Private equity opportunities in healthcare tech
Healthcare technology companies have historically gotten less attention fromprivate equity (PE) investors than they might warrant. Admittedly, healthcaretech is complex, making it difficult to understand the industry and identifygood assets. Investors are already hesitant to invest in young companies. Andmany prospective PE targets in healthcare tech offer solutions in unprovenmarkets that are vulnerable to disruption, further dampening investorinterest. Investors may be especially dissuaded if deal sourcing and duediligence require substantial cooperation between interdisciplinary teams inhealthcare and technology.Despite these challenges, maturing healthcare tech companies can be goodtargets for PE firms ready to apply rigorous analysis and invest in growingcompanies in US and European markets. Healthcare companies with a strongtechnology component are valued, on average, at 17.1 times earnings, comparedwith 14.9 times average across the industry, with lower multiples forcompanies without strong technological components; for example,pharmaceuticals average 15.1 times and healthcare providers average 11.4 times(Exhibit 1). In recent years, well-managed healthcare tech companies haveperformed even better, with some exits at 23 to 25 times EBITDA.Exhibit 1We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:McKinsey_Website_Accessibility@mckinsey.comStructural factors create opportunities for further growth. Healthcare lagsbehind other industries on digitization. This tardiness is due partly to thedifficulty of managing the range of stakeholders, regulations, and privacyconcerns involved in digitizing records and processes that affect sensitiveinformation.However, the industry will soon have no choice but to catch up—fast. Varioustrends, including funding deficits in public healthcare systems and pricepressures on pharmaceuticals, have driven healthcare players to seek ways toreduce operating costs and improve productivity. Meanwhile, an increasinglycomplex regulatory environment means that digital solutions are the best wayto ensure monitoring and compliance in some parts of the healthcare market.These burgeoning digital needs translate into significant opportunities forhealthcare technology providers, companies that provide technology-enabledsolutions for healthcare industry players. In fact, the first cohort ofEuropean and US healthcare tech companies is now sufficiently mature for PEfirms to consider as investment candidates. Especially attractive are onesthat can become platform providers—entities that create and maintain the basisfor data exchange, analytics, and user engagement.PE firms should invest in such companies now to capture disproportionatebenefits. Here we highlight ways that these firms can identify winninghealthcare-tech investments.
What is healthcare tech?
At its core, healthcare tech refers to technology-enabled products andservices in healthcare. Distinct from medical devices and diagnostics,healthcare tech focuses on facilitating and enabling healthcare functions.Healthcare tech is a vast, hyper-fragmented field. Individual companies mayserve a specific vertical, such as pharmaceuticals, medical technology,providers, or regulators, in a portion of that vertical’s value chain. In thatcontext, individual companies usually fulfill a specific need—for example,digitizing core processes or providing digital health solutions. Healthcaretech companies can provide or facilitate anything from electronic medicalrecords to clinical-trial management software (interactive).Nontech healthcare companies can sometimes have technological components thatbolster their core (nontechnological) services or products. For instance, somecompanies provide services and products to support pharma companies’ medicalaffairs functions, which often come with a software tool such as a workflow-management tool for publications.
Time to invest in healthcare tech
Often stereotyped as targets more suitable for venture capital than for PE,healthcare tech sees relatively few deals, especially outside the UnitedStates. Healthcare tech deals made up only 7 percent of European and UShealthcare deal volume from 2015 to 2018, and 83 percent of global healthcaretech deals occurred in the United States over this period (Exhibit 2).Exhibit 2We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:McKinsey_Website_Accessibility@mckinsey.comFirms are reluctant to invest in healthcare tech for structural and culturalreasons, but discerning investors can find many opportunities in the industry,which is projected to grow 14 percent per year through 2023.
