Companies looking to go public in the health care IT space are facing higher hurdles than they did even 18 months ago due largely to sliding valuations, according to Deutsche Bank Senior Analyst George Hill.
“Investor sentiment now is generally terrible,” said Hill during a presentation on the state of the capital markets at Healthegy’s Digital Healthcare Innovation Summit.
While the health care IT space still remains one of the most expensive sectors to invest in, investors have become increasingly intolerant of companies that could require multiple trips to the capital markets or face a longer-than-expected road to profitability.
“The thing we hear most often from investors who are looking at smaller companies is, ‘What is the path to profitability?’ No longer do we see investors who are willing to fund ‘the dream’ for a longer period of time,” said Hill.
Until fairly recently, he noted, most investors would focus on a company’s Total Addressable Market (TAM), adding that it wasn’t unusual for companies to project TAM at two or three times that of revenue. Now, said Hill, investors most want to know if the company will make money in the next two years.
“What a difference 18 months makes,” he observed.
Investors are also not interested in companies that might have to return to the capital markets in the near term.
“The ‘death knell’ for any company that wants to go public in this emerging space is when or if you will need to raise capital again. The last thing public market investors want to see right now is a private company that’s coming public that may need a second round of primary capital at some point in the future,” said Hill. “That window is absolutely closed to you from a public market financing perspective.”
He added that although companies with “sexier growth stories”might have an easier time attracting investor interest, they will still face resistance due to sliding valuations in the subsector.
Hill noted that the run-up in health care IT valuations over the past five years was largely driven by changes in regulatory compliance standards and expanded enrollment in health care plans. Now that such growth has slowed, we will likely see increasing competition among companies for market share. He pointed out that cloud-based companies currently appear to be outperforming traditional software-based companies.
Hill also advised companies looking to go public to wait until they really need the cash.
“The worst thing that can happen to an aspiring public company is to come out of the gate and have a problem with a booking that doesn’t come through, have a problem with revenue that doesn’t come through,” he continued.
“The market will punish you very quickly for those early-stage misses and a company can find themselves in micro-cap purgatory, where you’re not big enough for institutional investors to care or take notice. It’s a bad place to be,” Hill concluded.
Held on November 2 in Boston, the Digital Healthcare Innovation Summit, chaired by Robert Mittendorff, MD, MBA, of Norwest Venture Partners, and Bill Geary of Flare Capital, brought together leading innovators, investors, and industry executives to share their valuable insights on the future of healthcare.
Contributed by Val Kennedy