Kelsey Maguire
Investors are still there. They still have money that they want to spend in great assets, but they’re a little bit harder to convince that you are that great asset. And they’re a little bit more hesitant to deploy capital, and so the bar is a little bit higher.
Narrator
That was Kelsey Maguire, talking about the increased scrutiny that investors are giving companies as economic uncertainty continues to reshape capital markets. As macroeconomic conditions shift, Maguire, who is managing director at Sandbox Industries and Blue Venture Fund, says companies seeking capital must have a solid footing in three key areas. They need a great management team, they must be in a market that has a need, and they have to show that they can be profitable. She and Oliver Wyman’s Akshay Agarwal dig deeper into the macroeconomics impacting capital markets, as well as the micro trends facing healthcare.
The Oliver Wyman Health Podcast is brought to you by the global management consulting firm Oliver Wyman. For more insights on the business of transforming healthcare, visit our online publication health.oliverwyman.com. And now let’s pick things up with Akshay asking Kelsey about declining valuations and the potential of a healthcare bubble.
Akshay Agarwal
We’ve seen the bubble burst in healthcare valuations in the last year or two. What do you think that’s been caused by?
Kelsey
I think it’s a couple of different things. I think there are macroeconomic factors that are impacting nearly all public companies, and that then is trickling down into the world of private valuations as well. And so those are just the realities of the macroeconomic market. I think there are things about healthcare specifically, where a lot of investor money went towards healthcare, in particular in 2020 and 2021 during COVID because it was an area of high growth, high innovation. And I think in some cases that led to very high valuations that were potentially not supported by the business fundamentals or the market fundamentals. And so I think some of the correction has been writing those large valuations back to a place that makes more sense, based on the markets and the business models. I think there are places where there’s probably over-corrections happening too. You’ll see a public company that’s trading below the amount of cash it has on its balance sheet, where it just doesn’t make sense and likely it’ll come back up to something more reasonable. But I think those are probably the two primary factors leading to the correction.
Akshay
Kelsey, when you refer to macroeconomics, what are the factors that you’re considering within that?
Kelsey
When I’m talking about macroeconomics, I really just mean things like the inflation rate, war in Ukraine, the cost of debt. Macroeconomic conditions that are impacting all public equities, regardless of whether they’re healthcare or not.
Akshay
Like debt getting more expensive.
Kelsey
Exactly.
Akshay
And then industry specifics?
Kelsey
I was speaking specifically about business models and companies that may have raised at valuations that were higher than were supported by those business models. And you saw that with some of the public companies that corrected in the last one to two years, that they were trading at 30 times multiple of revenue. Things that essentially said that maybe if you actually backed into what are the investors underwriting it’s something like 20% of medicine is going to be done online in the future. And I think, as folks have seen things stabilize at a much lower percentage than that, the valuations have corrected.
Akshay
And you mentioned this potentially is a pendulum swing swinging back from low valuations. Have you seen that playing out in the last few months?
Kelsey
Yes, I do think we have seen that. It’s been interesting. I will say, it hasn’t swung back entirely and on every company, so there are still a lot of investors with capital, looking to spend money. And I’m speaking to the private market specifically where I spend most of my time. And so if you have a really great team, a really big market, and a business model that seems like it can work and make money and be profitable someday, I’ve seen those companies get bid up and be more expensive than they might have been two years ago because everyone’s going after the same asset. So while there has been a correction, I will say there are folks that it’s not necessarily impacting, but on the whole, I agree that those valuations have dropped. And I think most of the investors that I speak with feel, and this is the way I feel, generally relief, that it does feel like a pendulum swinging back towards reality. And so the conversations that you’re having aren’t, “What’s the most amount of money I can raise at the highest valuation,” but instead, “What’s the right amount of money for us to raise right now and what’s a evaluation that feels good for where we’re sitting?” And I think ultimately long-term that’s going to lead to healthier companies.
Akshay
That’s good to know. We’ve been involved in a lot of processes that stalled in the private markets in the last year. And one of the fundamentals you mentioned was this flight towards quality of private investors looking at specific companies and their evaluation’s going higher. Do you think going forward there’s going to be less transactions on the market, where perhaps B-grade companies will not come from the market anymore, because they know they’re going to get a much lower valuation or there are going to be much less interest in those types of companies?
