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The ‘giant sucking sound’ of digital health consolidation

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The ‘giant sucking sound’ of digital health consolidation

Ross Perot may have popularized the term during his failed presidential bid in the 1990s as a reference to NAFTA’s adverse effects on American jobs, but “giant sucking sound“It may be a fitting metaphor today for the rapid consolidation of digital health companies.

Recent reports indicate explosive growth in venture capital funding for digital health startups, around $ 15 billion for the first half of 2021, with no slowdown in sight. The story from the other side is that these same startups are exiting through liquidity events at an equally rapid pace.

Amwell’s announcement of the acquisition of two digital health companies is the latest in a series of mergers and acquisitions that have continued to accelerate since Teladoc and Livongo merged last year in a $ 18.5 billion deal.

At first glance, the two companies are in unrelated spaces. Silver Cloud is a behavioral health company that has developed digital care models equivalent to face-to-face encounters. Conversa is a chatbot technology company that uses conversational interfaces for digital pathways to support a wide range of clinical needs, from pre-admission patient education and preparation to post-acute monitoring and chronic care management.

The unusual settlement announcement indicates that the two companies, with combined revenues of less than $ 15 million, were acquired for a combined value of more than $ 300 million.

The announcement of the agreement confirms an ongoing consolidation trend in the digital health space. We are seeing digital health startups merge or are acquired by larger tech firms to achieve this goal. An example of the former is the merger of Grand Rounds and Doctor on Demand for a combined value of $ 2 billion. An example of the latter is Microsoft’s $ 8 billion acquisition of Nuance. Amwell’s acquisitions are small by comparison. However, these deal values ​​may be the norm as we see an increase in the pace of M&A in digital health.

Ongoing consolidation makes sense for startups (and their venture capital backers). There has been a proliferation of chatbot-based tools and virtual behavioral health companies. The bottom line for startups is how to achieve scale and profitability in this highly competitive landscape. Many will be tempted to exit in today’s environment of unlimited funds and attractive valuations rather than burn out in the long run.

What does this wave of consolidation mean for your clients, that is, the sanitation companies?

Today’s digital health solutions landscape is highly fragmented. The healthcare CIOs and CDOs my company works with are struggling to make strategic bets on partnerships in this confusing landscape. Digital leaders in healthcare systems realize that selecting a promising startup for a strategic partnership can have the perverse effect of putting the startup on the line for a potential acquisition simply based on acquiring a prominent name as a customer.

On the other hand, many of the more mature digital health solution providers are acquiring smaller startups with complementary offerings to expand their “footprint,” a term that is now trending among digital health VCs. This further complicates provider governance and management for health systems executives.

If a healthcare system is on the Teladoc platform and uses Conversa chatbots, Amwell may soon be knocking on their doors to enter as the new Conversa owners. In the long term, the number of incompatible vendor relationships will increase and will require CIOs and CDOs to design their solution stack loosely coupled and write contracts that provide exit options with minimal separation costs and penalties.

Many healthcare systems are joining the party, investing in the startups they bring in, mitigating risk, and capitalizing on the opportunity to cash in if the startup finds a profitable outlet. One of Conversa’s main investors is Northwell Health in New York. Other health systems, notably Providence Health, have actively invested in startups and seen significant returns from successful exits.

There is no question that mergers and acquisitions have become a necessity to grow and scale for digital health startups and larger companies. As big tech firms like Microsoft and Amazon aggressively move into the telehealth and virtual care space, independent firms like Amwell and Teladoc are using mergers and acquisitions to scale and remain strong contenders for leadership in the emerging landscape of digital health.

Smaller digital health startups are also finding that extended sales cycles and slow decision-making in healthcare organizations make acquiring new customers increasingly challenging. Your best bet to avoid bankruptcy is to hitch your wagons to an established supplier with a substantial footprint in the market. In particular, even the largest companies in the telehealth space are not profitable today.

For Amwell, Teladoc, and others, acquiring smaller companies is really about strategic positioning for long-term market share growth and profitability. In the short term, they can take advantage of synergies between acquired companies (Conversa chatbots can complement Silver Cloud’s virtual care model for behavioral health) to increase opportunities for organic growth.

In the long run, well, who knows? The party has just begun. Hold on tight for the wild ride ahead.

Paddy Padmanabhan is the author of Digital Transformation of Healthcare: How Consumerism, Technology, and the Pandemic Are Accelerating the Future. He is the founder and CEO of Damo Consulting.

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