to Elina Halatcheva, a former board member at the recently acquired Woom Fertility, the shortened time frame can be a real issue for healthtech companies, which generally take more time and cash to scale to the point of profitability than startups in other sectors.
“Some digital health startups must obtain regulatory approval or conduct clinical trials, so they require more capital and have a longer time to scale,” Halatcheva continued. “There has been a shift among founders, and they are now more open to exiting than they were two years ago.”
Private markets aren’t the only ones that have changed recently. When the tide was high, many of the startups approached by HealthHero’s Singh would have likely gone public.
However, the valuations of many publicly traded technology companies have plummeted this year. Few have had it worse than telehealth behemoth Babylon, whose stock price has dropped 95% since a $4.2 billion SPAC deal last October. As a result, the desire to float has all but vanished. Only 8 European health startups have gone public this year, raising a total of $1.3 billion. Last year, 48 companies listed in transactions totalling $33.7 billion.
Startups aren’t buying as much as they used to
While some digital health startups are looking to exit, those that are surviving the tough times are not looking to buy.
Consolidation was on the minds of Europe’s leading digital health startups in 2020 and 2021 as they sought to capture ever-increasing market shares. Major players such as Babylon, Kry, Alan, Doctolib, and Docplanner, as well as smaller digital health startups such as Zava Med, Numan, and Mindler, have all acquired startups in order to expand into new market segments or geographies.
When the market was expanding, startups bought because they had funding. Ranjan Singh’s startup, HealthHero, has acquired seven others since its launch in 2019, but none since April 2021. Of the above mentioned startups, only Docplanner has acquired another startup since February of this year, around the time when the market began to noticeably deteriorate. Elina Halatcheva, also managing partner at BrightCap Ventures, thinks that they aren’t seeing startups acquire others right now because everyone is just trying to survive, but that big corporations are much more open to acquiring them as they have more capital.
What does this mean for digital healthtech?
Pandemic-driven digital adoption fuelled the sector’s excitement, as regulators, practitioners, and patients flocked to remote healthcare solutions. Investors wrote checks totalling $6 billion for digital health platforms in 2020 and 2021, more than in the previous ten years combined.
Moreover, despite the downturn, many founders and venture capitalists believe digital health is more resistant to adverse market conditions. This is because with personal and government budgets, health services will typically get cut last when the purse strings are tightened. However, increased exit activity indicates that some startup leaders’ confidence in their ability to raise capital is dwindling.
Originally published at https://www.7startup.vc on September 30, 2022.