Historically timid PE firms
Before PE firms invest in healthcare tech, they must adjust their mind-setabout pursuing targets that are smaller than typical PE investments. What’smore, investors are sometimes unable or unwilling to underwrite high multiplesfor healthcare tech companies for fear that the assets are not worth theirvaluations; venture-capital funding tends to bid up healthcare tech companies’valuations, after which interested PE investors must compete against eachother as well as established healthcare players for targets. However, the fearof unreasonably high multiples might be unfounded. Many healthcare techcompanies serve growing markets, and market positions, once secured—especiallyas part of a platform or suite of solutions—are often defensible. Such assetsare worth their higher multiples.The fear of high multiples is related to the difficulty of identifying goodassets from the large number of available deals and opaque markets. Duediligence in healthcare tech requires the ability to evaluate customer needs,competitive dynamics, regulatory pressures, differences among geographies, andemerging sectors—without a developed base of customers or many competitors aspoints of comparison. It can often be difficult to obtain accurate andcomprehensive information about the relevant markets, making due diligencechallenging. Exacerbating the complexity of deal sourcing and due diligence isthe difficulty of effectively coordinating healthcare and technology teamswithin PE firms.Healthcare tech investment from PE firms is also stymied by PE funds’ fear ofthreats and disruption to healthcare tech companies. Threats include industryenterprise players that can organically enter the field through preexistingrelationships; disruptive start-ups; deep-pocketed, nonhealthcare corporates,such as large technology companies; and even customers’ internal tools.However, careful due diligence that focuses on firms that are relativelyinsulated from short-term disruption can mitigate risks for PE firms.
Opportunities for PE firms that invest now
In the early days of the healthcare tech market, most healthcare tech firmspresented more appropriate investments for venture-capital and growth-capitalfunds, but many are now mature enough to benefit from PE investment andguidance. Moreover, the first crop of healthcare tech companies, many of whichwere acquired by growth funds between 2010 and 2014, will soon be ready for PEconsideration as growth funds prepare to exit after a typical five-yearholding period.Maturing healthcare tech companies have demonstrated a proof of concept, havewon flagship customers, and are consistently profitable. The best targets forPE firms will come from the often-overlooked middle tier of companies that areunlikely to reach billion-dollar valuations but have the potential for double-digit growth. These companies can benefit the most from investment andexpertise (Exhibit 3).Exhibit 3We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:McKinsey_Website_Accessibility@mckinsey.comFor example, electronic clinical outcome assessment (eCOA), medical affairsprocess management, and patient safety are areas where midtier players splitthe market. Because many healthcare tech solutions do not fully addresscustomers’ needs, good-to-great solutions can establish market leadershippositions relatively quickly, even with sales cycles that can stretch intoyears.Other than optimizing midtier companies in fragmented subindustries, PE firmscan identify companies that provide function-wide platforms. Incumbents andcorporates are already trying to establish themselves as platform providers,and those that succeed are likely to become the standard for their portion ofthe healthcare value chain. These companies can then grow and cement theirposition by providing analytics services for the data they gather. Becauseplatform providers are exceptionally difficult to replace, companies need tobecome standard-setters now and win disproportionate returns later—or positionthemselves to be acquired at a premium by the eventual platform provider.Timing is an important factor, regardless of the submarkets PE investorsdecide to address. Healthcare digitization means that firms that invest inhealthcare tech now rather than later are more likely to capture value fromgrowth within crucial markets. Entering the market now also means that PEinvestors can more easily roll up assets in fragmented markets and build scaleand market share. In fact, healthcare tech companies are already pursuingroll-ups: an eCOA company acquired seven small companies in the field between2009 and 2017. Healthcare tech companies in diverse global markets arepursuing similar moves (see sidebar, “Creating value through M&A and roll-ups”).
Maximizing the odds of success in healthcare tech
The best way to ensure success in sourcing and evaluating deals in healthcaretech is to have PE firms’ healthcare and technology teams collaboratethroughout the process. Unfortunately, this collaboration is sometimesdifficult to achieve. Having teams with relevant industry and technicalknowledge work together is not a new idea. But it is worth reinforcing howvaluable it is for healthcare investors to retool their approach toincorporate technical expertise, including knowledge of the risk ofdisruption. Having access to both healthcare and technical experts will helpinvestors evaluate the strength of the market as well as targets’ corebusiness and growth prospects.
Candidates must fulfill important needs in growing markets
PE healthcare candidates should be neither start-ups nor enterprise systems,and they should address an unmet market need. A way to diagnose whether aproduct meets a need is to ascertain whether customers have identified theproblem and asked for solutions. This method should eliminate companies thatsimply provide interesting software from consideration.The best candidates demonstrate new revenue-creation opportunities, increasethe efficiency of existing processes, and reduce costs or risks. For example,material-tracking software in clinical settings, especially in surgical andcritical-care environments, can capture data that allow hospitals andhealthcare providers to improve clinical performance, procurement processes,and material-management practices.Attractive markets should be growing and have room for growth. Investors canidentify such markets by their low technological penetration, high levels ofpaper use, and regulatory trends that encourage or force the use oftechnological solutions. These traits are especially important because ofhealthcare customers’ “stickiness” and long contract cycles, which make new-business development critical to sustained growth.The best markets for healthcare tech companies that are interesting to PEinvestors are those that are not large enough to be appealing to enterpriseplayers. In our experience, markets of less than $1 billion are safest formaturing healthcare tech companies because they are too small to appeal tolarge corporate investors. Such markets should also present material barriersfor entry. Acquisition targets’ products may not necessarily containproprietary code, but they should possess advantages that aren’t easilyreplicated by entrants from other fields. Such advantages include user-friendly interfaces built based on privileged customer relationships andspecialized knowledge of stakeholders.
