Venture Capital Drives M&A in the Healthcare Industry

Venture Capital Drives M&A in the Healthcare Industry

Updated: Mar 12

Venture capital investments are still the top driver in mergers and acquisitions (M&A) in the healthcare industry. But research shows that there’s little common ground between CEOs and investors.

Research by PricewaterhouseCoopers found that the US market experienced a 14.4% increase in mergers and acquisition activity from 2017 to 2018. There were 1,182 M&A deals in 2018. The pace of M&A activity has kept up, as deal volume was greater than 250 deals in the first three quarters of 2019.

A survey conducted by Sage Growth Partners (SGP) showed that a majority of those deals were conducted by healthcare venture capitalists. Across all industries, more than $130 billion was invested in US-based startups in 2018—more than the previous record set in the dot-com era. In addition, there was roughly $713 billion in private equity investment.

The report also declares that healthcare is “experiencing a gold rush of sorts: the amount of capital chasing the dream of disrupting the industry’s massive bloat and inefficiency is staggering—with both CEOs and investors hoping to take even a modest portion of the enormous pie.”

Finding capital isn’t a problem, the report says, with “a ton of capital” coming into healthcare IT.

What’s Driving the “Gold Rush”?

Dan D’Orazio, SGP’s CEO stated that business opportunities in healthcare are currently being driven by the industry’s widespread waste and inefficiencies, along with public and private sector directives to decrease costs while increasing health outcomes. Because of this, D’Orazio says that there’s a wealth of potential partners and investment capital. But investors and CEOs don’t always have identical M&A objectives goals. It’s an issue that experts say may result in difficulties realizing efficiencies and reducing costs.

While there are differences of opinion on the perceived benefits of venture capital investment between investors and CEOs, SGP found that the varying perspectives of investors and CEOs to be a net positive for a healthcare business. The report explains that each group has “overlapping, but largely distinct, experiences and skill sets that diversify a company’s most valuable resources— namely their individual know-how and can-do spirit.”

The key to optimizing these resources, the report explains, is to align and deploy them.

What are the Differences Between Investors and Healthcare CEO?

To see the differences between investors and healthcare CEOs, SGP asked 30 investors who provided capital to healthcare companies at stages ranging from seed to buyout, and an equal number of healthcare companies—half of which received funding in the past 12 months. SGP examined the attitudes of these investors and CEOs and sought to understand why M&A deals were growing year over year when the perspectives of these two groups were so different.

When asked about what they want in a partner, both groups agreed that driving revenue growth, possessing expertise relevant to the business, and ready access to customers and subject matter experts are essential to a productive, long-term partnership. Both also said it was important to adequately capitalize a business. However, the research shows that there are “markedly varied perspectives” on the reasons for engaging in negotiations and the variables integral to the success of a business.

What Do Investors Prefer to See in Targeted Healthcare Companies?

Most investors (83%) said they prefer investing in healthcare companies that are vulnerable to competing businesses rather than threats from government intervention (17%).

Also, two out of three respondents said they’d invest in a healthcare company with a proven team and an average product over a company with a differentiated product and an average team. That’s because investors generally favor risk mitigation, preferring a team that can sell and adapt.

“The sweet spot, as one healthcare CEO commented, “would be a differentiated product and a killer team.”

What Do CEOs Want in a Merger or Acquisition?

CEOs want proven investment firms that prioritize their business, the report says. In evaluating partnerships, CEOs look at the level to which their business will be a priority of the investment firm and its track record of success. About 80% of CEOs said that they’d rather be a first tier investment with a firm that’s respected as opposed to a second tier investment with a firm that is well-known throughout the country.

Roughly 60% of the CEOs responded that an excellent track record of success is more important than the financial terms of a given deal.

Both groups agreed that business to business is the greatest opportunity in healthcare, while business to consumer is the least effective opportunity.


The report concluded that it’s vital that the perspectives of investors and CEOs’ be in agreement for the success of a healthcare company. Nonetheless, respondents to the survey believed that the varying perspectives of investors and CEOs was a net positive for healthcare businesses.

The report detailed several critical junctures in the evolution of a healthcare company that create natural and necessary opportunities for alignment.

They include:

  1. the realization that a company’s narrative is only as good as its data

  2. finding agreement on the success factors for a company

  3. assembling the plan and resources needed for the company to succeed

  4. the periodical reevaluation of the plan to determine if the goalposts have moved

Read about Carpenter Wellington’s mergers and acquisitions practice.