Kelsey
I’m going to speak on two different things. I’ll first talk about fundraising from investors, and then I’ll talk a little bit about M&A. On the fundraising, from investors side, I do think that we will probably see fewer folks going outside their current investor base to go and raise big rounds of capital and always raising the next round from the next new investor. I think there are probably folks who need to grow into their valuations. There are plenty of investors with dry powder that can continue to prop up companies that they’ve already invested in. And we’re seeing a lot of that. And I do think you’ll just see fewer series A, series B, series C type of announcements. On the M&A side, we’ll see. I think there will still be quite a bit of M&A activity. Probably less public market IPO activity, but I think there’ll be quite a bit of consolidation and acquisition of assets that have run out of capital, that can be nice tuck-in acquisitions for large strategics. And the fundamentals of healthcare more broadly, aging demographics, increasing costs, tremendous waste, none of that has changed. And so I still think that the Uniteds and CVSs and other folks of the world are going to be looking to make acquisitions like they always have. And in fact, now and the next couple of years might be a particularly nice time for them to do it with the market correction and with a bunch of companies maybe looking for an exit that’s more palatable now.
Akshay
Yes. You’ve mentioned two things. One is this, let’s call it flight to quality, of investors looking at specific assets and maybe paying more for those types of assets. Another one is strong market fundamentals that that company or business model may have. How do you see that playing out in different sub-sectors of the healthcare market? Because healthcare is such a vast market. Do you see different segments maybe attracting different types of investments or different levels of investments?
Kelsey
I think the most dollars will continue to flow to the largest markets. And so I think huge buckets of spend, conditions that are just... Cancer, or COPD, or conditions where there’s still tremendous room for innovation and they’re just massive markets, or things like primary care. If you add together all of the risk-based providers in primary care and look at what they are as a percentage of overall primary care in the US, it’s a tiny, tiny fraction. There’s still so much to do. And I think those type of companies will still continue to get a lot of attention and investments. I think companies that are in smaller markets that are maybe going towards more niche conditions, there’s still a tremendous amount of opportunity but I think you’ll see less capital flow there. And so I think that’ll be a clear differentiator.
Akshay
Yes. That’s an interesting concept. What I hear you saying is, point solutions may attract less investment, but somebody who’s fundamentally changing the way that healthcare is delivered would attract more.
Kelsey
I do think there’s opportunity for point solutions, but you’re probably not going to get valued at $3 billion for doing something that’s very specific in a small market. And so they’ll have to get priced more rationally so that everyone can do well in that smaller market.
Akshay
If you play that out a little bit, so the companies that have these point solutions are more niche. Before, they were attracting huge valuations and were able to raise a huge amount of capital, but now will struggle a little bit more to raise that type of valuation in cash. Do you think that exits are going to be different going forward, and they’ll be more focused on maybe getting bought out by an aggregator or a larger entity?
Kelsey
I think definitely. And I think for a long time, before the last two, three years, most healthcare investors were underwriting to sub-billion-dollar type of private company M&A transactions. So an outcome where you were acquired for $300 million was a great outcome. And I think the wave of IPOs in the industry, folks started to potentially underwrite or think about exits differently because all of a sudden, “Hmm, this point solution, maybe this could be a $3 billion public company.” And I think more and more folks are, again, for the more point solution type of investments, are going back towards, well, what would a large company acquire this for? What would this get consolidated at? And thinking about exits in that reference.
Akshay
What should companies be doing differently now, compared to a year and a half ago, when fundraising or looking to exit?
Kelsey
Investors are still there. They still have money that they want to spend in great assets, but they’re a little bit harder to convince that you are that great asset and they’re a little bit more hesitant to deploy capital. The bar is a little bit higher. I think those three things that I mentioned before are the three things that you have to convince every investor in order to invest in you. The first is that you have a great team. The second is that you have a great market. And even if it isn’t an enormous market, even if you are tackling something small, why is it a good market? Why are you the best suited to go after it, and how can you conquer it? How do you make it seem like a really attractive market that you understand well? And then the last piece is on business model, and I think maybe this is where the bar has changed the most. Two or three years ago, if you picked a hot condition and had some nice logos on your team slide and said you were going to bring value-based care to whatever that was, you could probably get someone to fund you. And now I think people are saying, “OK, how? What’s the lever you’re going to pull, and why should this market be in value-based care, and can you actually have impact on cost and outcomes?”