The company and its core offerings must be well regarded
By the time a company is a target of a PE firm, its solution should becomparable to competitors’ offerings in its ability to meet customer needs.This assessment will likely require a combination of technical reviews and in-depth customer interviews to understand customer perceptions of the solution.Technological assessments from PE funds’ technology teams will also benecessary to confirm that the target has a sound, flexible tech stack (theframeworks and tools developers work with).Strong targets must have a record of customer success, which can involve a“soft” element that requires due-diligence teams to use perception to arriveat insights that aren’t necessarily reflected in conventional metrics. Duediligence must therefore go beyond standard measures of customer experiencesuch as customer satisfaction scores and include in-depth customer interviewsto understand demonstrable customer impact and check for serious issues.Issues include risks such as high-impact events, often related to compliance,that could shatter credibility and damage key customer relationships.Investors must also evaluate the company’s operations to ensure that the righttalent and processes are in place. Management should contain a mix ofhealthcare and technology experts who understand the solution and itsopportunities for growth. Investors should also speak to nonmanagementemployees to understand if best practices such as agile methodologies areembedded in the company. To evaluate how well the company attracts andretains talent, investors should examine employee-churn data and interview across-section of employees for insights on the company’s talent blind spots.If a PE firm decides to acquire a target, it must prepare to continuouslyinvest in development—including talent, product, and customer service.
9 Steps to Start a Tech Company
Decades of innovation have led many industries to take advantage of technologyand integrating it into business processes. With the great demand for the mostinnovative solutions available in the market, entrepreneurs are exploring anew business venture—tech solutions. Because of this, many entrepreneurswanted to start a tech company. Thus, the emergence of the startup trend inthe IT industry—small tech startup companies providing disruptive solutions orcreating software for their clients to use.At Full Scale, we help startup companies grow their businesses. We providesoftware developers quickly and affordably to our clients so they can scale upand succeed.We’ve done that before and getting to where we are now has not been easy.There are so many factors to be considered: budget, looking for clients,hiring developers, and making sure to provide exceptional service.To help you avoid all the challenges we’ve been through, we would just like toshare some tips on how to create a tech startup company.
9 Steps to Start a Tech Company
Not all tech startup companies start the same. Some came out of epiphanies andsome are results of pure serendipity. Regardless of how a company started, itslifespan heavily relies on how it is planned and executed. For this one, let’sstart by saying that there is no perfect formula; it’s not a “one size fitsall” kind of thing. But there are some guidelines to note when starting yourown tech startup company.
9. Hire the best team.
We’ve been saying this in the previous items: building the best developmentteam is a key component of your company’s success. Focusing on the mostfundamental trio in business organizations—marketing, accounting, andoperations—really helps.However, hiring can be a tough job, especially for companies in the techindustry. Aside from the shortage of software developers in the United States,the salary for the available remaining developers may not be as affordable asyou wished they could be—so unaffordable that at the starting point, it’salready a risk in sustaining your business.
Where can I hire software development teams?
You have come to the right place. We at Full Scale help tech startup companiesgrow by providing software developers quickly and affordably. How do we dothis? We do this through offshoring.Offshoring is an industry practice that allows a company to extend itsprocesses to a different territory. This is mostly done because of a majoradvantage in costs. To put it simply, software developers in other countriesoffer the same services at a much lower cost. This is explained by theeconomic difference among the territories. Besides, it offers opportunities incountries that have a surplus of software developers.We have a pool of talented and experienced software developers in Cebu City,Philippines. We can help you kick off your startup tech company by providingsoftware developers to be a part of your team.Our Guided Development process allows you to extend your operations here inthe Philippines while still having the leadership and control for yourproduct.Get a free consultation when you contact us or get additional info onoffshoring and startups when you listen to the Startup Hustle—a podcast forentrepreneurs. For more information, you can visit our website now.10 Unique Jobs for Nurse Practitioners