Akshay
And we saw a lot of companies that are quite small raising quite a lot of money. And one thing that surprised me always was there was no product market fit done and people just had great concepts, but it wasn’t tested. The concept wasn’t tested aggressively in the market. Do you think that’s going to change fundamentally, where investors will look at the market research done and people actually wanting this product? Having been a physician myself, a lot of people pitch a lot of ideas, and I always felt some of them will never work but they raised huge amounts of money. How do you think that dynamic’s going to change going forward, and will investors look for something slightly different?
Kelsey
CEOs and other executives with a great track record are still going to be able to command premiums, even if they don’t have product market fit. Because people are going to take a risk on their track record and say, “I bet, even if this doesn’t have product market fit, this gal or guy will figure it out.”
Akshay
Or they can create a market that nobody knows right now.
Kelsey
Exactly. I don’t think it will be the case that every company needs to have product market fit before investors will really fund it. But I do think, especially for newer entrepreneurs, having proof points around product market fit before you’re doing that growth round and really going towards execution, I think that’ll be key. People aren’t going to give $50 million to someone who... You’re not sure if people want to use this tool yet. I do think people will wait for those proof points.
Akshay
That’s very interesting. A few closing questions for you. What’s exciting you the most in the next 18 months?
Kelsey
In the next 18 months? I do think there are areas right now where incentives are still so clearly misaligned, and there are very clear, very obvious levers to pull to better align incentives and lead to better care and outcomes. I’m on the board of a company called Quilted Health, which is in the pregnancy care space. I also have a one-year-old, so I went on this personal journey myself recently.
Akshay
And that’s an idea of product market fit. Oh, yes.
Kelsey
Yes, exactly. And as much as I loved my OB-GYN, it was just so clear from start to finish how misaligned the incentives are in pregnancy care, because she will make more money if there are more interventions in my care. And so an area like that, pregnancy care, especially given outcomes in costs in the US and especially given that half of the babies born in the US are born on Medicaid, there’s just so much opportunity to go after that market, align incentives, provide better care, provide earlier interventions, and lead to better, healthier outcomes. There are other areas like pediatric behavioral health, for example, that there’s just a true dearth of providers and of quality providers. And they might not even need value-based care, they just need more people providing good care. And so how can you impact that market, I think that’s another area where I’m particularly excited.
Akshay
And then what keeps you up at night?
Kelsey
Once you’re invested in a company, you’re just holding hands and all working hard on all of the stuff that you need to get done together. I work with the Blue Cross Blue Shield plans, and in particular when I invest in companies, I try to partner with the plans to drive more growth and contracts and business development with the companies that we invest in. And that can be a multi-year process. And so oftentimes what keeps me up at night is just, how can we make things move faster? How can we get that risk-based contract over the finish line? How can we make sure that when it is, we are executing on it successfully?
Akshay
It’s interesting you say that, considering the backdrop of the macroeconomic environment, that your fundamental belief is, if you have the business model right and the company’s doing the right thing, there’s enough capital out there for transactions to happen. It’s about getting that business model right and driving growth within that company, rather than focusing too much on the external environment because there’s always going to be demand for healthcare, or good healthcare companies.
Kelsey
Totally. And I mean, there are always acute situations. If you’re working with a company that’s going to run out of cash, that’s a problem you have to solve. But in general, I think that the fundamental market business, and even emotional reasons why we all invest in healthcare, are still true. And there’s the macroeconomic environment, but then there’s the macro healthcare environment of just the demographic shift in the United States and the amount of waste that is out there. And none of that has changed, and there’s just so much opportunity. And I think people will continue to invest in healthcare. I think great companies will continue to get funding.
Akshay
Macroeconomic versus macro healthcare. That’s a good concept to think about when you’re looking at healthcare companies.
Kelsey
Exactly. And in some ways, you’re distracted. If you’re spending too much time looking at the Teladoc stock, instead of looking at the percentage of our population that’s going to be over 65 in five years, you’re missing the point a little bit. And I think most investors are still looking towards, “OK, how do we solve these really, really big problems,” and not overly focused on the day-to-days of the stock exchange.
Akshay
Kelsey, thank you for your time. That was absolutely fantastic. I think the biggest thing for me was looking at these companies rather from a macroeconomic viewpoint, but to a macro healthcare viewpoint, and how to make that work. I really appreciate your time.
Kelsey
Thanks so much.
Narrator
The Oliver Wyman Health Podcast is brought to you by the global management consulting firm Oliver Wyman. For more insights on the business of transforming healthcare, visit our online publication, health.oliverwyman.com.
This transcript has been edited for clarity.
